January 31, 2005 11:50 AM
Taking the Wheel Before a Pension Runs Into Trouble
Excerpt: Their misfortunes raise important questions for the millions of workers and retirees who participate in company pension plans: Who stands to lose when a plan fails? How big are losses likely to be? And, just as important: If you find that you are not fully insured, what can you do?
UNTIL recently, a pension seemed like a sure thing. If you worked long enough, you could count on a predetermined stream of income upon retirement, backed by the federal government.
Now, however, a series of pension failures at companies like United Airlines, US Airways, Bethlehem Steel, Kaiser Aluminum and Polaroid has cast doubt over such certainties. While the government insures pensions, the coverage is limited - and it is much more varied than the government's insurance for bank deposits. In the last two years, tens of thousands of pilots, steelworkers, managers, mechanics and others have discovered that the pensions they earned were richer than the government's insurance - something that they did not know until their pension plans had failed.
Their misfortunes raise important questions for the millions of workers and retirees who participate in company pension plans: Who stands to lose when a plan fails? How big are losses likely to be? And, just as important: If you find that you are not fully insured, what can you do?
The answers ought to be readily available, given the stakes. But finding out whether your pension - or the pension of a spouse, sibling or parent - is fully insured can be a complex process.
For bank accounts, the Federal Deposit Insurance Corporation has a straightforward limit of $100,000. Depositors who have more than that can protect their funds by simply dividing their money between several institutions or account categories. But the federal Pension Benefit Guaranty Corporation's coverage depends on a person's age, the type of benefits promised and other factors generally beyond the control of a typical employee. The wide variations are mainly a result of efforts by Congress to make the system fair and to keep companies from ringing up big pension obligations and then dumping them on the government.
A basic rule of thumb is that the government covers benefits of up to about $45,000 a year for people who retire at 65; this maximum rises each year with inflation.
But the guideline can be misleading: it is a little like saying that your homeowner's policy pays a maximum of $450,000 before you know if it covers floods, fires, theft or other losses, or if possessions like antiques are handled in some other way.
In reality, few people caught in a pension collapse happen to be 65 when their plan fails. For those who are younger, the maximum coverage is lower. For a 45-year-old whose plan fails this year, for example, the government covers a maximum of $11,403 a year, even if he has earned a larger pension. But for a 75-year-old, the government covers benefits of up to $138,665 a year. A list of the figures can be found at the Web site of the pension agency,
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