A perfect storm on pensions

In an earlier column on the crisis gripping state employee pension funds, I mistakenly gave some comfort to private sector workers by alluding to pension protections provided by the Pension Benefit Guaranty Corporation (PBGC).

The PBGC, a government-created institution, guarantees payment of pension benefits promised to 44 million American workers and retirees in more than 31,000 private-sector, defined-benefit pension plans. Now it, too, is in serious trouble.

Take, for example, the situation involving United Airlines. In August, out of self-defense, the PBGC intervened against UAL’s announced plan to stop all pension plan payments while it is in bankruptcy proceedings.

PBGC Executive Director Bradley Belt stated: “United’s decision to stop funding its pension plans increases the risk of loss not only to the company’s workers and retirees but to participants in other plans insured by the PBGC. ... The bankruptcy court should reject this attempt to sidestep the statutory funding rules. Agreements between private parties [UAL and its creditors] must not take precedence over federal pension law.”

If UAL is permitted to go forward with its plan, the move may kill the PBGC altogether. The PBGC already has an $11.2 billion deficit; the UAL default will add $6.4 billion more. And this is just the beginning!

Now comes US Airways, which announced in September its intention to terminate its remaining defined-benefit pension plans. The carrier did not make a $110 million payment due last month, and that act will trigger the transfer of $2.1 billion in pension liabilities from US Airways’ machinists’ and flight attendants’ plans onto the PBGC.

According to Olivia S. Mitchell, Wharton professor of insurance and risk management and executive director of the Wharton/University of Pennsylvania Pension Research Council, a “perfect storm” of circumstances is battering corporate pension plans and the willingness of sponsors to fund them:

• Stock losses from the bubble crash have wiped out 10-15 percent of U.S. pension portfolios.

• Low interest rates require funds to use more assets to satisfy current and expected obligations.

• Enrollments in defined-benefit plans are dropping, even though active retirees are increasing due to increased job changes and use of contract and temporary work.

• Lower profits characterize significant sectors of the U.S. economy, especially air transportation, steel and automobile manufacturing, and several industries (machine tools, textiles, plastics) facing increased competition from globalization.

The PBGC estimates that pensions have been underfunded by almost $400 billion since 2002. Many workers do not realize that the PBGC only insures approximately 60 percent of those liabilities. Even so, the size of the potential bailout is staggering. The GAO now terms the PBGC Single Employer Insurance program as “high risk.”

Since the Bush administration favors tax-sheltered investment accounts (IRAs, 401(k)s, etc.) over defined-benefit plans and over Social Security, do not expect a big rescue operation coming from that direction. Bush’s tax cuts for the rich will make the payment of these pension liabilities more difficult and unlikely. Furthermore, Bush’s drive to privatize Social Security — if successful — would put the entire Social Security system at risk.

In short: if Bush is re-elected, retirees can expect only a fraction of what was promised to them.

The big problem with individual private accounts is this: it’s one thing for millionaires like Bush to “voluntarily” save for retirement. In fact, if he can’t save enough to retire, maybe he should starve. But it’s quite another for millions of workers who are bounced from job to job through their working lives, and who are not paid enough to “voluntarily” save for their retirement. You get laid off. A doctor must be paid for a sick child. Cash one of the 401(k)s with the penalty? Easy choice. But no retirement.

The challenge is to protect Social Security, as Sen. John Kerry has pledged to do. In fact, because Social Security may be the only retirement millions of American workers will get, these benefits should be increased.

It’s worth noting that the most successful and healthy retirement financial company is the nonprofit TIAA-CREF, The Teachers Insurance and Annuity Association. Is that an accident? Tune in to a forthcoming column for the answer!

The author can be reached at jcase@steuber.com.