Is Your Pension Safe?

“Is it safe?”

You may remember this question from the movie “Marathon Man.” The bad guy (evil Nazi dentist) keeps drilling this question into the innocent good guy as he drills the poor fellow’s teeth trying to inflict maximum pain.
Well right now, you might be asking the same question, but it’s the answer you might find painful.

If you are (now or soon to be) retired, your pension is an important provision you’ll be counting on to complete your retirement journey safely. So you have to ask the “Is it safe?” question.

Unfortunately, the answer is — maybe.

If you elect to take a pension once you retire, the safety of those payments will depend on the financial health of the company you retire from. And your firm must remain financially strong for the duration of those payments. In other words, your firm might be solid now, but if your company gets into trouble 10 years after you retire, your pension may be jeopardized.

In 2005, over 1100 companies reported that their pensions were more than $50 million underfunded. Keep in mind that if your firm’s pension is underfunded by less than $50 million, it doesn’t even have to report it. Oh, and by the way, current law makes it impossible for employees and shareholders to even know how solvent their plan is. Makes you wish your CEO was sitting in that dentist’s chair…doesn’t it?

Before you enroll in dental school, I do need to tell you that your pension may be “secured” by the Pension Benefit Guarantee Corporation (a government agency). The PBGC currently “guarantees” your pension up to $4,500 in monthly benefits. So if your pension is $4,500 (or less) a month, you might consider your income safe.

Here’s my only problem. Even if your pension is less than the maximum benefit, good Wealth Pilgrims don’t set out on a journey with a leaky boat. And the PBGC is taking on water.

A few years ago (the latest data I found), the PBGC was running a deficit of over $23 billion annually. As more companies go bankrupt, the PBGC has to step up to the plate more often. I’m guessing (and mind you, it’s a wild guess) the PBGC may be covering for more and more companies right now as a greater number of firms go belly-up.

Can the PBGC go bankrupt? Will the US government step in if that happens? I just don’t know.

So here is my recommendation.

If you have the option of taking a lump sum or a pension right now, I’d strongly consider the lump sum. We all know that the financial landscape has changed. We have an abundance of uncertainty. If you take the lump sum you have more control over your money and destiny. The returns may be lower, but right now the benefit of having control is worth a great deal.

What are your thoughts? Do you think I should have my head (and teeth) examined? Do you feel comfortable relying on the financial strength of your company and the PBGC?