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How safe is your pension?

Private-sector and public employee plans are significantly underfunded

Consumer Reports magazine: July 2012

Illustration: Keith Negley

If you’re counting on a traditional defined-benefit pension, there’s reason to worry that you might not get everything you’ve earned. About 80 percent of the 29,000 private-sector defined-benefit plans insured by the federal Pension Benefit Guaranty Corp. have been underfunded by $740 billion. State and local public employee pensions were recently in a $1 trillion hole.

Instead of beefing up plan assets, many companies have cut benefits. Employers can change their pension rules going forward using a variety of tactics, including tinkering with benefit formulas so that your eventual payout will be reduced, “freezing” the plan to stop further accruals, or terminating an underfunded plan.

“Vested” pension assets—those that legally become your property after a period of time—are generally safe thanks to federal law. But if the plan is terminated, the PBGC, which itself is $26 billion in the red, is required to pay vested benefits only up to a certain amount, which varies by the employee’s age and the year in which the plan is terminated.

Pensions of government workers aren’t covered by the agency but are often protected by state constitutions or laws. Still, 26 states have squeezed benefits for new hires, some other workers, and retirees.

Be prepared for changes

Your retirement planning could be upended by these trends, especially if you’re a mid-career or higher-earning employee. Here’s how to prepare yourself.

Conduct a pension checkup. Study the summary plan description and annual benefit and funding notices, which your employer should send or make available to you, and its federal 5500 Form, available from BenefitsPro.com. It’s a good sign if assets are at least 80 percent of liabilities; below that is a red flag for potential problems. Also review your company’s financial strength, its position in the field, and the outlook for your industry overall.

Assess specific threats. They can range widely depending on your age, how many years until your retirement, and exactly how your benefits are altered. For example, a so-called hard pension freeze, which stops benefit accruals based on job tenure and compensation growth, is worse for mid-career workers, who are denied the added pension kick that late-tenure accruals tend to provide.

Earlier this year, American Airlines said it would freeze the plans of most of its 130,000 employees and retirees after threatening to terminate its pension (underfunded by $10 billion) and letting the PBGC take it over. Both options ultimately create a freeze, but a takeover would put into effect payout limits that could shortchange higher-income beneficiaries. For plans ended this year, PBGC maximum monthly benefit are $2,094 for 55-year-old workers and $4,653 for 65-year-olds.

If you run into trouble collecting your pension from a former employer, get legal help from the Pension Counseling and Information Program of the U.S. Administration on Aging.

Save more now

You can make up for pension cuts by putting more money into a 401(k) plan if your company offers one. Contribute at least what’s required to get the maximum employer match, typically 5 or 6 percent of your salary. Many companies provide a more generous match to late-career workers who are affected by pension changes.

You might also consider funding an IRA—either the traditional tax-deductible type or a Roth IRA, which is funded with after-tax money (withdrawals are tax-free if all the conditions are met).

No safety net for retiree health benefits

Though federal law provides some level of protection for your pension, retiree health benefits are a different story. “You have next to no consumer rights,” says Paul Fronstin, director of the Health Research and Education Program at the Employee Benefit Research Institute. Employers can reduce or eliminate those benefits if their plan contract allows such changes, and many employers inserted such language two decades ago.

Costly coverage. Early retirees are usually not eligible for Medicare until 65. Retiree health benefits often fill that void, but if they dry up, you’ll have to go without coverage or buy a pricey individual policy, which you might not get if you have a pre-existing condition and the U.S. Supreme Court finds the Affordable Care Act unconstitutional.

Even if you plan to retire at 65, you should boost savings to cover Medicare premiums, deductibles, co-pays, limits, and exclusions. How much? A married couple should expect to pay $158,000 to $271,000 in out-of-pocket health costs after age 65, the EBRI says.

   

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