The World's Poor Preparation for Retirement
- Pity for the Pension Benefit Guaranty Corporation
- State Pension Systems Are In A Sorry State
- Retirement Preparedness Is A Global Problem
Editor’s note: we’ve written at some length this year about the world’s poor preparation for retirement, which will become more apparent as populations age. In this issue, we examine three areas that illustrate the immensity of this issue.
At my wife’s urging, I’ve recently spent some time organizing my affairs. While I trust her interest in the exercise is administrative, last week I saw a spreadsheet on her computer indicating I was worth more dead than alive. Cold calculus, indeed.
Among the inventory of statements I assembled were pension statements from two prior employers. Although I confidently placed the promised benefits into our projections of retirement income, recent news has given me pause. The funding of corporate pension plans is not always robust, and if the plans falter, the agency that serves as a backstop is in such bad financial condition it can guarantee nothing.
That agency is the Pension Benefit Guaranty Corporation (PBGC). The PBGC is technically insolvent; without a massive recapitalization from the U.S. Congress, millions of pensioners will face a substantial loss of retirement income. The story of how the PBGC reached this precipice includes sad chapters that detail the failure of retirement systems more broadly.
The PBGC acts as an insurance company to private pension plans, charging premiums based on the size and funded status of each plan. It has two programs: one for individual plans, and a second for a collection of plans across a range of heavy industries (referred to as the “multiemployer plan”). The former faces challenges, but is reasonably balanced. The latter is in dire condition.
When a company fails, its pension is turned over to the PBGC for administration. If the assets in the plan are sufficient to meet retirement payments (represented by a positive “funded ratio”), the PBGC simply takes over operations and beneficiaries receive the amounts they were promised.
If the funded ratio is insufficient, plan participants will see their benefits reduced, in some cases very sharply. Unfortunately, the poor condition of many pension plans places a considerable number of retirees at risk.