Underfunding Pensions, Public and Private, can Hurt Taxpayers

Don has posted on the perils to the taxpayer derived from excessive penision and other benefits to government employees and has also posted on the perils to private business if they over-promise benefits to their retirees. Ironically, the poor decisions of both can hurt the U.S. taxpayer. If public sector employees get too much, well, it's fairly obvious who foots the bill. However, in addition, the private sector may soon come calling to the American taxpayer, too.

In 1974, the U.S. government set up the Pension Benefit Guarantee Corporation to protect retirees of private companies from losing their benefits. This pseudo-government corporation was supposed to keep an eye on private business as sort of an insurance for private pensions. If a company failed, the PBGC would pick up the pension tab. Unfortunately, the PBGC have been too lax in their oversight and many companies have taken advantage of them by underfunding their pensions. The result has been an increase in PBGC bailouts as companies have become bankrupt, the recent example of United Airlines is a case in point. However, in addition, some companies are looking to shed their pension liabilities altogether by calling on the good graces of the PBGC.

An editorial in yesterday's New York Newsday warns that the UAL "fix" may signal a danger to U.S. taxpayers

Washington [should] shore up the listing finances of the Pension Benefit Guaranty Corp., the government corporation that insures defined benefit pension plans and pays those benefits when companies can't.

Doing nothing will invite pressure for a taxpayer-financed bailout of distressed pension plans. With the pace of defaults quickening and plans around the country underfunded by a total of $450 billion, that's a bailout that deficit-ridden Washington can ill afford.

The PBGC is not taxpayer funded. It collects premiums from firms whose pensions it insures, assumes the assets of the plans it takes over and earns money on its investments. But with the United default, PBGC's obligations now outstrip its resources by $23 billion. It's an insurance company that can't set its own rates (Congress does that) and can't manage its risk, (it has to insure all comers).

United Airlines is not alone in shedding responsibility for its pensions, and other troubled airlines must be watching. Pan Am, TWA, Eastern, Braniff and U.S. Airways all defaulted on pension plans; most went out of business. Other distressed sectors of the economy, such as the auto industry, could see defaults.

The White House has proposed increasing the $19-per-plan participant premium, the first hike since 1991, and other tweaks to improve PBGC's fiscal picture. That's the least Congress can do to help workers caught in the gears of the shifting pension paradigm.

I've posted on need for morality in government before. It is patently obvious that there is also a need for morality in business. As Jeff Adams at RealityCheck writes

Mind you, I’m no fan of unions, who I think more often than not these days push too hard and far with contract negotiations to the point where they break companies. Still, why was not enough money set aside to fund the pension plan? United had to know they were cutting corners and eventually the crap would hit the fan.

Is anyone at United being held accountable? I haven’t heard anything about stockholders being upset at this move (but then why would they be if it improves their bottom line), and it’s obvious that the government is in on what could be a really sweet deal if United is able to get itself back in the black. Even though United just unloaded billions in debt off on the American taxpayer (how else do you think the PBGC is going to pay those greatly reduced pensions?), the feds will come out pretty good on this (surely you don’t think the PBGC will use the notes and stocks they acquired in the deal to pay those pensions; especially when they can stick to us via taxes).

An added concern in this situation is how other companies with pension plans will react to what United has done. Companies can claim they are in a bind and screw over their employees by dumping the problem on the federal government. This should cause people to stop and think. Remember the S&L mess? Businesses were mismanaged and the feds (read taxpayers) paid billions to ‘save’ them. Social Security is going down the toilet, and there will be few, if any, benefits to receive in old age (an age the government wants to keep increasing to delay paying back what they took from us, hoping we’ll die before we can collect), and there’s huge potential for a growing trend in defaul! t on pension plans by corporations, leaving the government to ‘cover’ those pensions at a fraction of their value.

I believe in the benefits of capitalism, but the benefits can only be accrued consistently and over a long period of time if we remember that virtue, including honesty and responsibity, is not something to be dispensed with if it inhibits increasing the bottom line. Capitalism and freedom form a symbiotic relationship as they draw from and support each other, but they are both supported by the structures of a moral society. It is up to us to continue to foster and adhere to moral tenets. It is simply wrong to promise something and then willfully engage in practices that will render those promises unfullfilled. Many conservatives hold their government to a high moral standard. It is incumbent on us to also hold private business to the same standard. We have neo-cons, theo-cons, paleo-cons, etc. Color me a virtue-con.