Painful Pensions

Regardless of whether you’re a pro-labor or pro-management ideologue, the United Airlines pension story stinks. Last week, a federal Bankruptcy Court allowed United to terminate four employee pension programs. The responsibility for the programs will be transferred to the federal Pension Benefit Guaranty Corporation (PBGC). In no particular order, here’s why this deal will wind up with more losers than winners:

1. Once again the government is bailing out a failing corporation simply because it’s big. Hey, government people, what message are you sending to the airlines that are managed properly and making money? What message are you sending the losers in every industry? On top of that, the track record of protectionism tends to be awful: with few exceptions, poorly performing companies that are shielded from market realities remain weak.
2. If taxpayers are expected to pay for failed pension plans at United, why shouldn’t they pay for every failed plan in other companies? As of 2004 there are 31,000 pension plans covering 44.4 million employees in the U.S. Golly--as a taxpayer, I’d be tickled pink to pay extra every April 15 to buffer incompetent top managers from pension liabilities when their companies don’t perform, wouldn’t you?
3. Had United died, its assets (including many of its employees) would have been picked up by healthier rivals. That’s how weak companies get winnowed out, how good companies get stronger, and how new jobs get created. It’s Darwinian in the short run, healthy in the long run.
4. Having said all that, if we as a society insist that United must survive, we must recognize that the company has little choice but to dump its current pension liabilities. That means it has to violate its long-standing promises to its employees, who labored for years in good faith that those promises would be honored. Goodbye, integrity.
5. You know that however this turns out, United’s top managers will walk away with millions, while most of the employees and retirees will enjoy reduced and uncertain pension benefits. Hmm, what’s wrong with this picture?
6. Currently, the PBGC has $39 billion in assets. Sounds like a lot, but it’s not when you consider the scale of the payouts to United and other unsuccessful firms (192 in 2004 alone, including US Airways). A spokesperson for PBGC said: “We do have a long-term financial problem.” Nice understatement, especially since the PBGC estimates that corporate America’s total pension deficit is around $450 billion. Look for pork- loving members of Congress to pour more funds into PBGC so big failing companies in their districts can be kept on life-support indefinitely.

I hope you don't expect me to pull "le compleat solution" out of a hat! I wish I were that sort of magician. But perhaps I can make two modest self-evident comments that might help prevent this sort of fiasco in the future.

First, to labor-management negotiators: Think twice before agreeing to contracts that commit a firm to huge pension liabilities that may one day paralyze a firm, and may well be impossible to fulfill when the company’s fortunes sour. There are a number of alternatives (including the old battle- scarred 401k) that are superior to defined benefit plans like United’s.

Second, to individual investors: Don’t allow all your retirement dollars to be sunk into one company, regardless of whether you’re working for United, or Enron (remember what happened there?), or Google, or anywhere else. You’ll be much better off if you diversify your retirement portfolio big time.