This article has been updated for 2022. If you’ve only ever had access to a defined contribution retirement plan like a 401K or 403B, you have little stake in the Pension Benefit Guaranty Corporation (PBGC).
Defined contribution plans are, by nature, fully funded by what an employer and employee contribute to it (+/- non-guaranteed investment returns).
Defined benefit plans, on the other hand, are not always fully funded, and the result is they could be at risk of not paying out full benefits in the event of company failure. Thankfully, the PBGC was created as a safety net for private defined benefit plans. If you have a defined benefit retirement plan (aka a pension) – you’ll definitely want to read on and pay close attention.
Not sure what type of retirement plans you have? Check out my post on defined benefit vs. defined contribution retirement plans.
What is the PBGC?
The Pension Benefit Guaranty Corp, or PBGC, is an independent agency of the U.S. Government that is designed to provide an insurance backing to private pension, or defined benefit plans.
In many ways, the PBGC is to private pension assets as the FDIC is to bank deposit assets. Both are independent agencies of the government that are not funded by taxpayer dollars. In both cases, the majority of funding comes from insurance premiums charged to members (the PBGC also gets revenue from investment returns and the assets it takes over in the event of failure). Private pensions pay insurance premiums in to the PBGC. And banks pay insurance premiums to the FDIC. In both cases, becoming a member is voluntary.
If a member pension plan were to fail, the PBGC would take over remaining assets and make pension plan payments.
In 2021, according to the PBGC annual report, it:
- Protects approximately 33 million workers in 25,000 private pension plans.
- Paid $6.4 billion to nearly 970,000 retirees.
- Assumed responsibility for more than 33,895 retirees in 47 newly failed single-employer plans
In a way, the PBGC is providing a massive insurance blanket to the U.S. economy via its coverage, which is truly why it exists. If there were no backing protections for all of these retiree benefit plans, taxpayers would be on the hook for essential care for retirees with little to no retirement savings, and lower payouts would equate to less currency flowing through the economy.
The PBGC and Public Pension Plans
It is key to note that public (state, federal, and local government) pension plans are NOT COVERED by the PBGC. Public pension funds are funded by taxpayer dollars, bonds, and investment returns.
If a municipality or state cannot meet its pension obligations and cannot raise taxpayer dollars to compensate, big problems can arise.
Public pensions, which once seemed invincible, no longer are. That’s a big problem for those who count on those benefits in retirement. And solutions need to be put in place.
Meanwhile, if you are a member of a public pension, do as much as you can to protect yourself by saving for retirement outside of your pension.
Maximum PBGC Payments
One very important difference between the PBGC and the FDIC is how much each will cover. Whereas the FDIC guarantees 100% coverage of all deposits to its member bank depositors, the PBGC sets annual maximums of what it will pay out to pension plan participants.
The PBGC maximum guaranteed payments, listed below for 2022, are very healthy by most measures, however, could be less than you expected – so it’s important to take this in to consideration for retirement planning. The PBGC sets its maximum benefit levels based on age, and if you were expected to receive less benefits than outlined below, that is what you would actually be paid out.
PBGC Maximum Monthly Guarantees For 2022
PBGC Maximum Monthly Guarantees for 2022
|Age||2022 Straight-Life Annuity||2022 Joint and 50% Survivor Annuity*|
|* Above J&50% amounts apply only if both spouses are the same age. Different amounts apply if that is not the case.|
PBGC Premium Rates
I was also curious about what it costs to be covered by the PBGC (costs are covered by the employer). Here’s are the PBGC premium rates based on year:
Per Participant Rate
Per Participant Rate
Rate per $1,000 UVBs
Per Participant Cap
Finding Out if your Company’s Plan is Covered by the PBGC
If you have a private pension plan and are not sure if you’re covered by the PBGC, check out the PBGC company search tool. Your employer should be proudly stating if their plan is covered by the PBGC, as it would be a huge employee retention nightmare if it was not (particularly when you look at the rate at which pensions seem to be failing lately).
- If you are enrolled in a private pension plan, is it a member of the PBGC?
- If you are in a public pension plan, what kind of guarantees, if any, have been stated for your pension assets?
- Has your pension plan been taken over by the PBGC? What has the experience been like?
- What do you think of the PBGC?
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