Pension Income Is Guaranteed, Right? Yes, But …

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As if we needed another reminder that our safety net is threadbare, AMR Corp., the American Airlines parent company, says it will shut down pensions covering 130,000 employees and retirees as part of a reorganization in bankruptcy court. A government backstop is in place to keep most pensioners whole—but not all of them, and the backstop itself is rickety.

We all know the sad funding state of Social Security and Medicare. We’ve seen traditional pensions swapped for less reliable 401(k) plans. AMR proposes just such a swap. Last year, sponsors filed to terminate 1,425 fully funded pension plans.

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We’ve seen communities like Prichard, Ala., and Central Falls, R.I. go bankrupt and either stop paying public pensioners or seek to extract brutal cuts. We’ve seen other companies dump pension obligations in court too, way ahead of AMR. Last year, the Pension Benefit Guaranty Corp., a government agency that insures pensions, took over 134 underfunded plans including those at Alabama Aircraft, Wolverine Tube and Johnson Memorial Hospital. In total, these plans covered 57,000 workers and retirees.

When it comes to financial security, we’re on our own like never before. That’s a recurring theme here, and the evidence keeps mounting. Now comes the colossal AMR failure, which by itself is twice the size of all plans assumed by the PBGC in 2011. By most accounts, the PBGC has enough resources to eke by in the near term. But you have to wonder if its growing fiscal problems will lead to benefit cuts down the road. Currently, the PBGC has obligations totaling $107 billion, which exceeds its assets by $26 billion. This deficit is up from $23 billion in 2010.

So the backdrop isn’t pretty. Still, AMR and other pensioners under PBGC care are in no immediate danger—unless they are among the 15% whose pension benefits exceed PBGC limits. On average, pensioners who exceed the PBGC limit end up seeing their benefit slashed by 28%.

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That would include a lot of pilots, by the way. They may enjoy private pension benefits that are double what they’ll get with the PBGC. AMR says 90% of its workers and retirees will take no haircut. But overall pension payments will shrink by $1 billion.

Who gets the haircut? The PBGC has a sliding scale of maximum benefits, depending on age. The most it will pay people who retire at age 65 is $55,841. If your benefit is less than that you have only the long-term health of the PBGC to worry about.