We have all been reading about the losses suffered by employees in the air carrier business and others as a result of bankruptcies and the termination of their pensions. Here is a brief discussion of what's been going on.
Defined Benefit Plan
In the old days when you went to work for a large air carrier or any other company for that matter, they usually had available what is now called a defined benefit plan. That is, if you worked long enough, and participated in the plan, you received a specific amount of money every month after you retired. All you had to do was hang in and stay alive until a certain age and you got paid a reasonable amount, that, when added to your Social Security, provided a modest income during your sunshine years. This was a benefit provided by many companies to encourage loyalty and longevity with the company. My father had such a plan when he worked for the Edison company as a mechanic. However, there is no law that says a company must provide a retirement plan. Many today don't have any type of retirement plan.
Most of the so-called legacy airlines provided this type of retirement program in the past and some still have similar plans in effect, but they won't last long. If you are in one you had better be prepared for the worst.
Well, along came ERISA (Employees Retirement Income Security Act) in the late 1970s which was your government's grand plan to improve and provide more benefits protection to the employee. You can imagine what happened.
Most private companies by this time saw the writing on the wall and were looking for a way out of the traditional pension plan. Most of these plans were grossly underfunded (something like Social Security today) and there was no way they could continue going into the hole to provide this type of plan. But take note . . . governmental entities, state and local, kept right on with their programs for one good reason. Nobody (the taxpayers) cared or for that matter paid attention. Keep in mind that the fire departments, police departments, and just about every other government employer still have a defined benefit plan including of course our Congress and other federal and state employees.Why? Because, they were all conveniently exempted from ERISA regulation. Their pensions are guaranteed by you, the taxpayer. They simply vote the continuance and enhancement of their plan themselves. Talk about conflicts of interest.
The alternative to the defined benefit plan, is the self-directed pension plan. This is loosely defined as a program where you put in some money and the company puts in a little money and you invest in various ways for your future retirement security (401K, etc). This type of plan is much less attractive for the employee and can be risky, but it is the most popular plan generally available today. There are few if any remaining industry-offered defined benefit plans because of their high costs. Many companies simply cancel them and provide alternate plans that are less costly. So you younger guys should consider city, state, or government employment if you want an attractive pension alternative.
Pension Benefit Guarantee Corp. (PBGC)
ERISA provided for the creation of the Pension Benefit Guarantee Corporation. This is a government organization that takes over a pension program when a company goes bankrupt or just cannot fund the pension program anymore. It's like the FDIC, Federal Deposit Insurance Corporation, that insures your bank deposits. The PBGC provides a form of insurance to industry employees so that they can recover some percentage of their defined benefit plan when it or your company fails. However, this amount is generally quite a bit less than they would have received under their plan. The PBGC is supposed to be funded by all companies by way of joint premium payments into the program. But the PBGC is also presently underfunded and you know who is going to eventually pay for this.