Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Bankrupt Corporations Mean Your Pension is at Risk!

Personal_Finance / Pensions & Retirement Apr 29, 2009 - 05:27 AM GMT

By: Money_and_Markets

Personal_Finance

Best Financial Markets Analysis ArticleNilus Mattive writes: Yesterday, General Motors said it was cutting another 21,000 jobs, getting rid of its Pontiac brand, and begging Washington to take a 50 percent equity stake.

Meanwhile, Chrysler reached an agreement with United Auto Workers negotiators on Sunday but is still struggling to work out deals with Fiat and other investor groups.


Now, the fact that these two major automakers are on the brink of failure is hardly news.

But even if the companies manage to survive, there’s a major question that needs to be answered, and its implications could extend out to many Americans, even those who don’t work for the companies …

What Will Happen to the Automakers’ Pension Plans?

According to mainstream news reports, Washington is already bracing for an outright failure of these plans. And rightfully so!

What remains unclear is whether these plans would be allowed to fail in the “regular” way — i.e. by turning themselves over to the Pension Benefit Guaranty Corporation.

The PBGC is the quasi-governmental agency that insures defined benefit pension plans.

Unfortunately, there are three problems with going the PBGC route:

First, when the PBGC takes over a plan, it is only allowed to pay out benefits up to a certain cap.

For 2008, the maximum guaranteed amount was $51,750 a year ($4,312.50 per month). That number applies to workers who begin receiving payments at age 65 or older. Anyone younger would see even lower amounts.

So many autoworkers — even those who already retired — can expect to receive sharply lower benefits than they were promised or are currently receiving.

Second, unlike Social Security, PBGC payments do not have cost-of-living adjustments. That means they remain static even if inflation soars. Over time, that will prove disastrous for just about any recipient.

Third, the PBGC itself has been wrestling with underfunding. In fact, it’s been running a deficit for most of this decade!

PBGC Running Major Deficits

Imagine what the failure of even just one major automaker’s plan would do to the PBGC.

Remember, the Chrysler plan currently has a quarter of a million participants and GM’s plan for hourly workers covers another half a million!

Not only would a plan failure of that magnitude create a logistical nightmare, but it would certainly put a further strain on the PBGC’s resources in two important ways:

#1. It would suck tons of money out of the PBGC.

#2. It would mean far less money going into the PBGC for other plan failures.

Let me clarify that second point a bit more.

The PBGC funds its kitty by collecting money from all the companies that operate pension plans. That money is then put away to help mitigate losses down the line.

With the loss of a major pension plan such as Chrysler’s or GM’s, the PBGC would get squeezed from both sides!

Sure, the companies still have sizeable assets in their own pension reserves. And by some estimates, they might be able to survive by reducing the benefits they’ve promised along with other minor modifications.

But even if the failures don’t completely cripple the PBGC, they could still sound the death knell for the entire defined benefit pension plan system as we know it.

After all, the availability of these plans has already been in steady decline. A failed automaker plan would likely open the floodgates for other major American companies to cancel their plans. Many are certainly itching to do so.

If a major automaker abandons its pension plan, many other companies may quickly follow suit.
If a major automaker abandons its pension plan, many other companies may quickly follow suit.

This would give them the out they need. They could cite competitive reasons. They could say things like, “Look what happened to the automakers. If we don’t cancel our plans or reduce our promised benefits, we’re going to suffer the same fate.”

And in doing so, they would look far less culpable. It would be hard for anyone in Washington to hold them to a different standard.

No less than The New York Times echoed that sentiment yesterday, saying,

“The demise of the bellwether auto plans might set a template for other companies seeking to cut costs and stay competitive.”

The end result could be a spiraling series of abandoned pension plans, and a potential catastrophe for the PBGC and anyone relying on it.

What This Could Mean for You …

According to a survey conducted by the Employee Benefit Research Institute in 2006, 61 percent of workers anticipated receiving income from a pension in retirement.

So the idea of a collapse in defined benefit pension plans clearly affects a lot of people!

While I am not trying to make this out to be an end-of-the-world scenario, I certainly think the risks at many plans are a lot larger than people realize.

Heck, I have a defined benefit plan from a previous employer. And the way things are going, I’m certainly not counting on it.

If you are lucky enough to have access to such a plan, great! But you should not completely rely on yours, either.

Instead, do your best to prepare in other parts of your life.

Bump up your personal savings rate a little more.

Keep your own private retirement portfolio in a diversified mix of solid investments like dividends stocks and select bonds.

And consider ways to cut the amount of money you’ll need in retirement, too.

Because as the Social Security and corporate pension debacles prove, we clearly cannot rely on government or private programs to take care of us in our golden years.

Best wishes,

Nilus

P.S. Want to take charge of your retirement right now? Download a copy of my special report, “The Weiss Guide to Worry-Free Retirement Profits”. All the details on that report can be found here.

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

Money and Markets Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in