posted July 22, 2005
CRASH LANDING: United Airlines Ditching Its Pensions

“CRASH LANDING: United Airlines Ditching of its Pensions
May Well Precipitate a National Crisis“
copyright 2005 by Jack Rasmus
“In These Times? Magazine, June 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 $9.8 billion in total pension liabilities, making it 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’s abandonment comes barely a year after legislation passed by Congress in April 2004 relieving it and other airlines of $1.6 billion in pension fund payments. 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?. .

But now those employees have been 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. A January 30 Wall St. Journal article estimated that “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.?

A Gathering Storm

But United’s nearly $10 billion abandonment is only a drop in the bucket of endangered pension plans. Between 1985 and 2002 more than 80,000 Defined Benefit Pension plans have been abandoned by corporations in the U.S., according to 2003 U.S. Senate hearings that examined both the shoddy condition of corporate pension funds and the PBGC’s ability to handle future terminations.


Collapse of Defined Benefit Pension Plans, 1975-2002

Period Plan Terminations Plans Remaining

1975-1985 65,000 112,000

1986-2002 95,000 32,000

Source: Hearings, Special Committee on Aging, U.S. Senate,
October 14, 2003.

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 among companies in a similar position, such as Delta, Continental and Greyhound, triggering and 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.

Thus, the PBGC thus now faces its own funding crisis. It has an immediate liability of $62 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 by Congress of the Defined Benefit Pension plans that the PBGC is responsible for.

Referring to this $23 billion deficit, Rep. Jan Schakowsky told reporters on May 10, “Taxpayers had better buckle up because we will be in for a bumpy ride of bailout after bailout, as more and more corporations dump their pension plan obligations on the PBGC.? She and Rep. George Miller (D-Calif.) have co-sponsored the Pension Fairness and Full disclosure Act, which would deny payments to executives’ plans if worker pension plan obligations were underfunded.

But the current deficit is only part of the problem. In an emergency report issued in June 2004, the PBGC estimated that more than 1000 pension plans were under-funded by $50 million or more—a combined under-funded liability of $278.6 billion. And that doesn’t 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?.

Bush’s Red Herring

While President Bush stresses a 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.

The April 2004 legislation passed by Congress amounted to a two-year, $80 billion ‘pension contributions holiday’ for corporations with under-funded pension liabilities, but it was basically a stop-gap measure. In January, Bush proposed legislation to the House and Senate that would allow companies with severely under-funded pension plans to take up to 7 to 10 years to make up contributions to stabilize their funds, instead of just two years that had previously been required. A single corporate bond interest rate to calculate the value of a pension’s fund was proposed, but it is 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.

The last proposal seems designed to encourage corporations in trouble to abandon their DBP pensions even faster than before. Should Congress pass Bush’s proposals this year, companies with ratings below investment grade, like US Steel, Lucent, Goodyear, Qwest, R.J. Reynolds—not to mention most of the remaining major airlines—will now serious consider dumping their pensions onto an already financially stressed PBGC.

Perhaps that is just what the Bush administration wants. It would certainly hasten the demise of the traditional Defined Benefit Pension system and usher the way 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 upcoming 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 regarding the restructuring of Social Security.

Today 44 million receive 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

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