Worry About Your Pension, Not Your Pension's Insurer

(MoneyWatch)  Last week the Pension Benefit Guaranty Corporation, the federal agency that pays your pension if your employer can't, told the Senate Select Committee on Aging that its assets fall $33.5 billion short of its obligations. In other words, the perennially underfunded agency wanted to let everyone know that it wasn't just underfunded; it was really, really underfund. Since the agency is charged with stepping in as backup if a company issuing your pension goes broke, this sound like a bad thing. The NYT deemed the news scary enough for the front page.

But for once, this is something you don't need to worry about. You can see how Times editors, weighing the slender chance that their company will be around in five or 10 years to support their pensions -- currently $625 million underfunded -- would be sensitive to the health of the PBGC. But you surely have better things to lose sleep over.

For starters, let's face it -- you probably don't even have a pension. In the great failed experiment that George W. Bush called the Ownership Society and that Yale professor Jacob Hacker more aptly calls The Great Risk Shift, your company probably terminated your pension, froze it, never offered it in the first place or otherwise rendered the PBGC irrelevant to you.

And if you do have a pension, the PBGC's financial strength becomes an issue only if two conditions are met simultaneously: your company fails and terminates its pension, and the pension is underfunded. Since the pension is held apart from the company's assets, in theory your company could suddenly go brain dead and its pension heart, if healthy, will keep beating. When Lehman Brothers went under, for example, its pension was 95 percent fully funded and probably won't be a draw on PBGC's resources. But in the much more likely event that your company feels itself sinking, odds are the company will throw the pension overboard first by freezing benefits or terminating the plan. Unless you're already collecting a pension from the PBGC, I'd worry about losing your pension that way a lot more than I'd worry about the solvency of the PBGC.

And then there's the long-term nature of the PBGC's liabilities, which suggests that a $33.5 billion hole isn't a disaster. The agency is not like a bank, in which depositors or other creditors might one day demand their money back all at once. Its obligations stretch out over decades, and there's time for the PBGC to make them up, if necessary, by charging higher insurance premiums to employers, or by investing those premiums for higher returns. (Ironically, in pursuit those higher returns, the PBGC's trustees had received permission to invest in stocks at the beginning of 2008 rather than just bonds; luckily, they never got around to diversifying much until this year.)

In addition, the expected size of those pensions is highly sensitive to the assumptions that actuaries make in projecting them. A rise in assumed interest rates would close the gap simply by the magic of accounting. And a rise in rates is highly possible, considering how the Federal Reserve is hell-bent on inflating the economy.

If you are really worried that your retirement security might be suddenly cast into the weak hands of the PBGC, you can check your pension's health by writing your plan administrator for a copy of Form 5500, which your company has to file with the Department of Labor, or by reading the pension's Summary Annual Report, which it's required to send you every year. Honestly, though, even if you find that your plan is underfunded, there's not much you can do about it.

Besides, despite the $33.5 billion deficit, the PBGC is going to be there to backstop the plan one way or another. That' s really the bottom line on last week's announcement. The agency isn't as essential to maintenance of economic confidence as the FDIC, say, but it's too big a deal to fail. If it can't support itself on premiums from corporations, Uncle Sam doesn't have to step in to save it... any more than it had to step in to save Fannie Mae and Freddie Mac. The PBGC isn't about to drop the ball.

The one actionable piece of advice I'd give is this: If you're one of the last few workers in America lucky enough to retire with a pension and it's going to be above the limit guaranteed by the PBGC -- today, that's $54,000 a year if you retire at 65 -- take the benefit as a lump sum and invest it yourself. These days, you don't want to bet that your company will last as long as your retirement does. Even if you don't work for the Times.

More: My CBS MoneyWatch colleague and co-blogger Charlie Ferrell offers a different, but similarly optimistic -- if you can call it that -- take on the PBGC and other federal retirement programs.