Final answer:
The Pension Benefit Guaranty Corporation insures defined benefit pension plans, providing payment of some pension benefits if an employer goes bankrupt and cannot pay the pensions. This insurance is funded by employer contributions, ensuring financial security for retirees under such plans. Defined contribution plans like 401(k)s are not insured by PBGC but offer different benefits.
Step-by-step explanation:
The Pension Benefit Guaranty Corporation (PBGC) serves a crucial role in ensuring the financial security of retired workers by providing insurance for certain types of pension plans. Specifically, its purpose is to insure defined benefit pension plans, as opposed to defined contribution pension plans such as 401(k)s and 403(b)s. These economic safety nets are critical because they provide at least some pension benefits to workers if their employer goes bankrupt and cannot fulfill the pension obligations it has promised. Employers fund this insurance by paying a small fraction of the pension funds they set aside for employees into the PBGC.
It's important to understand that defined contribution plans, where both employer and employee may contribute and which are invested by the employee, are different and not backed by the PBGC. Instead, these plans offer benefits like being tax-deferred and portable between employers and rely on the real rates of return from the investments made by the employees. Hence, in the scenario of pension plans, the PBGC acts as a form of financial protection for traditional pensioners against employer insolvency.