Who Pays for Pensions?
Washington Post Editorial
Friday, May 13, 2005

EVERY TIME a company promises a pension benefit, taxpayers are potentially on the hook.  The company is supposed to put aside money to back its promise, but if it goes bust without doing so, a government agency, the Pension Benefit Guaranty Corp., shoulders its obligations to workers.  By the end of 2004, this government backstop had taken over pension plans whose liabilities exceeded assets by $23 billion, and the current trouble in the airline industry seems likely to inflate that total.  Somebody has to pay for this, and Congress appears to think you should.

The Bush administration has a better proposal.  To plug the deficit, companies with defined-benefit pension plans (the sort that, unlike 401(k) plans, promise a certain share of final salary after retirement) should pay larger premiums for their government insurance;  the administration suggests a raise of about $18 billion over five years. 

Meanwhile, to reduce the risk that new liabilities will be dumped on the government, pension plans should be required to fund their promises fully within seven years.  Firms with pensions that are chronically underfunded should not be allowed to exacerbate the problem by making new pension promises.  Firms at greater risk of going bust (those whose bonds carry poor credit ratings) should pay higher premiums, reflecting the threat they pose to taxpayers and deterring the companies from making reckless promises.

The recent budget resolution adopted by Congress raised doubts about one part of this good plan.  Instead of increasing premiums by $18 billion over five years (which would reduce the insurer's deficit by about three-quarters), negotiators floated an increase of just $6.6 billion. 

Meanwhile, the proposals to limit additional liabilities being dumped on the government have been countered by business lobbyists, whose clients want to keep forcing taxpayers to underwrite their pension promises.  A requirement that companies should fund such promises within seven years is regarded as impossibly draconian;  the idea that risky companies should pay higher insurance premiums is regarded as unfair.  If the lobbyists get their way, the deficit at the Pension Benefit Guaranty Corp. is likely to grow.  And if it's not going to be plugged by adequate premiums, it will have to be plugged by taxpayers.

Congress's hesitation on this question is especially depressing because the airline industry is making an eloquent case for reform.  On Tuesday a court allowed United Airlines to hand off responsibility for its pension plans to the government; those plans have a deficit of nearly $10 billion.  United workers and retirees with generous pensions will suffer, because there is a cap on what the government will pay to each of them.  But even after United Airlines beneficiaries are deprived of about $3 billion, the government will be on the hook for more than $6 billion.  Delta Air Lines is threatening to follow United into bankruptcy, and Northwest may not be far behind.

There are no good options on the airlines.  Bankruptcy law gives the companies the right to transfer pension promises to the government, so the feds, like other creditors, are going to take a loss.  But that prospect ought to motivate Congress to protect taxpayers from more such pain in future, however much lobbyists complain about it.