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Saving for Retirement

Inside the Pension Benefit Guaranty Corp.

The federal agency that insures defined-benefit plans is $23 billion in the red.

It's perfectly legal for a company with billions of dollars in its pension plan to shut it down. Under the law, an employer that terminates its pension plan must have enough to pay all vested benefits immediately, either as a lump sum or in the form of an annuity. Companies operating under bankruptcy protection -- which currently include airlines as well as steel makers and other old-line manufacturers -- can transfer their liabilities to the Pension Benefit Guaranty Corp., the federal agency that insures defined-benefit plans.

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So many companies have turned to the PBGC in recent years, however, that the agency is now running a $23-billion deficit of its own. Former director Bradley Belt notes that the PBGC has added more plans and beneficiaries during the past four years than in the previous 27 years combined. Pension-reform legislation pending in Congress would raise the premiums companies are required to pay and bolster the PBGC's insurance fund. But the prospect of larger contributions could backfire, prompting more employers to end their pension plans.

When the PBGC takes over a bankrupt plan, it guarantees monthly benefits for workers and retirees. Although 90% of pensioners are fully covered, higher-paid workers, such as airline pilots, receive far less than if their employer had continued to operate the plan. The PBGC's maximum benefit to anyone whose pension plan is terminated in 2006 is $47,659 per year for those who retire at 65, and less for younger retirees. If your pension plan ends this year but you aren't old enough to collect benefits until a future date, the 2006 maximum still applies. For details or to search for a lost pension, go to the agency's Web site.

In case you're tempted to start a second career as a public-school teacher or government employee, you should know that public pension plans aren't a sure thing, either. Most of them have funding problems of their own -- and state and municipal workers don't have a safety net like the PBGC.

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Wilshire Consulting's latest annual report on 125 state retirement systems found that state pension plans have, on average, enough assets to fund only 87% of their promised benefits. That means many state and local governments will need to raise taxes or cut services in order to pay for pension liabilities as their baby-boomer employees prepare to retire. Some states will try to trim retirement benefits for future workers or shift more of the burden to employees. For example, Alaska voted last year to replace its statewide defined-benefit pension plan with a defined-contribution plan. And Rhode Island enacted major changes in retirement eligibility and benefit calculations for new and nonvested teachers and other employees.