Traditional pension plans have become almost a thing of the past, especially for younger workers. But even if you're fortunate enough to have a pension at work, recent events have shown just how fragile it may be -- and how things could get a whole lot worse in the future.
When your pension falls short
Eastman Kodak's (OTC: EKDKQ) recent bankruptcy filing has again brought employee pensions back into the spotlight. According to SmartMoney, Kodak had about 63,000 workers and retirees covered under two traditional pension plans. Now, some of them may no longer get the pension benefits they expected.
For those who've already retired, the news isn't as dire as it may sound. If Kodak shuts down its pension plans, then the government's Pension Benefit Guaranty Corporation will step in to provide benefits, in most cases ensuring that workers will get the same benefits they were getting before. The only exceptions would be workers who receive more than the PBGC's maximum benefit cap, which stands at the equivalent of about $56,000 per year. They could see their benefits cut, depending on how the bankruptcy proceeding goes.
Obviously, this isn't the first time that a pension plan has left some workers with problems. AMR's bankruptcy in November brought back recollections of numerous airline bankruptcies, many of which resulted in terminated pension plans. In fact, a report from the General Accounting Office in late 2009 suggested that several companies, including United Continental's
From bad to worse
For current workers, however, the news is even worse. Even if they manage to keep their jobs, a terminated pension plan means that they can't count on getting anywhere near what they might have received from their pensions had the plans continued into the future -- especially for workers who still have years to go before retiring.
That problem isn't unique to bankrupt companies. Several years ago, Hewlett-Packard
With the economy starting to recover, you can always hope that your employer will be able to weather the storm. But if you have concerns about your employer's ability to pay pension benefits far into the future, consider these options:
- Take the money and run. Often, you may have a choice at retirement between taking a lump sum or accepting monthly payments. Even if the lump sum wouldn't let you buy an annuity large enough to replace your pension payments, taking it while the company has the money to pay you ensures that you won't get left short if the company's pension plan melts down later.
- Start saving. The fragility of pension plans shows just how vitally important it is to have money set aside outside a company retirement plan. Pensions are great, but having your own savings gives you a lot more flexibility to invest the way you want as well as to use your money when you need it most.
Finally, don't panic. Even with the PBGC facing a potential shortfall, it's likely that the federal government would bail out the pension-saving agency to ensure that retirees don't lose a primary source of income.
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Fool contributor Dan Caplinger has no pension expectations beyond his own savings. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of IBM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. You can count on The Fool's disclosure policy.