Saving private pensions

September 17, 2004

WHEN US Airways began the path to its second bankruptcy this week by seeking court permission to skip a $110 million payment to its employee pension plans, the airline simply dismissed living up to that responsibility as "irrational."

And why not? When U.S. companies fail to meet their pension promises to their workers, there's very little hazard - because American taxpayers then pick up much of the remaining tab through the insurance program run by the federal Pension Benefits Guaranty Corp.

Trouble is, with a raft of large steel companies (Bethlehem, LTV), retailers (Bradlees, Caldor) and airlines (Eastern, Pan American) having dumped sizable pension plans on the PBGC, it would be considered insolvent if it were a private insurer. The 30-year-old pension insurer has about $34 billion in assets and $1 billion in company premiums coming in each year, but its deficit ran to $11.2 billion last year.

The PBGC already owes pensions to 1 million workers and retirees in 3,200 failed plans and faces having to cover about $300 billion in estimated pension underfunding by more than 1,000 companies. If bankrupt United Airlines is allowed to shirk its pensions, that alone would add a record $6.4 billion.

The first outside analysis of the guaranty corporation, by the Center on Federal Financial Institutions, now predicts it will run out of cash by 2020 or sooner - with the debacle, again, falling on taxpayers. Over decades, the total cost of a federal rescue could dwarf that of the savings-and-loan meltdown of the 1980s.

With companies rapidly shifting responsibility for financing retirement onto workers via 401(k) savings plans, virtually no new defined-benefit pensions - promising monthly checks for life - have been created in the last decade. Nevertheless, 44 million American workers and retirees still receive or look forward to benefits under about 31,000 such private pension plans.

The PBGC largely fell into desperate straits because its premiums have been set too low and because corporations have been allowed to use outmoded regulations to woefully underfund their pension promises (81 percent have shortfalls), subject too great a share of their pension investments to stock market volatility, and make insufficient catch-up payments to the federal insurer once their pension systems have been determined to be a risk.

President Bush and Congress took a stab at this worsening situation last spring by giving corporations a temporary reduction in their required pension payments. That relief just postponed and likely made worse the day of reckoning.

But U.S. Rep. John A. Boehner, the Ohio Republican who chairs the House Education and Workforce Committee, announced this week that he is trying to forge a fix that would stop companies from making pension promises they can't keep and require them to more fully and consistently fund pension plans and to provide more detailed disclosure of their plans' financial health.

This is an encouraging, if already tardy, start on a firm fix. The guaranty corporation has to be put on solid footing - and the sooner that happens the less it likely will cost taxpayers.

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