The Association of U S West Retirees



Dealing Pensions
By Jessica Holzer
Friday, July 21, 2006

Washington, D.C. - A congressional plan to avert a costly taxpayer bailout of corporate pensions could end up weakening rather than strengthening the system.

Lawmakers are on the verge of striking a deal on legislation that would force companies to shore up their defined benefit pension plans and raise the premiums they must pay into the Pension Benefit Guaranty Corporation, the funder of last resort for the pension system.

But still up in the air is whether the airline industry and defense contractors might get 20 years to fund their unfunded liabilities, compared with just seven years for other companies.  Exempting big swaths of corporate America from the tighter funding rules may well worsen the PBGC's fiscal position, raising the risk that taxpayers will get stuck with the tab.

President George W. Bush has said that he believes, as the Labor Department put its, "promises made to workers and retirees must be kept."

Still, the new congressional plan could be "possibly the worst thing," argues to David John, a pension expert at the Heritage Foundation in Washington.

The PBGC is already $23 billion in the hole after a string of companies, such as    
UAL's United Airlines and Delphi, saddled it with huge pension liabilities in recent years.  Giving breaks to certain companies would only exacerbate the problem, because there's no telling whether the company will be around in 20 years --especially if it's an airline.

Under the relaxed standard, it's quite likely that a pension plan will be forking over sums to its beneficiaries faster than it is paying down its unfunded liability, says John.  If it goes bust in ten years, the PBGC will get stuck with a plan that is in a worse fiscal position than it would have been under current rules.

And that says nothing about moral hazard.  The airlines have unleashed a lobbying blitz to plead for special treatment.  But down the road, there's nothing to stop other beleaguered industries from doing so as well.

"The theory is, when you're down, why would you put on an additional burden?" said Alex Pollock, a pension expert at the American Enterprise Institute in Washington.

About 44 million Americans -- mainly from the steel, automobile and other older industries -- are covered by the pension system, which is estimated to be underfunded by a whopping $450 billion.  Though the PBGC is not guaranteed by the government per se, no one believes that taxpayers will be off the hook in case it becomes insolvent.

But just who will pay introduces a sticky political problem, as only 20% of private sector workers have a defined benefit plan, notes Pollock.  "You're asking 80% of people who don't even get a pension like this to pay for the ones who do."