Is Your Pension Safe?

photo-1448975750337-b0290d621d6dThe Pension Benefit Guarantee Corporation (PBGC) guarantees the pension benefits you were promised if your original pension fails to do so.

Today, the PBGC helps protect the retirement benefits of over 40 million Americans in over 2,400 different pension plans.

Across the country the PBGC paid benefits to over 825,000 retirees in 2015. Here in MN, the PBGC paid over $54 million in benefits to more than 9,000 retired workers.

Worried about your pension? Perhaps you should be. The promise of a pension is that you will receive a monthly pension check for life, but that’s really not an absolute guarantee.

If your pension fails and the PBGC takes over your plan, you may receive a lower pension benefit than what was originally promised by your employer. In some cases your pension may be reduced by as much as 50% or more.

The Minneapolis Star Tribune recently reported that nearly 15,000 Minnesotans who are or were part of the Central States Pension Fund could face significant cuts to their pension benefits. The average pension cut is estimated to be 34%, but some pensioners could receive cuts of up to 60%.

PBGC Losses. In the fiscal year 2015 the Pension Benefit Guarantee Corporation reported a $76.4 billion loss. This was an increase over the previous year’s loss of $62 billion.

While single-employer plans seem to be on a stronger footing, over the next ten years the PBGC estimates as many as 50% of all multiemployer plans like the Central States Pension could fail.

Pension benefit guarantees can vary. Pension benefit guarantees are set by law and cover only vested benefits. Single-employer plan benefits are guaranteed up to $60,136 for a 65-year old retiree.

In multi-employer plans, the PBGC guarantees only up to $12,870 for a retiree with 30 years of service. Multiemployer pensions affect about 10 million Americans in 1400 different plans.

Not an ironclad guarantee. Normally, when I advise clients on whether to take their monthly pension or a lump sum payout at retirement, the conversation goes something like this:

“A monthly pension offers the benefit of a guaranteed income for life. A lump sum payout doesn’t offer a lifetime income guarantee, but it gives you greater control over and access to your retirement assets, and the ability to pass on any money left over to your heirs when you die.”

The decision for many retirees is often a choice between the promise of guaranteed lifetime income and control over your retirement assets.

What’s the best strategy? Unfortunately, the assumption that your monthly pension is guaranteed for life may no longer be inaccurate. However, the decision to take a monthly pension or a lump sum payout at retirement depends on many factors such as how long you expect to live, whether you will need access to your funds, your comfort level with managing your retirement assets, etc.

For retirees who need the promise of a guaranteed monthly check and are confident in their pension’s ability to meet its obligations, a monthly pension may still make sense.

For others, access to principal and control over their retirement funds is the higher priority.

For more information. The PBGC website is a good first stop if you are looking for more information regarding the solvency of your pension. The website also offers some good advice regarding the lump sum vs. monthly pension decision.

If you are weighing your options, I recommend you click here for more information.

Then consult with your tax professional and/or financial advisor to determine the right choice for you.