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 and get the answer he’s looking for.

Well if you are counting on a retirement pension for retirement income this is a question you also have to ask.  Fortunately you don’t have to pull out your dental drill to find out.  The only bad news is that the answer is “it depends”.

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.

According to the New York Times, the 500 companies that make up the S&P are collectively short over $355 billion.  That’s a lot of cabbage partner.  Of those 500 companies, only 18 have fully funded pensions.  The other 338 are short.   Makes you wish your CEO was sitting in that dentist’s chair…doesn’t it?

Keep in mind that the problem probably isn’t the result of funny business.  It’s because the companies earned less on their investments than they projected.  None-the-less, those pensions have problems.

Before you enroll in dental school, keep in mind that your pension may be “secured” by the Pension Benefit Guarantee Corporation (a government agency). The PBGC currently “guarantees” your pension up to $4,943.18 in monthly benefits. So if your pension is that amount or less you might consider your income safe assuming your pension is covered by this plan.

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 $26 billion annually. As more companies go bankrupt, the PBGC has to step up to the plate more often.  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 taking the lump sum. There are pros and cons to this of course and you should always speak with your own advisor. But we all know that the financial landscape has changed. If you take the lump sum you have more control over your money and destiny.

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?