Adrian Hale watched the unfolding American Airlines bankruptcy with a sense of dread. Hale, 75, a retired vice-president of engineering, had already suffered a 25-percent hit to his retirement income because the company slashed a supplemental retirement program when it filed for bankruptcy protection in November.
American recently struck a deal that should save most of its pensions from termination, easing Hale’s worries. But even if his pension had been terminated, the hit he already took would have been his last because his benefits from the Pension Benefit Guaranty Corp. would have been based on his current age.
Like the Federal Deposit Insurance Corp., which stands behind bank deposits in the event of a failure, the Pension Benefit Guaranty Corp. ensures that troubled pensions keep their promises to retirees. It does that by assessing fees on existing pension plans to finance benefit payments for beneficiaries of failed plans. Through this system, the agency insures 44 million Americans in 27,500 traditional pension plans and currently pays monthly benefits to some 829,000 individuals. Last year alone, the agency took over 134 plans, covering 57,000 workers.
Even without a PBGC takeover, current American Airlines employees, such as flight attendant Patrick Hancock, aren’t likely to fare as well as Hale. That’s because when American filed for bankruptcy, its pension plan was frozen. Hancock, 55, is facing a huge loss because he’ll no longer accrue benefits, and the amount of money he and other workers can expect at retirement is likely to be drastically reduced.
Hancock was planning to retire in five years, at age 60, and was expecting a $2,500 monthly pension. He’ll get just $1,800 a month because he won’t earn those pivotal five final years of accrued benefits. Now he’s trying to save like crazy in a 401(k) plan. Though he’s already near the annual contribution limit of $17,000 in 2012, he’s able to take advantage of “catch-up” contributions that allow participants over the age of 50 to save $5,500 extra.
Realistically, however, even if he saves every dime he can and gets an unusually high investment return, the result of five years of saving can’t possibly be enough to make up a $700 monthly shortfall for the rest of his life. “I relied on the company’s promises and representations,” he says. “I’m going to be hurt because they’re not going to keep their promises.”
If he were younger and further from retirement, he’d have a better chance of saving enough to fill the gap. Compound investment returns would have more time to work their magic.
(Kathy M. Kristof is a contributing editor to Kiplinger’s Personal Finance magazine. Send your questions and comments to [email protected]. And for more on this and similar money topics, visit www.Kiplinger.com.)