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Retirees May Suffer In Pension Takeover
The Chicago Tribune
August 30, 2004
CHICAGO - On the most grueling days, Duane Warning reminded himself that there would be a pension awaiting him - and that he had earned it.
He got his pension, for sure, but it was not what he expected.
After 37 years as a Trans World Airlines pilot, commuting daily for the last 15 years on the job from his home in the far south suburbs of Chicago to a St. Louis hub, he wound up with about half of what the airline had promised him.
"I was decimated. I was upset. But there was nothing I could do. I had to swallow it," said the 60-year-old former pilot, who receives a $1,600 monthly pension, not the $3,100 he had counted on. The difference in the numbers is the result of TWA's bankruptcy and the federal takeover of its pension plans in 2001.
Warning and others with promises of comfortable pensions have faced rude awakenings when their firms abandoned their pensions and the Pension Benefit Guaranty Corp. stepped in.
They quickly learned that the agency has a cap on benefits and a formula that means they may not receive 100 percent of their old pensions. It also cuts back on pension hikes workers had received in the last five years, and it bears no responsibility for extra bonuses linked to workers' pensions.
One out of 10 workers whose pensions are taken over by the PBGC do not get 100 percent of the benefits once promised to them, say PBGC officials in Washington.
The reason for this, pension experts explain, is that when the agency was created 30 years ago, it was meant to come to the rescue of blue-collar workers, not better-paid workers like Warning.
But the collapse of the steel and airline industries has created an unforeseen dilemma.
"When we take over a pension plan in the retail trade, just about 100 percent of the people will receive 100 percent of their pensions. In the steel or airline industry, that won't be the case," said Gary Pastorius, a PBGC spokesman.
Indeed, a government survey several years ago showed that only 60 percent of steel industry workers were receiving 100 percent of the pensions promised to them.
Airline pilots like Warning of suburban Frankfort, Ill., face a double whammy. First, the PBGC's maximum annual payment is $44,386, a sum that is likely to fall below their expected pensions.
But that is at age 65. Since pilots must retire at 60 years old, their pensions are reduced. And the maximum for retirees at age 60 is $28,851 a year.
In Warning's case, there were several reasons why he fell short of the maximum, mostly because he retired at age 58.
Still, some pilots have received payments above the PBGC's maximum, because of the amount of money left in their companies' pension pools and because of their age, experts said.
There's another problem that compounds the situation for retirees whose pensions have suddenly shrunk.
As companies wipe out pensions, they often do the same to health care benefits, but the government doesn't similarly protect these benefits.
Mary Browning, an attorney in St. Paul, Minn., for the Upper Midwest Pension Rights Project, has seen this problem come up frequently for retirees dealing with a much-reduced pension.
Yet more often the biggest problem, she said, is just accepting the stark reality of a smaller pension. She tells of one widow who, because of bureaucratic twists, saw her monthly pension fall from $1,835 to $122 a month after the PBGC took over her company's plan.
And most of the time, the retirees barely understand how the government's pension bailout system works, she said.
"What happens is that when the PBGC comes in, they are in shock and they don't get a lot of the details," she said. "Then they get these PBGC letters which they can't understand and they are in shock for months later."
That's not the only danger.
The Cato Institute, a Washington-based policy research group, last week warned that a $350 billion pension shortfall may force PBGC to seek a taxpayer bailout.
The Pension Benefit Guaranty Corp. had a record deficit of $11.2 billion last year after taking over plans for 152 companies, including Bethlehem Steel and US Airways.
Without changes to funding and premium rules, the agency's deficit is likely to swell to $18 billion in the next 10 years and may reach more than $50 billion, said Richard A. Ippolito, who wrote the report for Cato and is a former chief economist for the pension agency.
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