Why Your Pension Is at Risk
The recent bankruptcy filing from American Airlines parent company AMR (AMR) could become the latest example of what can happen to workers and their pension plans when their employers go bankrupt.
With AMR's bankruptcy proceedings having just gotten under way, it's too early to tell what could happen to some AMR employees. But past bankruptcies give a roadmap for what can happen to workers anywhere when their employer goes under.
You see, even if a company eventually gets out of bankruptcy and keeps operating throughout the process, its employees may end up with the short end of the stick -- especially those workers expecting a pension check in retirement.
Who Pays Your Pension?
Over the past decade, several airlines, including United Airlines parent United Continental (UAL), Delta Air Lines (DAL), and US Airways (LCC), have gone bankrupt. All three of the companies decided that they would terminate at least some of their pension plans. By doing so, they were able to shift responsibility for making pension payments to the Pension Benefit Guaranty Corporation, leaving the government on the hook for future benefits.
If you don't make much money at your job, then you typically don't notice a big change if the PBGC takes over your employer's pension plan. Among the airlines whose pension plans the PBGC has bailed out, more than three-quarters have gotten their benefits in full.
But if you've risen through the ranks over the course of your career, then you may well get only a fraction of what you expected.
Pension Pay Cuts
For this year, the PBGC pays a maximum of about $54,000 for 65-year-old workers, with younger workers having a lower cap. That's undeniably a nice chunk of money, but for pilots and other mid- to high-level employees, it may be much less than what they'd be entitled to receive under their previous plension plans.
Sometimes, that doesn't turn out as badly as it sounds. For instance, with the US Airways pension plan, retired pilots ended up receiving more than 90% of the benefits they were originally promised.
But when you consider other possible impacts of bankruptcy -- such as reduced or eliminated retiree health-care benefits -- the impact on worker finances can be huge.
Who's on the Hook? Taxpayers
The PBGC is supposed to be funded entirely from two sources: insurance premiums that employers pay, and the assets of the pension plans that the government entity takes over. But usually, the whole reason the PBGC comes in to manage a pension plan is because it's underfunded -- sometimes severely.
For instance, within the four pension plans that AMR sponsors, the plans have a funding shortfall of more than $10 billion, with $18.5 billion in liabilities offset by just $8.3 billion in assets. It's easy to see how just a single big-employer failure can put big financial stresses on the PBGC.
Moreover, just as the weak economy has hurt businesses, it has also left the PBGC with a severe funding shortfall. Last month, the PBGC announced a record deficit in 2011 of $26 billion, the largest in its 37-year history. With an anticipated $107 billion in liabilities to pay pension recipients and only $81 billion in assets to cover them, the PBGC may join the long list of private companies and government-sponsored entities that end up needing a taxpayer bailout.
Unfortunately, there's only so much you can do to protect yourself if your employer makes bad decisions about your pension plan. With 401(k) plans and other pension alternatives increasingly becoming the only option for younger workers, the most likely outcome is that most pensions will simply become a thing of the past -- and their last recipients may well consider themselves lucky if they get the full benefits they've earned over their careers.
Motley Fool contributor Dan Caplinger plans to make his own pension. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article.