The Association of U S West Retirees



By Christopher Byron
New York Post
Monday, November 7, 2005

The news that Exxon Mobil netted a startling $9.92 billion from rising oil prices this summer has brought quick demands from legislators that Congress enact a windfall profits tax on the industry.

It's a familiar way for vote-hungry politicians to look indignant over soaring oil prices. But any legislator interested in solving a real problem should have demanded instead that Big Oil's windfall profits be reinvested in the industry's outrageously underfunded pension system.

Underfunded corporate pension and post-retirement health-care plans are a ticking time bomb at the heart of not just the oil sector but the whole of American business, imperiling the retirement dreams of millions of workers as well as the stability of the entire economy.

Yet Washington seems blithely indifferent to the burning fuse in front of them, or the mountain of dynamite to which it is attached.

Exxon alone is currently staring at an unfunded pension obligation of $11.5 billion.  And since the amount is even larger than the company's reported third-quarter net income from soaring oil prices, any legislator with a soapbox could have performed a true national service by insisting for the symbolic value of the gesture alone the money be used to eliminate Exxon's pension plan shortfall.

But Senate Democrats Christopher Dodd of Connecticut and Byron Dorgan of North Dakota trafficked instead in the quick and crowd-pleasing demagogy of a federal excise tax on one quarter's worth of oil patch profits.

Their goofball idea:  to recycle the loot back to the public as "rebates" in effect, squeezing what amounts to involuntary campaign contributions out of Big Oil to help the two men get votes in the next election.

Too bad, for the situation at Exxon simply underscores a larger and far more threatening problem that has been growing silently on the balance sheets of many of America's biggest and best-known companies for years.

From mining to transportation, from manufacturing to computers, some 40 million American workers are heading toward retirement relying on company-paid pension plans that are propped up by grossly inadequate funding from the companies themselves.

Company-paid "defined benefit" pension plans are an indispensable prop to the entire economy, providing more than 20 percent of all income to Americans 65 years of age and older.  Nearly half the country's private-sector labor force participates in these plans, which promise fixed and guaranteed pension payments for life to retiring employees who haven't spent their careers job-hopping from one company to the next.

Under federal law, companies setting up these plans must back them with portfolios of enough stocks, bonds and similar assets to guarantee the plans will be able to continue meeting their obligations to retirees even if the companies themselves go out of business.  If a company collapses with an "underfunded" plan on its books, a government-run entity called the Pension Benefit Guaranty Corp. is supposed to take the plan over and run it for the beneficiaries.

But scarcely did these plans start coming on line before corporate raiders began dreaming up ways to loot them.  The raiding began in earnest when a series of 1980s-era court decisions let the companies running the plans use preposterous, pie-in-the-sky estimates regarding how big a return they could reap for the plans by investing their assets ultra-aggressively.

If the stock market was returning an average yield of, say, 8 percent annually, companies could get away with claiming that they'd be able to generate twice that rate of return and no one batted an eye.  Management was then able to begin scaling back future fund contributions and start siphoning off existing assets.

Nonetheless, the corporate pension system was still self-sustaining and in the black as recently as four years ago, with nearly all major corporate plans able to make their obligated payments to beneficiaries from the yield on their invested assets.

BUT that is no longer the case, with two-thirds of all corporate plans now needing supplementary cash payments from their sponsoring corporations to meet payment obligations to beneficiaries.

The most troubled biggie on our list of corporate time bombs:  Goodyear Tire & Rubber Co.  Its pension plan assets of $4.6 billion amount to less than 60 percent of the plan's obligations.  So last year Goodyear had to contribute $264.6 million in cash to its plan (more than twice the level of the year before).  Meanwhile, the plan's unfunded obligations have continued to swell, as the company approaches balance-sheet insolvency, with no tangible net worth at all.

If Goodyear's long-term slide were to end eventually in bankruptcy court, the company's 84,000 employees would get the shock of their lives.  That's because, looming behind the pension crisis is an even bigger problem:  unfunded retiree health-care plans.  Like those of nearly all companies, Goodyear's health-care plan for retirees is backed by no assets at all and is instead funded totally out of general corporate revenues.  So a Goodyear bankruptcy would be hard cheese for the company's health-care beneficiaries, who would wind up with nothing.

Add it all together and our Top Ten list of corporate time bombs forms a massive $146 billion black hole at the heart of the U.S. economy.  What's more, when the list is broadened to include the corporate behemoths of the Standard & Poor's 500 Index, the black hole swells to more than twice that size.

As a result, many of the 76 million baby boomers, who are only now beginning to move into life's checkout line, can no longer be sure that the corporate retirement and health-care plans they had hoped to rely on will be there when they're needed.

In most cases, failed corporate pension plans become the responsibility of the aforementioned Pension Benefit Guaranty Corp.  But the PBGC is itself now effectively busto, with more than 200 failed plans having been dumped in its lap since the start of last year.  That has created about $23 billion in unfunded obligations on the PBGC's own balance sheet, a number that is bound to worsen.

Yet, since payouts from the PBGC are not government-guaranteed, Washington is under no obligation to keep funding the operation if the PBGC's pension burdens become unmanageable.

Worst of all, there is no apparent consistency in the ways the companies are basing their forecasts of future obligations.  For example, Goodyear pegs the current rate of inflation in the health-care sector at 12 percent, United Technologies Inc. puts it at 10 percent, and Exxon at 6 percent.  They all can't be right, yet Washington regulators do not even seem to have noticed such discrepancies, let alone questioned them.

The Financial Accounting Standards Board is said to be looking at setting some accounting ground rules in this area.  And some congressional squabbling is going on over whether the PBGC should charge companies more to guarantee their pension plans.  But other than that, few in Washington are showing any real interest in the financial calamity that is boiling up in front of them.

Dodd and Dorgan certainly missed their moment. But how many more chances will the rest of us get before it's too late to do anything but stand back and watch in awe as the biggest financial mess since the savings-and-loan crisis of 20 years ago erupts before our eyes?