Detroit got handed one more ugly number Wednesday to slap us into the reality that we must rethink our futures. Sheet metal no longer can craft a cushy retirement. Nor can rubber, tires or seat cushions, apparently.

The entire auto industry — which would include the Detroit Three, as well as other auto manufacturers and auto suppliers that offer defined-benefit pension plans — is looking at a combined $77 billion in underfunded pension liabilities, based on the estimates of the Pension Benefit Guaranty Corp.

We do not want to alarm anyone. So make no mistake, the rug is not being pulled out from under most auto retirees. Many older retirees at General Motors Corp. and Chrysler LLC face no change in their pension payout.

But it is essential for others to know that about 45% of those underfunded pension benefits — or about $35 billion — would not be guaranteed in the event that all those plans in the auto industry would have to be terminated.

Who’d get hurt? Often it would be retirees in their late 40s, 50s or early 60s if their plans are terminated when they’re young and turned over to the PBGC, the agency that protects basic pension benefits. If the agency took over, those younger retirees would see caps on pension benefits. Go to www.pbgc.gov.

Early retirement deals could be on shaky ground

For years, the auto industry has tried to cut costs by enticing employees in their late 40s or 50s to take early retirement buyouts.

But those early retirement deals that offer full retirement benefits at a young age could be on shaky ground in the years ahead. The risks are real, if not immediate.

The PBGC said on Wednesday that it would cover only about $42 billion of an estimated $77 billion in underfunded benefits in the auto industry in the event that all the plans would be terminated. That’s because Congress put a limit on how much money the federal agency would pay out to younger retirees.

So could $35 billion in retirement benefits in the auto industry really be lost?

First, realize that the PBGC estimate covers 46 companies in the auto industry, including the Detroit Three, other car companies, auto suppliers, and rubber and tire companies.

No one is expecting all of those companies to terminate their plans and turn over the pensions to the agency tomorrow — or even in the near future.

Vince Snowbarger, acting director of the PBGC, noted in an interview earlier this month that Chrysler LLC and General Motors Corp. both are not expected to terminate their pension plans.

A warning for retirees

The latest numbers, though, do serve as a warning that it’s possible that some retirees down the line won’t get as much money as they expect.

“It says: People in the auto industry may have been promised more than can be delivered,” said Douglas Elliott, economic studies fellow at the Brookings Institution, a nonprofit public policy organization based in Washington, D.C.

Elliott points out that a pension fund can run out of money if its investments go bad and the employer becomes bankrupt and stops making new contributions.

All you have to do is go back a few decades. Elliott said the bankruptcies of the automakers Packard and Studebaker in the 1960s left a large number of employees with substantially reduced pensions when they retired.

Until 1974, there was little or no protection for pensions.

That same year, Congress passed the Employee Retirement Income Security Act, the foundation for the current pension insurance program.

Yet when a plan is turned over to the PBGC, there are strict limits on what can be paid out to younger retirees. Older retirees see more generous limits.

Now that several auto-related companies are in trouble, some younger retirees may not get everything that was promised in the long run.

For example, someone who is 50 years old today cannot collect a $25,000-a-year or $50,000-a-year pension if the PBGC doles out the dough right now for his or her old pension plan.

The PBGC limit in 2009 would be $1,575 a month — or $18,900 a year — for someone who is 50 years old and retired.

For 2009, the maximum guaranteed amount is $4,500 per month — or $54,000 a year — for workers who begin receiving payments from PBGC at age 65.

The specific limits are based on when the PBGC takes over the plan, as well as how old you are if you are retired when the PBGC takes over that plan.

Elliott sees a real risk even if the pension plans for GM, Chrysler and others are not terminated now.

It’s possible, he said, some auto industry firms could have to re-enter bankruptcy even if they emerge from one bankruptcy reorganization. Who knows what happens in three or four years?

Stock market not a fast fix

While the stock market losses in the past year did hurt pension fund investments, a dramatic increase in stock prices alone won’t solve all the pension troubles.

“The most critical factor in people looking at the risk is the financial health of their company,” said Jeffrey Speicher, a spokesman for the PBGC.

Speicher said the PBGC has been involved with 93 new bankruptcies in different industries since Oct. 1, 2008. A plan will not necessarily be terminated if a company files for bankruptcy.

On Wednesday, the PBGC reported that it posted a $33.5-billion deficit for the first half of fiscal year 2009.

Based on unaudited financial numbers as of March 31, the deficit represents an increase over fiscal year 2008’s $11-billion shortfall, and is the largest in the agency’s 35-year history.

“The increase in the PBGC’s deficit is driven primarily by a drop in interest rates and by plan terminations, not by investment losses,” Snowbarger said in written testimony for the Senate Special Committee on Aging.

The PBGC has stressed that it has sufficient funds to meet its benefit obligations for many years because benefits are paid monthly over the lifetimes of beneficiaries, not as lump sums.

Over the long run, some such as Elliott, predict that the PBGC itself will need a bailout.

Contact SUSAN TOMPOR: 313-222-8876 or stompor@freepress.com

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