Thursday, May 12, 2005

United's Pension Debacle

The New York Times
May 12, 2005
United's Pension Debacle

On Tuesday, when it received a federal bankruptcy court's permission to terminate its pension plans, United Airlines became the biggest pension defaulter in the history of corporate America. Analysts fear that Delta may also default, as well as other ailing airlines, followed by auto parts companies and perhaps even, in five years or so, the carmakers themselves.

When the court's decision is finalized, United will unload $6.6 billion of obligations onto the Pension Benefit Guaranty Corporation, the federal agency that insures corporate pensions. Some of the 134,000 employees and retirees of United will see little change in their retirement payouts because the government insures a big chunk of promised benefits - up to $45,614 this year for someone retiring at age 65. But for others, especially pilots, who typically accumulate six-figure pensions and must retire at age 60, the cuts will be draconian.

Sadly, it's too late to offer relief to the burned United employees. But their plight should compel Congress to learn the right lessons and take the necessary steps to protect Americans' pensions.

There are, for instance, loopholes in the law that is supposed to penalize companies for underfunding their pensions. Currently, the government estimates that, at most, 20 percent of a total of $450 billion in underfunding is due to financial distress at companies. The rest is occurring at businesses that are financially healthy and are simply dodging their responsibility to put the proper resources into their pensions.

Congress must also raise the premiums that corporations pay the government for federal pension insurance, something that hasn't been done since 1994. This is politically difficult because corporations obviously don't want to pay higher premiums. Unions, fearing that corporations will cut back or drop pensions if forced to pay more, have not been lobbying for the change. But study after study shows that premiums are underpriced by one-sixth to one-half. No wonder that with the United default, the pension agency's deficit will rise to $23 billion; as recently as 2001, it had a surplus of $7.7 billion.

If the pension agency itself was pushed toward bankruptcy, some 40 million Americans who are covered by traditional corporate pensions would be more vulnerable to catastrophic losses. In addition, taxpayers would be called upon to rescue another failing federal institution, as in the savings and loan bailout of the 1980's.

The United debacle also holds a broader lesson about retirement security. The level of risk that exists in pensions and other retirement savings plans has no place in the core tier of retirement savings, Social Security. If lawmakers and policy makers are not yet convinced of that, they should talk to the people at United.