For many decades, workers have relied on the security that they would retire with a reasonable pension, and that amount, usually paid on a monthly basis, was not subject to change. Companies made certain that money would exist to pay pensions, by fully funding their pension plans. A fully funded pension plan is one where the company has 100% of the money needed to cover current pensions and those that will be paid out in the future.
As the economy took a downturn in the late 1990s, many companies sought to provide more spendable cash by creating an underfunded pension plan, where the money to cover all pensions owed currently, or in the future was not available. Essentially the liabilities of the underfunded pension plan exceeded its assets, changing the profile of the retiree significantly. For many people, this results in no surety that they will get the pension they were promised or for those who are retired, it may cause a significant drop in current pension distribution amounts.
There are several reasons why an underfunded pension plan may exist or why one may become underfunded. Many pension plans invest in stock, and if stock investments result in huge losses, this can mean a plan becomes underfunded. Pensions that are in savings accounts have suffered from low interest rates, which mean they are not accumulating the interest they need to be fully funded. Alternately, mergers might create an underfunded pension plan, and bankruptcy can completely eliminate a plan. Current US laws favor paying debtors before employees who are due a pension. The burden of paying retirement benefits then falls to the American taxpayer in the form of Social Security payments, which itself is underfunded and set to expire if laws are not changed. The US doesn’t presently collect enough to keep Social Security fully funded.
There have been some extreme examples of the way an underfunded pension plan can dramatically affect the retirement income of certain workers. In 2005, a federal court allowed United Airlines to default on its underfunded pension plan. Retirement pay for workers, especially pilots, dropped sharply. Some were receiving as much as $12,000 US Dollars (USD) per month and saw this amount drop to $2000 USD. In other companies, pensions drop by a few hundred dollars a month, but this can still dramatically affect ability to live well or survive if pension income is small.
It’s estimated that only about 30-40% of pension plans are now fully funded, which means that people should take action by preparing for retirement without including what they may get in future pensions. Some companies have already taken this step by allowing people access to 401k investments, and using matching funds. They essentially privatize the pension system, and if workers make sound investments, they may have significant funds to cover retirement. Individuals may also set up their own retirement plans through IRAs and the like to help cover drops in income or possible defaults on pension.
People who have not gotten ahead with savings or acquirement of assets, and who face sharp cuts in their pension now realize they may need to continue working long after they planned to retire. For many young people, the idea of working for the rest of your life is pretty much standard, especially with Social Security possibly not available in the future and no guarantee of pension payouts.
