What happens if the company paying your pension goes bust?

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pension fund
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Pensions have been going the way of the dodo for a long time now with the rise of the 401(k), but many Americans still have one.

There’s no question that pensions are more popular in the public sector — particularly among unionized workers. Some 75% of public sector workers have a traditional defined benefit pension plan, according to recent data from the Bureau of Labor Statistics.

In addition, 15% of private sector workers still have a pension, too.

But what happens if the company paying your pension goes out of business and can’t honor the promise it’s made to you?

RELATED: Missed initial enrollment for Medicare? You have until March 31 to sign up!

That’s where the PBGC steps in…

There’s a little-known federal entity that is a lifeline to hundreds of thousand of Americans in their time of need when their old employer goes bust. It’s called the Pension Benefit Guaranty Corporation (PBGC).

The PBGC is able to step in to pay pension obligations when companies go out of business. It does so by collecting premiums from employers when they’re in business and investing that money.

It’s a similar concept to the idea of unemployment taxes that employers pay. Those payments go to benefit employees who lose their job through no fault of their own.

That’s how the PBGC works; it collects money from employers during the good times and invests it to deal with the possibility that some companies will go out of business and not be able to honor their pension promises.

The organization doesn’t survive on any of your tax dollars, which is a misconception surrounding the PBGC.

In 2017, PBGC paid about $5.6 billion to more than some 868,000 retirees in 4,900 terminated pension plans.

Additionally, another half a million Americans — 504,687, to be exact — are expected to receive their pension from PBGC when they’re eligible to retire.

You can view this interactive map of the United States to see how exactly much this U.S. government agency paid out in benefits in your state last year.

Find out if your employer’s pension plan participates by searching the PBGC database.

Being offered a lump sum payout? Here’s what you need to know

Companies who still offer a pension increasingly like to present you with a pile of cash in the form of a lump sum payment to get you off their books. The goal is to avoid having to pay your every month for the rest of your life.

Is a lump sum payment a good idea? The short answer is that you have to crunch the numbers!

Take your monthly pension offer and multiply if by 12, then divide by the lump sum offer. If the number you get is greater than 6%, you’re better off taking the monthly amount as agreed. But if that number is less than 6%, you’re better off taking the lump sum.

As a quick illustration, say you have the choice between $1,000 a month for life beginning at age 65 or a $160,000 lump sum today.

  • $1,000 x 12 = $12,000
  • $12,000 divided by $160,000 equals = 7.5%

What this means is that you would have to be able to earn 7.5% per year on the lump sum for as long as you live just to earn $12,000 annually. Because that’s not the easiest task, you’re better off with the guaranteed $1,000 a month.

That’s the calculation method used by our contributor Wes Moss. Get full details on how the math works here.

Money expert Clark Howard believes as a general rule that you’re almost always better off with the monthly amount, not the lump sum.

“The only exception might be if you are retiring and let’s say you have a terminal illness. Other than that, take the monthly pension,” Clark says.

“You will never be able to convert that lump sum into a level of stable lifetime income that you would get from that pension. So avoid the lure of the pile of cash and make sure that you turn that [monthly pension] into a lifetime income so that you never outlive your money.”

RELATED: How happy retirees can spend $82,770 a year without having millions in the bank

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Theo Thimou About the author:
Theo has co-written several books with Clark Howard, including the New York Times #1 bestseller Living Large in Lean Times. As a single widowed parent of two young children, he strives to bring unique savings tips to men and women like him who must face life without their spouses. He can be reached at [email protected]
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