Retirement Nightmare: Underfunded Pensions Want to Chop Your Benefits by 60%

By: Money_Morning

David Zeiler writes: Unions, employers and the federal government have finally come up with an answer for the nation's underfunded pension plans, many of which are headed for bankruptcy.

Take the money from the retirees.

The proposal would erase the guarantees created under the 1974 Employee Retirement Income Security Act (ERISA) and allow underfunded pension plans to reduce monthly benefits for both future and current retirees.

That change would affect the more than 10 million people who participate in defined benefit pension plans operated by companies, unions, or both. It could have a devastating impact on those already receiving benefits, and have been depending on promises made decades ago.

"The truth about pension plans is that they are promises -- not guarantees," said Money Morning Capital Wave Strategist Shah Gilani. "It's unfortunate, but current retirees won't likely see promises made to them fulfilled."

Why Underfunded Pension Plans Need to Cut Benefits
The gap between what pension plans owe current and future retirees - their liabilities - and their assets has grown substantially since the financial crisis of 2008 disrupted the markets.

The seeds were sown in the 1980s, when pension funds flush with cash from the robust economy dramatically increased benefit levels to avoid losing tax-exempt status.

Those elevated benefit levels were never reduced. When you add in falling corporate contributions and two major stock market reversals, you end up with a lot of underfunded pension plans.

By the end of 2012, corporate pension liabilities had increased to $1.564 trillion, while assets increased to just $1.39 trillion, according to a report released by Wilshire Consulting this month.

That pushed the median funding ratio down to 76.9% from 78.1%, which means the typical pension fund has just 76.9% of the assets it should have.

Of the 308 companies in the Standard and Poor's 500 Index that have pension plans, 94% are underfunded, Wilshire Consulting said.

The government projects that as many as 150 private pension plans are underfunded to the extent that they face insolvency.

Meanwhile, the Pension Benefit Guaranty Corporation (PBGC), the independent government agency that takes over private pension plans that become insolvent, isn't all that healthy itself.

The PBGC already has a deficit of $34 billion. Its own estimates indicate the agency has a 91% chance of becoming insolvent itself by 2032. The PBGC estimates pension insolvencies could double over the next decade, forcing it to take on as much as $295 billion in underfunded pension plan liabilities.

With $16 trillion of debt and annual budget deficits in the neighborhood of $1 trillion, Congress has no desire to spend hundreds of billions of dollars to bail out private underfunded pension plans.

That's why Congress is likely to look very favorably on the proposal from the unions and employers - it needs to reconsider the 1974 ERISA law because the rules governing pensions expire in 2014. It might even eliminate the PBGC entirely.

Sen. Tom Harkin, D-IA, chairman of the Senate committee that oversees pension policy, called the proposal "a starting place."

How Much Pension Benefits Could Be Cut
The case of Greg Smith, a 64-year-old retired Teamsters truck driver, illustrates how the proposal would work.

Smith retired in 2011 after 31 years. He gets a $3,019 monthly benefit from an underfunded pension plan expected to go insolvent by 2024.

The proposal would allow such struggling plans to cut benefits to 110% of what the PBGC would pay. In this case, the PBGC would pay about $1,100 a month, so Smith's pension could reduce his monthly payment to as low as $1,210 - a 60% reduction.

The actual reduction would depend on how badly underfunded the pension is, but for those living on a fixed income any reduction will hurt.

If the proposal becomes reality many Americans will face a retirement double whammy as the scheme to tie future Social Security benefit increases to chained CPI will take another bite out of the wallets of retirees.

Advocates of the proposal say they're just trying to save underfunded pension plans from insolvency and the even lower payments such retirees would get from the PBGC.

But that won't make it any easier on those Americans forced to live on a reduced income.

"It's a precarious position for a lot of us retirees," Smith told The Wall Street Journal. "Let's come up with a plan that doesn't trash the retirees and put them in the poorhouse."

Source :http://moneymorning.com/2013/04/17/retirem....

Money Morning/The Money Map Report

©2013 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

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