ARFS - Introduction - Tension with Pension

[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

[Continued from ARFS - Introduction - Hurrah ! We live longer]

Today fewer and fewer companies are providing traditional pension plans. Of those companies which do provide pension plans, many are contributing less and less to pension funds. More so, many companies have already frozen their pension plans. A study by PBGC says that 9.4 percent of Pension Plans have been Frozen. This fact brings forth the following questions which require some contemplation.

• What are the chances that our employers have a defined pension plan and it is not frozen yet ?
  
• How likely is it that our employers will be able to pay our pension when we retire ?
  
• What if the employer goes belly up ? If the employer goes belly up there is PBGC (Pension Benefit Guaranty Corporation).
  

Hmmmn, lets investigate a little bit.

What is PBGC?

PBGC is a federal corporation created under the Employee Retirement Income Security Act of 1974. It currently guarantees payment of basic pension benefits earned by 44 million American workers and retirees participating in over 31,000 private-sector defined benefit pension plans. The agency receives no funds from general tax revenues. Operations are financed largely by insurance premiums paid by companies that sponsor pension plans and by investment returns.

Source: http://www.pbgc.gov/index.html

So far so good. But unfortunately, PBGC that gurantees pensions to American workers and retirees is itself in the negative. Figure 2 shows the highlights of the Financial Statements of PBGC for the years 2004 and 2005. The current scenario of PBGC and the unpredictability of continued success of any business corporation over a very long period does not paint a very optimistic picture about retiring on pensions. We can conclude safely that we cannot rely on pensions alone for our FIRE. No one should. Enron's case study is a good example shedding light on the consequences of putting all our eggs in one basket.

Figure 2: Highlights of PBGC's Financial Statement - 2004 & 2005

Source: http://www.pbgc.gov/docs/2005par.pdf

[Continued to ARFS - Introduction - Oh My Secured Social Security!]

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