posted July 22, 2005
United Airlines’ Pensions Go Bust

copyright 2005 by Jack Rasmus
The ILWU “Dispatcher", May 2005

On May 10, 2005 a federal court announced United Airlines could pocket $3.2 billion of contributions it owed its 134,000 workers’ pension plans, and turn over its four pensions to the government’s Pension Benefit Guaranty Corporation, the PBGC. The move will leave the PBGC saddled with total pension liabilities from United equal to $9.8 billion, the largest bailout of a private pension fund in more than three decades, at a time when the PBGC faces mounting red ink of tens of $billions and possible bankruptcy itself.

The court’s action will also likely set in motion a snowball effect as other major airlines move to jettison their pension plans. The effects could spill over to other industries as well—including the Auto industry where similar rumblings by management about abandoning benefit plans today may be heard—as corporate America accelerates its dismantling of union negotiated Defined Benefit Pension plans and seeks to replace Defined Benefit Pensions with privatized 401K-like contribution plans.

United Airlines’ abandonment of its pension comes barely a year after legislation passed by Congress in April 2004 relieving it and other airlines of $1.6 billion in pension funding obligations. As United’s CEO, Glenn Tilton, happily declared a year ago following that government handout, “This legislation will help strengthen the pension plans of millions of American workers, including the 62,000 employees of United Airlines?. Tilton took the money and ran, now a year later jettisoning pensions at United nonetheless.

Workers at United will now be left holding the bag. The takeover of their pensions’ obligations by the government’s PBGC will mean significant reductions in their pension benefit payments at retirement. It has been estimated, “For a 45 year old whose plan fails this year, for example, the government covers a maximum of $11,403 a year, even if he has earned a larger pension.?

The record-setting, nearly $10 billion abandonment by United Airlines of its pension liability is only the tip of the pension crisis iceberg, however. Between 1985 and 2002 more than 80,000 Defined Benefit Pension plans have been abandoned by corporations in the U.S., according U.S. Senate hearings on the crisis less than two years ago.

Since 2000 more than 9000 such plans have been terminated, with the number doubling in 2004 compared to the year earlier. During the decade of the 1990s the PBGC assumed on average annually pension payment liabilities for an additional 50,000 workers a year. That annual liability for pension benefit payments has increased since 2000 to an average of an additional 175,000 workers a year. The recent action by United Airlines promises to set off yet another wave and an even more severe pension crisis.

The growing corporate trend toward abandoning traditional pension plans has placed severe stress on the government’s PBGC and its ability to guarantee even reduced pension benefits to workers. Even before the United Airlines announcement, in 2004 the PBGC experienced the largest financial loss in its history, $23 billion. This followed an $11 billion loss in 2003 plus additional multibillion dollar losses each year since 2000.

The PBGC thus now faces its own funding crisis. It has an immediate liability of $69 billion in pension benefit payments and assets of only $39 billion. Should other airlines and other industries quickly follow the United announcement, that crisis will grow worse, much worse—likely requiring a major bailout of the entire private pension system in the U.S. by Congress.

But even this is still just a ripple. A pension tsunami is taking shape at sea and currently heading toward the retirement coastline. In an emergency report issued in June 2004, the PBGC estimated that companies with pensions plans under-funded by $50 million or more—that’s more than 1050 pension plans—together had an under-funded liability of $278.6 billion at the end of 2003. This compares to only $18.4 billion as recently as 1999. And it doesn’t even include the thousands more companies with under-funded liabilities of less than $50 million.

The aggregate total under-funding of corporate pension plans for which the PBGC is liable as of 2004 amounts to more than $600 billion. About $100 billion of that under-funding represents corporations and plans with severe financial problems and thus a very high likelihood of pension plan default and termination in the very near term.

In the words of the PBGC’s executive director, Bradley Belt, “The current massive under-funding of defined benefit pensions, compounded by the financial struggles of major industries that rely heavily on these pensions, has greatly increased the risk of loss for the pension insurance program?.

While George W. Bush concocts a phony financial crisis in Social Security in order to push his plans to privatize that public retirement system, a very real crisis in the traditional Defined Benefit Pension plan system is reaching a climax by the day.

In April 2004 Congress passed what amounted to an $80 billion ‘pension contributions holiday’ for corporations with under-funded pension liabilities. But the 2004 legislation was only a stop-gap measure. While much attention has been focused in recent months on Bush’s plan to radically restructure the Social Security System, a parallel Bush initiative to restructure Defined Benefit Pension plans has also been quietly taking shape.

In January of this year Bush proposed that companies with severe pension under-funding problems could now take up to 7 to 10 years to make up contributions to stabilize their funds, instead of just two years as has been the requirement. The companies have countered with an extension of 25 years in which to add back funds to bring their pensions back to solvency. A single corporate bond interest rate to calculate the value of a pension’s fund was proposed, but with a highly complicated formula that would provide many opportunities for corporations to manipulate and thus avoid accurately estimating their fund’s true value. Finally, a sharp increase in corporate contributions to the PBGC, from the previous $19 per worker to $30 per worker was proposed. For corporations with ‘below investment grade’ pension funds the PBGC contribution would be even higher than $30.

Were one inclined toward a Machiavellian view, one might interpret these proposals as designed to encourage corporations in trouble to abandon their DBP pensions even faster than before. As one Senator, Trent Lott of Mississippi, asked government representatives testifying before Congress at the time, “It almost looks like you want to put them into bankruptcy and make them terminate those plans?. Should the above Bush proposals pass Congress in 2005, certainly companies like US Steel, Lucent, Goodyear, Qwest, R.J. Reynolds—not to mention most of the remaining major airlines—with ratings below investment grade will now serious consider dumping their pensions onto an already financially stressed PBGC.

But perhaps that is just what the Bush administration wants. It would certainly hasten the demise of the traditional Defined Benefit Pension system and open the way more quickly for Bush’s preferred ‘ownership society’, replacing group pensions with 401k-like individual pension accounts.

Congress began considering legislation based on these Bush proposals in March 2005. In the next few months decisions will be made on the further restructuring of the private pension system, the import of which is no less consequential than the parallel debate and restructuring simultaneously now also underway with regard to Social Security.

Today there are 44 million receiving Social Security Retirement benefits. But there are 45 million workers also dependent on Defined Benefit Pensions with a potential total liability of $1.5 trillion. While the fight continues over Social Security privatization and restructuring in a highly visible public manner, a conflict just as significant though less noticeable is underway below the public radar on restructuring private pensions as well.

Jack Rasmus
National Writers Union, UAW 1981, AFL-CIO

Monday, August 02, 2021 1:57 pm | login | xhtml
"In 'Fire on Pier 32' historical events and the union movement live again through art, allowing our collective history to emerge clear and true."

Jack Rasmus Productions
211 Duxbury Court
San Ramon, CA 94583