26 October 2005

PBGC Update.

Dilbert's answer to the pension solvency crisis.

The Pension Benefit Guarantee Corporation is a government owned entity that insures the benefits of some 44 million people in 31,000 pension plans (an average of 1,419 each) will pay their promised pension obligations (sort of) for a fee of $19 per participant per year, which is now rising to $30 per participant per year in the wake of airline and automotive industry woes. The last big shock the the PBGC came when the steel industry collapsed.

The maximum annual PBGC benefit for plans taken over in 2005 is $45,614 for workers who wait until 65 to retire. Workers who retire before 65 get smaller benefits.

Thus, many employees with generous pensions, such as those of airline pilots, can take a huge hit of the company goes under.

The PBGC may also charge companies that have gone through bankruptcy and terminated their pension plans $3,750 for each participant in the plan and make additional rate increases under proposed legislation.

The fundamental problem facing the PBGC is that defined benefit plan funding requirements are not always sufficient to fully fund a pension's obligations in the event that the plan is terminated, because the formulas don't accurate reflect those obligations, especially during periods of extreme interest rate behavior and large stock market fluctuations. Also, any plan termination results in significant opportunity costs for many employees, because defined benefit pension plans are designed in a manner that always penalizes employees who either work fewer than a target range of years with the company, or work beyond that target range of years.

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