Suppose you're a retiree who spent 30 years in accounting at a Fortune 500 firm--a company now struggling to avoid the tar pit of bankruptcy. If your former employer goes under, what will happen to your pension?
And if the plan wasn't fully funded, will you be left with nothing to show for your service but a desk set and a picture of the softball team?
In 1974 the government set up the Pension Benefit Guaranty Corporation (PBGC) to guard against such an occurance. But if a company the size of Chrysler folded , leaving behind an estimated $1 billion in unfunded pension claims, the PBGC would be hard-pressed to cover the difference, says Alicia Munnell, vice-president of the Federal Reserve Bank of Boston,
''Bankruptcy of large corporations such as Chrysler and International Harvester could place a serious strain on PBGC resources,'' says Ms. Munnell in a recently published report.
The effect of the collapse of a large, underfunded pension-plan is just one variable adding to the uncertain future of America's private pensions. Social security has been shouted over, written about, and debated in Congress at great length. The role private pensions play in providing for America's elderly has received far less attention, according to Ms. Munnell.
In a recent New England Economic Review article and in a just-released Brookings Institution book, Ms. Munnell comes to these conclusions:
* The PBGC doesn't have enough money to insure large, shaky pension plans. If Chrysler keeled over, for instance, the insurance premium that other companies pay PBGC would have to be steeply increased.
Joseph Ellinger, a PBGC spokesman, says that if a large corporate plan went under, PBGC funds could handle immediate costs. Then the corporation could go back to Congress and arrange necessary premium increases.
Edwin M. Jones, PBGC director, did ask Congress on May 19 for a premium hike--from $2.60 to $6.00 an employee annually,
Ms. Munnell concludes many companies would be better off if they simply terminated their plans and made a one-time payment to the PBGC of 30 percent of their net worth, as current law allows.
A bill recently introduced by Sen. Don Nickles (R) of Oklahoma would make it illegal for firms to take such action. He argues that choosing the 30 percent route is cheaper for some firms than fully financing their pensions plans themselves. If many firms latch onto this cheaper method, the PBGC is going to have to make up the difference between the 30 percent figure and the amount it might really require to cover a firm's employees.
* Less than half the nonfarm work force is covered by private pensions, although all taxpayers indirectly subsidize the plans since pension costs are tax deductible. Pensions are concentrated in large, unionized industries, such as manufacturing; smaller firms and service businesses have spottier coverage.
* Pension plans probably won't expand to cover a higher percentage of workers , unless new legislation orders it.
In 1981 the President's Commission on Pension Policy recommended a compulsory private pension system to supplement social security. But for small business, the costs of setting up such plans may be onerous.
''We'll probably never have voluntary, 100 percent coverage,'' Ms. Munnell says.
* Partial indexing of pension benefits to inflation is both desirable and feasible. Also, if a pension fund earns a real rate of return on assets (after inflation is considered), the return should be used to help boost benefits under an indexing system.
''That inflation premium should be passed along to the worker,'' says Ms. Munnell. ''In many cases it has not been.''
Cost-of-living adjustments for private pension plans currently lag far behind inflation. A 1980 Hewitt Associates study found 57.5 percent of companies surveyed had not raised benefits for retirees since 1973. Without more extensive indexing ''the role of private pensions in the provision of retirement income can be expected to decline in the future,'' Ms. Munnell writes.
* Pension plan assets have yielded spotty returns. Pension trusts managed by banks, for instance, have had their fortunes fluctuate wildly. In 1980 they yielded an average 24.4 percent return on investment; in 1974 they suffered an average 21.3 percent loss. Over the last 20 years, the annual return has averaged out at 5.2 percent.
Life insurance companies, the other major managers of pension assets, did a bit better, averaging a 5.6 percent yield since 1960.
''I cannot believe they have done as badly as they have. It's mind boggling, '' says Ms. Munnell.
Pension trusts in particular, she says, could stabalize performance by investing in more mortgages.
Unless the above issues are addressed, Ms. Munnell concludes, private pensions won't be able to shoulder more responsibility for retiree's income security. The plans could easily decline in importance, relative to social security.
Not all pension experts agree with Ms. Munnell's findings.
''She implies both that private pensions are insolvant and the PBGC unworkable. Our work shows that most plans are highly funded. Some are overfunded,'' says Sophie Korczyk, research associate at the Employee Benefit Research Institute (EBRI), a company-supported study group.
An EBRI rebuttal further faults Ms. Munnell for studying only plans which promise a set benefit, while ignoring ''defined contribution'' plans--programs that allow employees to place certain amounts, partially matched by employers, into outside investments such as mutual funds.