What if PBGC Fails?

The Pension Benefit Guarantee Corporation (PBGC) is to pensions as the FDIC is to banks. Just like the FDIC insures your savings accounts and CDs, the PBGC protects your retirement savings if a pension fails. With more employers freezing pensions or folding altogether, it’s somewhat reassuring to know that the PBGC is there. But consider this:

This year marks the seventh straight year that the PBGC has been on the Government Accountability Office’s “high-risk” watch list. After bailing out thousands of pension plans since its creation in 1974, the PBGC racked up a deficit of $11.2 billion as of September 2008. Experts later warned that if the PBGC were forced to take over the pension plans of massive companies, such as General Motors, its deficit could double. That’s precisely what happened earlier this year when PBGC took over the pension plan of Delphi, an auto parts maker formerly owned by GM (which has sparked a separate, still raging controversy). As of October 2009, the PBGC’s deficit stands at $33.5 billion.

If the PBGC’s liabilities continue to outstrip its assets, it’ll likely be the next candidate for a big government bailout – at the taxpayer’s expense. What this would mean for the retirement accounts of individuals is unclear. The PBGC covers only “defined benefit” plans which does not include 401(k) and newer retirement plans but, of course, these plans are still subject to market woes.

Your best bet: save, diversify and plan for the worst even as you hope for the best.