Todays NY times has a front page article on the reduction of the retirement benefit of a 61 year old retiree from 151k to 22k when the employer filed for bankruptcy. I know that the max insured benefit is about 45k for a 65 year old but how does the reduction operate for ees less than 65?

Well, there is a strict hierarchy in the allocation of assets. Basically you calculate the participants PVAB. The hierarchy is then:

Voluntary contributions
Mandatory contributions
Benefits that were in pay status 3 years ago
Basic benefits not exceed the $ limit (the 45,000 in your case)
Non-forfeitable benefits
Everything else

There is also a limitation based on the number of years of participation (if I remember correctly). Each step must be completely funded before going to the next step. I believe it is just prorata within the step.

It seems really steep to go from 151,000 to 22,000 just because of the plan termination unless the plan was WAY underfunded. PBGC should have then taken over the liabilities and gone after the employer. Maybe the drop is due to early retirement subsidies which disappear until the last step???

That particular retiree was covered by the Consolidated Freighways plan. According to the PBGC news release, http://www.pbgc.gov/news/press_releases/2003/pr03_38.htm the plan was 45% funded.

One minor enhancement to the summary outlined by Frank above: step3 (benefits that were in pay status 3 years ago) should also include benefits that could have been in pay status 3 years ago.

http://pbgc.gov/services/descriptions/guarantee_table.htm

Provides a chart for the reduction in receiving benefits prior to age 65.

Plan assets are applied first to the priority categories 1 and 2 to cover voluntary and mandatory contributions and then to priority category 3 (PC3) people. As already described these are participants who were retired three years prior to the date of plan termination and those who, under the plan, could have been retired then.

Plan assets are used to pay these PC3 participants up to the amount of their plan benefit. If there are not enough assets in the plan to do that, PC3 particpants get a pro rata share. So, depending on plan assets, PC3 participants can get up to their plan benefit but in any event not less than the guaranteed maximum amount (GMA).

Some benefits are not insured and there are reductions for early retirement and certain forms of benefit. The GMA is for a person retiring at age 65. There is a 7% per year reduction in the GMA for the 5 years preceding age 65 and 4% per year for the next 5 years and 2% thereafter.

Age for the GMA chart is the later of age at retirement or age at time of plan termination.

And there is also a phase-in for plan amendments enacted in the last 5 years.

And a little OT, but there is also a phase-in for substantial owners on the maximum over 30 years. Kind of makes it a little silly paying the variable premium on your smaller plans...