As Goes GM’s Pension, So Goes Yours?

Yesterday, General Motors (GM) said it was cutting another 21,000 jobs, getting rid of its Pontiac brand, and begging Washington to take a 50 percent equity stake.

Meanwhile, Chrysler reached an agreement with United Auto Workers negotiators on Sunday but is still struggling to work out deals with Fiat and other investor groups.

Now, the fact that these two major automakers are on the brink of failure is hardly news.

But even if the companies manage to survive, there’s a major question that needs to be answered, and its implications could extend out to many Americans, even those who don’t work for the companies …

What Will Happen to the Automakers’ Pension Plans?

According to mainstream news reports, Washington is already bracing for an outright failure of these plans. And rightfully so!

What remains unclear is whether these plans would be allowed to fail in the “regular” way - i.e. by turning themselves over to the Pension Benefit Guaranty Corporation.

The PBGC is the quasi-governmental agency that insures defined benefit pension plans.

Unfortunately, there are three problems with going the PBGC route:

First, when the PBGC takes over a plan, it is only allowed to pay out benefits up to a certain cap.

For 2008, the maximum guaranteed amount was $51,750 a year ($4,312.50 per month). That number applies to workers who begin receiving payments at age 65 or older. Anyone younger would see even lower amounts.

So many autoworkers - even those who already retired - can expect to receive sharply lower benefits than they were promised or are currently receiving.

Second, unlike Social Security, PBGC payments do not have cost-of-living adjustments. That means they remain static even if inflation soars. Over time, that will prove disastrous for just about any recipient.

Third, the PBGC itself has been wrestling with underfunding. In fact, it’s been running a deficit for most of this decade!

Imagine what the failure of even just one major automaker’s plan would do to the PBGC.

Remember, the Chrysler plan currently has a quarter of a million participants and GM’s plan for hourly workers covers another half a million!

Not only would a plan failure of that magnitude create a logistical nightmare, but it would certainly put a further strain on the PBGC’s resources in two important ways:

#1. It would suck tons of money out of the PBGC.

#2. It would mean far less money going into the PBGC for other plan failures.

Let me clarify that second point a bit more.

The PBGC funds its kitty by collecting money from all the companies that operate pension plans. That money is then put away to help mitigate losses down the line.

With the loss of a major pension plan such as Chrysler’s or GM’s, the PBGC would get squeezed from both sides!

Sure, the companies still have sizeable assets in their own pension reserves. And by some estimates, they might be able to survive by reducing the benefits they’ve promised along with other minor modifications.

But even if the failures don’t completely cripple the PBGC, they could still sound the death knell for the entire defined benefit pension plan system as we know it.

After all, the availability of these plans has already been in steady decline. A failed automaker plan would likely open the floodgates for other major American companies to cancel their plans. Many are certainly itching to do so.

If a major automaker abandons its pension plan, many other companies may quickly follow suit.

This would give them the out they need. They could cite competitive reasons. They could say things like, “Look what happened to the automakers. If we don’t cancel our plans or reduce our promised benefits, we’re going to suffer the same fate.”

And in doing so, they would look far less culpable. It would be hard for anyone in Washington to hold them to a different standard.

No less than The New York Times echoed that sentiment yesterday, saying,

“The demise of the bellwether auto plans might set a template for other companies seeking to cut costs and stay competitive.”

The end result could be a spiraling series of abandoned pension plans, and a potential catastrophe for the PBGC and anyone relying on it.

What This Could Mean for You …

According to a survey conducted by the Employee Benefit Research Institute in 2006, 61 percent of workers anticipated receiving income from a pension in retirement.

So the idea of a collapse in defined benefit pension plans clearly affects a lot of people!

While I am not trying to make this out to be an end-of-the-world scenario, I certainly think the risks at many plans are a lot larger than people realize.

Heck, I have a defined benefit plan from a previous employer. And the way things are going, I’m certainly not counting on it.

If you are lucky enough to have access to such a plan, great! But you should not completely rely on yours, either.

Instead, do your best to prepare in other parts of your life.

Bump up your personal savings rate a little more.

Keep your own private retirement portfolio in a diversified mix of solid investments like dividends stocks and select bonds.

And consider ways to cut the amount of money you’ll need in retirement, too.

Because as the Social Security and corporate pension debacles prove, we clearly cannot rely on government or private programs to take care of us in our golden years.

To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive.

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