Benefits at the Brink-Pension Default Could Trigger Crisis

By Rosenblatt, Robert A. | Aging Today, November/December 2004 | Go to article overview

Benefits at the Brink-Pension Default Could Trigger Crisis


Rosenblatt, Robert A., Aging Today


Potomoc Sources

It's a raw deal for airline pilots and other well-paid workers when one of the big carriers goes into a financial meltdown and dumps its pension plan into the lap of the federal government. Imagine yourself after a career of 30 years flying the big jets and looking forward to a $100,000-a-year pension: The dream crashes when the airline can't make its pension promises. The federal government, through the Pension Benefit Guarantee Corp (PBGC), takes over defunct plans and guarantees payments up to $44,000 a year. But that applies only if you are at full retirement age, 65. But airline pilots, by federal regulation, can work only until age 60. This is considered early retirement under PBGC rules, and that $44,000 pension gets slashed to $28,000. That's all you'll get.

This possibility, which many expect to become an unsettling reality at United Airlines, is just the tip of the pension problem, which threatens to nosedive into the political scene. The PBGC is the insurer of last resort for the retirement promises for more than 40 million Americans with traditional pensions. If things go wrong, the PBGC could be trapped in the biggest federal bailout since the savings-and-loan crisis of the early 19905, when taxpayers had to spend more than $200 billion to bail out depositors in failed financial institutions. Corporate pension defaults will give boomers much to worry about as they move into their retirement years and will give federal regulators and members of Congress many sleepless nights.

PENSIONS AT RISK

The pensions at risk are called a defined-benefit pension, with the final amount linked to one's salary over the last three or five years of work and to the number of years at the company. Employers are responsible for investing the money and keeping their promise. Hence, a defined-benefit payment might be $20,000 a year for someone who worked for 30 years and had a final salary of $40,000. Federal law passed in 1974 guarantees these pensions, and the government stands behind the law through the PBGC, which finances the program by collecting premiums from employers for each worker.

For years, the booming stock market kept the pension accounts at corporations crammed with cash and the pension bank overflowing; money was piling up because of soaring stock prices, and companies didn't have to divert much of their profits into pensions. The economic dotbomb of 2000 changed all that. For the big companies in Standard and Poor's 500 index, there was a surplus of $280 billion in 1999, the year before the economy crashed, money they had over and above their pension promises. The surplus became a deficit. For 2003, the deficit totaled $165 billion.

United Airlines, which has been trying to arrange financing to keep it out of bankruptcy, has warned that it might simply drop its pension plans, which the government says are in deficit by more than $8 billion. If United walks away, it would trigger the PBGC 's largest pension bailout ever and could be a signal for other troubled companies to do the same. The PBGC would cover about $6 billion of United's pension promises to its workers. But another $i .9 billion that retirees expected would disappear because of the agency's payment limits.

Over 40 million Americans are enrolled in defined-benefit plans, such as the ones operated by United. PBGC officials are nervous because their premium base is shrinking as more and more U.S. companies switch to defined-contribution pension plans. Under this kind of retirement system, company and worker make a contribution to the program, usually called a 401(k) plan. There is no promised benefit; the amount at retirement depends on the skill and luck of a worker in making selections from a menu of investment options, usually mutual funds, provided by the company.

With fewer firms operating traditional pensions, the number of companies paying premiums to the PBGC (now $19 a worker) is shrinking.

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