The Wall Street Journal - August 20, 2004

UAL Is Likely

To Terminate

Pension Plans

By SUSAN CAREY

Staff Reporter of THE WALL STREET JOURNAL

August 20, 2004; Page A2

            CHICAGO -- United Airlines' parent, UAL Corp., said in a court filing that it likely will terminate its pension plans in order to become a viable business, and it defended its decision to stop funding the plans, citing a devastating run-up in fuel prices and its precarious cash position.

            UAL, which has been excoriated by two of its unions, a federal pension insurer and the Labor Department for missing a July pension contribution, said it hasn't made a final decision on terminating the four underfunded plans, which cover 120,000 workers and retirees. In a filing in U.S. Bankruptcy Court here, UAL said it "would like nothing more than to keep the pension plans intact."

            But business realities dictate that the company "could not make its minimum funding contributions and maintain sufficient liquidity to operate its business," the company said in its filing. UAL said that it hopes in talks with its unions, creditors and others in the next few weeks to find a modified business plan that keeps the pensions intact, but also provides sufficient liquidity and is financeable.

            Termination would require the court's assent and entail transferring the plans' assets, $6.9 billion, and obligations, $12.8 billion, to Pension Benefit Guaranty Corp., the pension insurer, and creating less costly, follow-on defined-contribution retirement plans. Hurt by the termination would be those among the 58,000 retirees whose benefits would be curtailed by caps mandated by Congress, and the 62,000 current employees who probably would receive less-generous retirement benefits in the future.

            UAL in June was denied federal financial aid that would have allowed it to exit from court protection later this year. Now, the company is on the hunt for commercial financing, a search that is shaping up to be difficult and time-consuming, given the weak pricing climate and high fuel expenses plaguing the industry. So the company amended the terms of its interim, debtor-in-possession financing to double the amount to $1 billion and to extend the maturity by six months through June of next year.

            This facility, which requires the approval of U.S. Bankruptcy Court Judge Eugene Wedoff, essentially precludes UAL from making pension payments for the duration of its stay in Chapter 11, unless its lenders consent. The amended financing, and the various objections to it by two unions and the PBGC, are on the judge's agenda at a hearing scheduled for today.

            UAL said in a motion supporting the new financing pact that it would have decided not to make $570 million of pension payments due in July, September and October in any case. "Even with an additional $500 million ... and the suspension of pension payments, United is by no means sitting on 'excess' cash," the company said in its filing.

            "Making more than $500 million in pension payments over the next two months would drastically and negatively impact current liquidity levels and dig an even deeper hole for United at exit."

            The PBGC, the International Association of Machinists Union and the Association of Flight Attendants have objected to the interim financing pact, claiming that skipping pension payments violates federal law. The Labor Department has questioned UAL's decision in June to switch the plans' fiduciary responsibilities from a group of senior UAL executives to the company itself, a "judgment-proof" entity in court protection. As a result, UAL and the Labor Department have agreed to appoint an independent fiduciary to ensure that the interests of workers and retirees are protected.

            Also on the agenda for today's hearing is UAL's motion to extend by four months its exclusive right to field a reorganization plan. That period currently expires on Aug. 30, which means creditors or other interested parties then could propose rival plans of their own. UAL argues that it needs more time as it tries to cut its costs further, enhance its revenues and look for exit financing. The extension has been opposed by the Machinists union, the flight attendants' group and the Air Line Pilots Association.

###   RETURN TO INDEX

USA Today – August 12, 2004 – Entire Article

Politicians fool only themselves with Medicare bribe

Today's column is offered as a textbook illustration of the principle that voters are far shrewder than most politicians believe. This case study highlighting Washington's inability to fool anyone is based on a recent survey of the attitudes of people on Medicare about their new prescription-drug benefit.

But first, a little background.

Last fall, when Congress added prescription-drug coverage to Medicare, the new law was hailed as a political masterstroke. It offered discount cards and, by 2006, the option of insurance to cover some drug costs. George W. Bush was expected to win plaudits for the largest senior-citizen health initiative since Medicare was created in 1965. The prevailing logic was that he had a tangible legislative accomplishment to flesh out his 2000 campaign claim of being a "compassionate conservative."

As Republican Party Chairman Ed Gillespie put it in an interview with Fox News last November: "People have talked about a prescription-drug benefit in Medicare for years. But this is the first we've actually been able to get it done, and I think that is important. I also believe that good policy is good politics and so, yes, I think that people will appreciate the president's leadership."

Congressional Democrats, who overwhelmingly opposed the bill, thundered that they, too, were eager to provide a drug benefit under Medicare, but they championed alternative legislation that offered a larger drug subsidy and smaller incentives to health insurers to participate. Liberals such as Sen. Edward Kennedy were confident that the drug bill, with doughnutlike holes in its benefit formulas, would inevitably be expanded around the time it took effect. Not many in Congress seemed troubled that the federal budget was deep in deficit, the nation was saddled with future expenditures for the Iraq war and virtually no health care expert believed that the legislation would fit into its projected $400-billion-over-10-years cost framework.

The new law was a cynical bargain that had more to do with the 2004 election than a rational approach to the prescription-drug needs of the nation's elderly. It offered neither the straight expansion of Medicare that Democrats favored nor the unrestrained free-market competition that Republicans wanted to bring to the government's social welfare programs.

Drew Altman is president of the Kaiser Family Foundation, the non-partisan health care research group that conducted the new survey with the Harvard School of Public Health. Altman calls the prescription-drug legislation "a compromise between competing ideologies shoehorned into a fixed congressional budget." Put another way, it was sausage-stuffing in the guise of lawmaking.

What no one anticipated was the reaction of the elderly, a group that votes in disproportionate numbers. The Kaiser-Harvard survey found that 47% of those eligible for the prescription-drug benefit don't like it. Only 26% have a favorable impression. Perhaps the most stunning figure is the number of Americans covered by Medicare who say they are "enthusiastic" about their forthcoming drug benefit. Just 2% of those polled — one in 50 — are lofting their pill bottles to toast this pre-election gift from the president and Congress.

So what's not to like when the government, in effect, is willing to borrow hundreds of billions to woo voters on Medicare? The major objections cited in the survey are that the drug coverage is too skimpy, that the law is too complicated and that the pharmaceutical and insurance companies derive a disproportionate share of the benefits from the legislation. More than two-thirds of those who have a negative impression of the new law cite all of these reasons to explain their hostility.

Campaigning in Florida on Tuesday, Bush declared: "When we came to office, too many older Americans couldn't afford prescription drugs, and Medicare didn't pay for them. You might remember the past debates. Leaders of both parties had promised prescription-drug coverage in campaign after campaign. We got the job done."

Despite the president's oratory, the message of "Mission Accomplished" does not seem to be getting through to the Medicare crowd. In the Kaiser survey, just 28% of Medicare recipients say the new law will influence their vote for president. In that group, John Kerry leads Bush by more than 2-to-1.

What seems likely is that no matter who wins the White House, there will be growing senior-citizen pressure on Congress to fix the prescription-drug bill. And make no mistake: The word "fix" means expand the benefits, just as liberals like Kennedy anticipated. As for the projected costs, all the government has to do is borrow more money. Already the Bush administration, in a classic whoops-we-forgot-to-release-the-real-numbers moment, admitted in its January 2004 budget proposal that the new drug plan would cost $534 billion over 10 years — $134 billion more than Congress blithely assumed.

The moral here is probably not the high-minded idea that you cannot buy the votes of the elderly and other Medicare recipients with a new something-for-nothing drug benefit. Instead, what the Kaiser survey suggests is that when the president and Congress set out to practice pre-election bribery, they had better not stint on the costs.

Contributing: Walter Shapiro's column appears Wednesday and Friday. E-mail him at wshapiro@usatoday.com

###   RETURN TO INDEX

Forbes.com - August 12, 2004 – Entire Article

Money & Investing
The Coming Pension Crisis
Bernard Condon, 08.12.04, 3:35 PM ET

NEW YORK - Allegheny Technologies is on a roll. Thanks to rocketing prices for its specialty steel and some cost-cutting moves, the Pittsburgh-based company has seen its stock climb 172% in a year. But those expecting nothing but blue skies ought to consider this sobering fact: What it owes its workers in pension payments exceeds what the whole company would be worth in liquidation.

And it's not alone. According to Jack Ciesielski, author of the widely respected Analyst's Accounting Observer, 13 companies in the S&P 500 are in a similar bind--which means investors could get hurt.

"Stockholders ought to sit up and take notice," he wrote in a recent issue. "Claims on future cash flows are at risk of being crowded out by the claims of the pension plan participants."

The problem is that many companies like Allegheny (nyse: ATI - news - people ) still haven't recovered from the stock market fall nearly four years ago, which not only dragged down their stock but also shares in their pension portfolios. More than half the companies in the S&P 500 had overfunded pensions in 1999. Now only 51 do.

To ferret out the most vulnerable companies, Ciesielski first compared the assets in pension plans to the so-called projected-benefit obligations, an estimate of payouts in future years. He found 313 companies in the S&P 500 expected to owe more than they've put aside. Then he compared that payments gap to each of those companies' shareholder equity or liquidation value.

One note of caution: The figures are based on year-end figures filed in recent 10Ks, and the fortunes may have changed since. Allegheny, for instance, has struck recent deals with unions to reduce its costs. Calls to the company were not returned before press time.

###    RETURN TO INDEX

The Wall Street Journal – August 11, 2004

Editorial - The Coming Taxpayer Bailout

 

United Airlines's recent announcement that it will skip payments to its four pension funds while it is in Chapter 11 has some observers murmuring about a government bailout. And not just any old bailout, but something akin to the hundreds of billions spent on the savings-and-loan debacle in the late 1980s. An overreaction? Unfortunately, no.

What has people nervous is that United's decision to stop contributing to its pension plans is not as limited as it might seem. The carrier skipped its July payment of $72 million, and the September contribution of almost $500 million and the October one of almost $100 million will also be missing in action. United has not made a decision, but it says it is considering dumping its pension plans altogether. Few companies have restarted their retirement plans after they emerge from bankruptcy.

To get rid of its four plans, United would have to persuade the bankruptcy court that a so-called distress termination is necessary for its very survival. This isn't a frivolous argument. New investment money is balking at assuming pension debts that could be as high as $7.5 billion, with about half due before 2008.

If the court agrees, what's to prevent the other major carriers from engaging in a similar ploy? American, Continental, Delta and Northwest are all struggling and would no doubt love to dump their underfunded pension plans too. This is precisely what happened in the steel industry a few years ago; one terminated plan encouraged other steel companies to get out from under their own pension obligations.

Here's where the situation begins to bear an uncomfortable resemblance to the S&L bailout. Just as the thrifts were insured by a government agency, so are pension plans. When a company terminates its plan, it gives the plan's assets and liabilities to the Pension Benefit Guaranty Corporation. The PBGC assumes responsibility for pension payments, making up the difference (within certain limits) of any underfunding in the plan.

In 2002, Bethlehem Steel off-loaded $3.6 billion in unfunded pensions on the PBGC in the biggest hit to the agency so far. A United Airlines dump would be almost double that. If that's not bad enough, the PBGC itself had a deficit of more than $11 billion last year. Since the government stands behind the PBGC to make up the difference, if United caused a domino effect in the rest of the industry, the result could be tens of billions of dollars in a bailout underwritten by taxpayers.

None of this should be unexpected. Government insurance creates an unintended moral hazard. That is, companies can promise retirement benefits knowing that the federal government will bail them out if necessary. Companies can also use the insurance to help them restructure bad business practices; dumping pension plans on the government becomes a type of strategy to refinance.

Trouble in the PBGC is no surprise either. Last spring, the PBGC's growing deficit prompted the White House to offer a wide-ranging piece of reform legislation to tighten up funding requirements for company pensions. What emerged from Congress however was a big, fat bailout for underfunded plans, especially in the airline and steel industries.

Instead of putting pensions on a sounder basis, the final bill liberalized funding accounting and relieved the airlines and steel from making accelerated contributions to reduce their funding gaps for two years. Mr. Bush signed the Pension Funding Equity Act on April 10, which not only postponed the day of reckoning but allowed the shortfalls to grow even larger in the interim.

As a final insult to taxpayers, it's not clear that writing a put option for company pension plans always works out. US Airways, which was in bankruptcy during 2002 and 2003, off-loaded its pilots' pension plan to the PBGC. Yet it is once again flirting with another bankruptcy filing.

The PBGC has attacked the suspension of United's pension contributions as illegal and is demanding that the carrier explain how it would restart its plans. It is a wussy response, but it's about all the PBGC can do. That and wait for the burgeoning crisis to hit. Which it will.

###    RETURN TO INDEX

Newsday - August 11, 2004 – Entire Article

Survey: Seniors seek fix to Medicare, not overhaul

BY DEBORAH BARFIELD BERRY
 WASHINGTON BUREAU

 WASHINGTON --  Less than nine months after the Congress passed the new Medicare drug law, most seniors said they want Congress to fix the complex measure, but only 10 percent support a major overhaul, according to a national survey.

 "Seniors are mostly negative and very confused, but there is little evidence of a large-scale backlash," said Drew Altman, president of the Kaiser Family Foundation, one of the groups that conducted the poll.

 Instead of repealing the law, seniors favor proposals that would allow the importation of drugs from Canada and give the government the power to negotiate prices with drug companies, researchers found.

 The law, which for the first time offers prescription drug coverage to all Medicare recipients, could play a role in some key states in the presidential race and in close congressional contests, researchers at Kaiser and the Harvard School of Public Health found. The survey of more than 1,000 Medicare beneficiaries offers one of the first snapshots of how seniors feel about the controversial law.

 Seniors, who have been a decisive voting bloc, have cited Medicare as an important issue to them.

 President George W. Bush and Republicans tout passage of the law as a victory. But health care experts say that it has not been the winning issue Republicans had banked on and that Democrats still have the upper hand on Medicare.

 For the 28 percent of seniors who said the Medicare law will be a key factor in their vote for president, 12 percent said they are more likely to cast their ballot for Democratic presidential candidate Sen. John Kerry (D-Mass.), 8 percent didn't know and 5 percent said Bush.

 The law is likely to have more of an impact on congressional races, where nearly 40 percent of seniors said it will make a difference in how they vote, researchers found.

 The Kaiser poll found that while most seniors like the current Medicare system, 47 percent don't like the new law, 26 percent favor it and 26 percent say they don't know enough about it. Most of those who don't like the law say it's because it doesn't help enough with drug costs.

 Federal health officials rolled out the Medicare drug discount card program in June, but seniors, often citing confusion, have been slow to sign up. "Nothing is supposed to be better than giving seniors a discount card," said Robert Blendon, a Harvard professor, but "the complexity really turned this into an anxiety issue."

 Bush could neutralize the issue by backing a measure that allows the importation of drugs from Canada, researchers said. Bush officials, however, don't support importation.

 A trade group representing drug card companies Tuesday blasted the report, saying it "plays into the hands of those seeking to undermine the new Medicare" drug benefit.

 Federal health officials have launched programs to explain the new law. They have also praised a recent Kaiser study that showed some seniors could save with the cards.

###     RETURN TO INDEX

The Monterey County Herald – August 9, 2004 – Entire Article

Coal miners to lose health benefits under court ruling

ROGER ALFORD
Associated Press

PIKEVILLE, Ky. - Thousands of coal miners, some sick from black lung disease, will lose their medical coverage under an order filed Monday by U.S. Bankruptcy Judge William Howard.

The judge ruled that Horizon Natural Resources, the nation's fourth largest coal company, does not have to honor union contracts that guaranteed benefits for 1,000 active miners and some 2,300 retirees.

The order sparked an immediate outcry from the United Mine Workers of America, which had staged massive protests on the streets outside Howard's courtroom in downtown Lexington.

"What a complete and utter travesty of justice," said UMWA President Cecil Roberts. "These workers did absolutely nothing wrong. They worked hard, did what was expected and accepted lower wages for the promise of health care, but look where that got them. They've been left high and dry. No health care and no job rights."

Roberts led two protests last month in Lexington, where coal miners and their supporters called for reforms to the nation's bankruptcy laws, which allow companies to void contracts that provide health insurance.

"It is past time for working people to start fighting back and joining together to reform the nation's extremely biased bankruptcy and labor laws," Roberts said. "As I've said often in the past several months, the UMWA stands ready to help lead this fight."

Miners had called for Howard to require Horizon to honor the labor contracts to protect their health care and retirement benefits. They said it was unfair that a bankruptcy judge had the authority to allow companies to shed medical costs and retiree benefits to make them more attractive to potential buyers.

Newcoal LLC, formed by New York billionaire Wilbur L. Ross and four other investors, and several other companies have expressed an interest in buying Horizon's nonunion properties. However, no one has made an offer on any of Horizon's six union operations in Illinois, Kentucky and West Virginia, said Jim Morris, Horizon's vice president for business development.

Morris said financial obligations related to union contracts and the union's retirement plan made them unattractive to potential buyers. The company's assets are scheduled to be auctioned at 9 a.m. EDT on Aug. 17 at the Hilton Cincinnati Netherland Plaza in Cincinnati, Ohio.

Horizon, posting huge financial losses and unable to pay its creditors, filed for bankruptcy in November 2002.

The company's assets, valued at just less than $1 billion, are being sold in an attempt to satisfy about $1 billion in debts and other obligations.

Roberts has said that the UMWA is prepared to take whatever legal action possible to stop Horizon from selling its properties without having to take care of its workers and retirees.

Dwight Siemiaczko, a union worker at a Horizon mine in Cannelton, W.Va., said the nation's bankruptcy laws are out of hand.

I'm hopeful that what is happening to us will spark a national movement to reform America's bankruptcy laws," he said. "Working people across the nation must join this fight."

Roberts said the UMWA will appeal Howard's decision to the U.S. District Court in Lexington.

"I promised every Horizon worker that the UMWA would explore every legal avenue available," he said, "at first, to prevent this injustice, but now to rectify it."

###   RETURN TO INDEX

The New York Times - August 8, 2004

Editorial

Pension Tension

First it was the steel companies. Now it's the airlines. Is the auto industry next?

In the past three years, bankrupt companies, mostly in unionized, old-economy industries, have dumped $11.2 billion in pension obligations on the Pension Benefit Guaranty Corporation, the federal agency that insures the pensions of 44 million people. As a result, the agency has gone from having a $7.7 billion surplus in 2001 to an estimated deficit of about $9.7 billion. And the situation may soon become much worse. The agency now faces a possible $5 billion default by United Airlines and the prospect of more airline defaults. Plenty of other companies, like Goodyear, also have seriously underfunded pension plans.

 Not surprisingly, the specter of a taxpayer bailout hangs over the pension agency, inviting comparisons to the savings and loan debacle of the 1980's. Things are not that bad - yet. As long as the economy and stock market improve, so should many pensions, since their health is tied to prevailing financial conditions.

 But in one way, the S.&L. comparison is apt. In the 1980's, government missteps exacerbated the S.&L. crisis. Today, again, government bears some responsibility for current pension problems. Congress must take steps now, both to strengthen pensions and the agency that insures them.

 To begin, lawmakers should allow companies to overfund their pensions to build a cushion for hard times. Currently, Congress restricts overfunding, ostensibly to prevent companies from stashing excess cash in tax-sheltered pensions. But another reason lawmakers restrict contributions is that doing so forces companies to pay taxes on income that would otherwise go into pensions, thus raising revenue to improve the government's own dismal budget outlook. The result of this self-serving machination is that many companies entered the recent economic downturn with less in their plans than would otherwise have been the case.

 To protect taxpayers, Congress should raise the amount it charges companies for pension insurance. Currently, premiums are estimated to be underpriced by one-sixth to one-half - a dangerously high dose of corporate welfare. The pension agency should also be given the authority to freeze a seriously troubled pension when an employer stops contributing to it, as United did recently.

These are tough remedies for a tough problem. But Congress would do better to tackle the problem now rather than wait until after a full-blown crisis.

###   RETURN TO INDEX

The New York Times - August 5, 2004 – Entire Article

Enron Tries to Block Pension Takeover Bid
By THE ASSOCIATED PRESS

WASHINGTON (AP) --  Enron Corp. has asked the court overseeing its bankruptcy case to block the federal Pension Benefit Guaranty Corp.'s efforts to take over four of the energy giant's retirement plans.

In court papers filed Wednesday, Enron accused the federal agency of frustrating its reorganization efforts and usurping the bankruptcy court's authority to consider claims against the company.

``Through its 'forum shopping,' the PBGC is attempting to accomplish in the U.S. District Court for the Southern District of Texas what it could not accomplish in the bankruptcy court,'' Enron said.

The PBGC's objection to Enron's reorganization plan was overruled by the bankruptcy court, and the plan was confirmed on July 15.

The PBGC is one of a handful of parties that has appealed the confirmation order. At the same time, the PBGC, which protects private-sector pensions, is trying to proceed with the action it filed June 3 in the federal court in Houston -- not in the U.S. Bankruptcy Court in Manhattan where the company's Chapter 11 case is underway -- to terminate the four underfunded pension plans.

By pursuing the termination action, Enron said the PBGC is trying to elevate its claims, which haven't even been resolved, above those of similarly situated creditors and avoid treatment under the plan.

Enron, in a lawsuit filed Wednesday against the PBGC, is asking the bankruptcy court to rule that the agency's termination action violates the automatic stay provision of the Bankruptcy Code.

The automatic stay provision blocks parties from filing or pursuing a lawsuit against a debtor company on account of a claim that arose prior to the company's filing for Chapter 11 protection.

The PBGC has asserted claims against Enron totaling $321.8 million for the four pension plans and another pension plan, the Portland General Electric Co. plan, which isn't subject to the agency's termination action. Portland General, an affiliate of Enron, isn't part of the bankruptcy proceedings.

As long as the agency's claims remain unresolved, Enron is required to reserve for the full amount of the claims.

If the PBGC claims are disallowed or reduced, then the amount Enron must pay to terminate the four pension plans may be significantly less than the amount sought by the PBGC in its termination action.

The bankruptcy court must determine the amount of the PBGC claims before the termination action can be resolved, Enron said. It is thus necessary and appropriate, the company said, for the bankruptcy court to block the PBGC from pursuing the termination action in the federal court in Houston.

In a separate filing Wednesday, Enron asked the bankruptcy court to issue preliminary and permanent injunctions restraining the PBGC from proceeding with its action.

The four plans at issue have roughly 17,000 participants and include the Enron Corp. Cash Balance Plan, Garden State Paper Pension Plan, Enron Financial Services Pension Plan, and San Juan Gas Co. Pension Plan.

###    RETURN TO INDEX

The Atlanta Journal-Constitution - August 4, 2004

OUR OPINIONS: Pension needs a swift, sure rescue
Staff

So much for temporary pension fund relief. Less than four months after President Bush signed legislation that gave all industries a break on pension costs and airlines and steel extra help, there's a crisis again. That's the legacy of a pension system that needs more than short-term "fixes" that simply paper over the problem.

United Airlines, which is in bankruptcy court, has stopped making pension payments. The thinking goes that if United eventually unloads its obligations on the federal Pension Benefit Guaranty Corp., a domino effect in the airline industry could follow. In turn, the overstressed Pension Benefit Guaranty Corp., which insures private-sector pensions, might need a taxpayer bailout.

A similar warning about taxpayers getting stuck with the bill was issued leading up to passage of the Pension Funding Equity Act of 2004. For this year and next, the law allows companies that provide pensions to use a higher interest rate to calculate liabilities. That reduces the amount of cash that employers owe to their pension plans.

Also, airlines and steel companies get to make smaller payments than otherwise would be required, with some limitations.

It's no mystery why United's move to conserve cash has set off alarms about the Pension Benefit Guaranty Corp. The agency reported a deficit of $9.7 billion at the end of March. That's an improvement from six months earlier, but still leaves a big gap between the agency's assets and its liabilities at a time when employers are about $400 billion short of what they need to pay promised benefits.

The Pension Benefit Guaranty Corp. pays benefits with pension assets it takes from companies when it takes over their plans and with insurance premiums assessed against employers that still offer traditional pension plans. The problem is that fewer and fewer plans are around to pay premiums.

The last time the number of insurance-paying plans increased was in 1985. Since then, the total has shrunk from more than 112,000 to fewer than 30,000. Those pension plans cover almost 35 million people.

This year's temporary fix --- the second in two years --- was approved on the premise that emergency relief was needed and that a permanent solution would follow. The way things are going, Congress may not have much time to make good on the promise.

And the longer the delay, the worse the problem.

Emory University professor George Benston compares the pension problem with the collapse of the savings and loan industry in the 1980s. Before the roof fell in, the rules were changed that made the industry look better off financially than it was. That delayed the day of reckoning and probably meant even more savings and loans had to be closed.

Repairing the pension system will not be painless. Either retirees, corporations --- which means shareholders --- or taxpayers will have to pay.

The most painful choice for retirees would be a cut in benefits, which is set by law and is capped at $44,386.32 this year. That would reduce outlays by the Pension Benefit Guaranty Corp., but would be as politically treacherous as suggesting a cut in Social Security payments.

Raising premiums paid to the Pension Benefit Guaranty Corp. would increase the assets available to pay current and future retirees, but would be opposed by companies better off than the likes of United.

Bradley Belt, who heads the Pension Benefit Guaranty Corp., has expressed support for changing the rules so companies more at risk of failing to meet their pension promises pay higher premiums. He has also suggested tighter funding rules for companies with shaky pension plans would help.

Congress needs to get busy. There will be pain, but it ought to be spread around as equally as possible.

###      RETURN TO INDEX

The New York Times - August 1, 2004 – Entire Article

Bailout Feared if Airlines Shed Their Pensions

By MARY WILLIAMS WALSH

In an echo of the savings and loan industry collapse of the 1980's, the federal agency that insures company pensions is facing a possible cascade of bankruptcies and pension defaults in the airline industry that some experts fear could lead to another multibillion-dollar taxpayer bailout.

``The similarities are incredible,'' said George J. Benston, a finance professor at Emory University in Atlanta who has written extensively on the regulatory failures that led to the costly savings and loan bailout.

Deposits in savings institutions are, like pensions, guaranteed by a federal insurance program. The savings industry first sickened because changes in market conditions made the traditional way savings and loans operated unprofitable, but government delays and policy missteps then made the situation much worse. In the end taxpayers bailed out the industry - at a cost, according to various estimates, of $150 billion to $200 billion.

Now experts say they see similar forces gathering in the pension sector, with United Airlines perhaps the first to go down the path. Operating in bankruptcy, United is striving to attract the lenders and investors it needs to survive. It said last month that it would no longer contribute to its pension plans; United also seems intent on shedding some or all of its $13 billion in pension obligations as the only way to succeed in emerging from bankruptcy proceedings.

If United manages to cut itself loose from the costly burden of its pension plans, it might force others determined to keep their costs similarly under control to emulate its move. ``Rivals may feel they are at a competitive disadvantage and follow suit, raising the specter of a domino effect in the industry,'' said Bradley D. Belt, the executive director of the government’s Pension Benefit Guaranty Corporation, which insures pensions. If every airline with a traditional pension plan were ultimately to default, the government would be on the hook for an estimated $31 billion. Its insurance coverage is limited, so some employees would have their benefits reduced.

“The pension insurance program is there to protect workers’ benefits,” said Mr. Belt, who took over the agency in April. “It shouldn’t be used as a piggy bank to help companies restructure.”

Already, some airline employees are taking steps to protect themselves against future pension losses. Each month, for example, about 30 pilots normally retire from Delta Air Lines. But in June, almost 300 did.

Andrew Dean, one of the new retirees, said he and his colleagues watched in dismay as the financial debacle unfolded at United. He said that he and many of his fellow pilots decided they had better grab their pensions right away while the money was still there.

“These are very scary times right now for someone in my position,” said Mr. Dean, who at 58 walked away from his job just as he was reaching the peak earning period of his career. His pension was also reduced because he retired early.

But his decision now looks prescient. On Friday, Delta asked its pilots for a 35 percent pay cut and proposed a smaller pension plan.

Foremost on the minds of the departing pilots, Mr. Dean said, were arcane pension rules that can offer advantages to workers who quit before a pension plan fails. At Delta, for example, as long as the pension plan stays afloat, pilots are allowed to take half of their benefit in a single check when they retire. But if the plan fails, the pilots lose their chance to take a big payout.

“What I’ve managed to do is secure half of my retirement,” Mr. Dean said. He may still lose the rest if the government takes over the program and limits future payouts. “I really lose sleep over that,” he said.

The Pension Benefit Guaranty Corporation is already hobbled by debt, having picked up the pieces of more than 3,200 failed pension plans in its 30-year life. The scale of the failures has risen sharply in the last three years, but the agency has few tools at its disposal to prevent the situation from becoming worse.

Now it faces a possible $5 billion default by United which would be a record and the possibility of more big airline defaults after that.

“The agency can’t take a lot of $5 billion hits, multiple times per year, year after year, and survive,” said Steven A. Kandarian, the pension agency’s immediate past director. “Eventually, you’ll run out of money.”

It is impossible to predict the exact size of any pension bailout, although economic projections by the agency suggest that in the worst case, a bailout within the next decade involving failures beyond the airlines could cost taxpayers up to $110 billion.

But because pension obligations, unlike bank deposits, do not have to be paid off all at once, it is difficult to raise alarms about the threat.

“The real blowup doesn’t happen right away; it happens over time,” Mr. Kandarian said. “You’ve got to address it now, but it doesn’t look like a crisis now. The crisis is always over the next hill.”

The risk is that the longer the problems are avoided, the worse they can get. “With the S.&L.’s, what was a relatively small problem in the early 1980’s became over a $100 billion problem in the late 1980’s,” said Mr. Kandarian, who fears the same thing will happen to the pension system.

United, the nation’s second-largest carrier behind American, is one of the worst off of the airlines. The entire industry has been coping with high fuel prices and flagging demand, particularly since the 9/11 terrorist attacks.

But United and the other five remaining major carriers that grew up in a world of regulated routes and ticket prices American, Continental, Delta, Northwest and US Airways face even more fundamental problems. In recent years, all of them have struggled to compete with the new, low-cost carriers like Southwest, JetBlue and AirTran that have much lower overhead.

United has been operating in bankruptcy proceedings since December 2002. Already, it has negotiated significant concessions from its workers, suppliers, landlords and others. United says it is still analyzing what to do with its pension plans.

In June, the Air Transportation Stabilization Board turned down United’s request for federal loan guarantees, saying it believed the airline could get financing without government help. So far, United has not been able to. Until it does, it cannot emerge from bankruptcy proceedings.

It is an open secret that prospective financiers are turned off by the roughly $13 billion of pension debt United is carrying on its books the one big block of debt that the airline has left untouched so far. That figure is the value, in today’s dollars, of the pensions that United’s pilots, flight attendants and other workers and retirees have earned. Once a pension has been earned, it cannot legally be taken away.

By law, this debt to the work force is to be secured by the money United sets aside in its four big pension funds. But as things have turned out, United had only about $7 billion in the pension funds as of last December.

The remaining $6 billion is unsecured debt. Pension law and bankruptcy law differ on the implications of this: pension law says the $13 billion owed to the workers cannot be taken away, while bankruptcy law says the workers are unsecured creditors with respect to the $6 billion shortfall. And unsecured creditors usually lose in a bankruptcy case.

If, in the coming months, United persuades its bankruptcy judge that it cannot survive without canceling its pension debts, then the airline will be allowed to unload some or all of its $13 billion obligation, helping it line up the financing it needs to emerge from bankruptcy proceedings.

The pension debt, and the $7 billion United has already set aside in pension assets, will go to the federal pension agency, which will pay the airline’s retirees their benefits, but only up to certain limits.

Hard as that would be on the employees of United, it is also an alarming prospect to the employees of the other major carriers.

“Things start to set a precedent,” Mr. Dean, the retired Delta pilot, said. “If a bankruptcy court allows a company to terminate its pensions, then that becomes a very tempting business tool.”

That is what happened in the steel industry. LTV Steel’s pension fund fell to the government in March 2002, and its unencumbered assets steel mills, coke and lime plants, railroads and other properties were snapped up at once. That put pressure on other tottering steel companies to shed their pension plans as well.

Seven more failing steel plans went to the government before the year was out, including the current record-holder among pension defaults, the Bethlehem Steel plan, which cost the pension agency $3.9 billion to take over.

It wasn’t supposed to be this way. In 1974, Congress responded to an ugly string of pension failures in the auto industry by passing landmark legislation. From then on, any company that promised pensions to its workers would be required to set aside enough money to pay them. Rules were written to determine how much money was enough. To weave the retirement safety net even more tightly, Congress also created the pension insurance program.

Those protections were hailed as “the greatest development in the life of the American worker since Social Security” by Senator Jacob K. Javits, the New York Republican who died in 1986.

But for many workers, those protections no longer look so secure. “You see that the whole thing could really be a house of cards that could come crashing down,” Mr. Dean said.

United’s pension plan developed its multibillion-dollar shortfall, in part, because pension law allows companies to fund their plans with the assets that any prudent investor would select. Over time, that has meant a shift away from the very conservative bonds that companies used to secure pensions before the 1974 law, in favor of more aggressive investments.

Stocks have become the investment of choice, but today many pension funds seek to bolster their returns even more by adding relatively small amounts of hedge funds, junk bonds and other risky assets. This investment approach can produce attractive returns over time, but can be very volatile and much more dangerous if companies are forced to pay off some of their pension obligations in a down market.

As the pension system has weakened, some specialists have called for measures that would discourage the riskiest investments. As director of the pension agency, Mr. Kandarian proposed charging higher insurance premiums to companies that invested their pension funds in riskier assets, particularly companies that were in bad shape themselves. No one paid attention.

“I was naïve,” Mr. Kandarian said.

Along with Mr. Kandarian, current officials at the pension agency and at the Treasury Department have also been calling for a tightening of the rules requiring pensions to set aside enough money to meet their obligations. In April, Congress loosened the rules instead. The biggest flexibility was given to the most troubled industries, making their pension funds look healthier.

###    RETURN TO INDEX

REUTERS - July 29, 2004 – Entire Article  
Kaiser says Pensions group taking over plan

SAN FRANCISCO, July 29 (Reuters) - Kaiser Aluminum Corp. (KLUCQ.OB: Quote, Profile, Research) said on Thursday the Pension Benefit Guaranty Corp. intends to assume responsibility for the Kaiser Aluminum inactive pension plan, retroactive to June 30, 2004.

 Houston-based Kaiser, which filed for Chapter 11 bankruptcy protection in February 2002, said the inactive plan generally covers hourly retirees who were represented by unions at several smaller Kaiser plants where operations were discontinued a number of years ago.

 The federal Pension Benefit Guaranty Corp. (PBGC) said the Kaiser inactive plan covers more than 2,900 former Kaiser workers.

 The plan has about $49 million in assets and $96 million in liabilities, and the PBGC said it expects to be liable "for virtually the entire $47 million shortfall," according to a statement on the PBGC Web site, http://www.pbgc.gov.

 Kaiser said the U.S. Bankruptcy Court in Delaware has ruled that the company met legal requirements for a "distress termination" of the inactive pension plan and several other plans.

 The PBGC took responsibility for Kaiser's salaried employees pension plan last December.

###

The New York Times - July 28, 2004 – Entire Article
Airline Woes Threaten U.S. Pension Agency
By REUTERS
WASHINGTON (Reuters) - Looming insolvency at pension plans run by bankrupt United Airlines and other struggling companies could overwhelm the U.S. agency that insures plans and force it to seek a taxpayer bailout, the agency's former head says.

The Pension Benefit  Guaranty Corporation expressed alarm this week after United, a unit of UAL Corp. (UALAQ.OB), said it would stop contributing to its pension plans while under bankruptcy protection, raising the specter of default.

``The PBGC wasn't designed to withstand the level of underfunding that we are now witnessing in the system,'' former PBGC executive director Steve Kandarian, who stepped down in February, said in a telephone interview with Reuters.

But the options available to the PBGC -- the agency that stands behind traditional corporate pensions and pays benefits up to certain limits to retirees when plans go broke -- may be limited, according to another former PBGC official.

The pension agency already has a deficit of $9.7 billion. A decision by United to scrap its pension plans, leaving the PBGC to pay benefits, would add another $5 billion to its red ink, the agency says, potentially its biggest hit ever.

Some fear other airlines with underfunded pensions could follow suit. The PBGC says 11 companies in the sector have $31 billion in underfunding in plans covering 444,000 people.

``How does the agency withstand that kind of an assault, when you are talking about a $5 billion potential claim coming in from one company and possibly more multibillion claims in the queue?'' he said.

These obligations would be paid out over time, and the agency has enough cash to keep paying out benefits for the near term. But a United pension failure, if it happens, ``certainly does add to the probability that you would need a taxpayer bailout in the future,'' Kandarian said.

 LIMITED LEGAL OPTIONS

The PBGC insures traditional ``defined benefit'' pension plans, which offer a fixed payout at retirement. Already most of the claims to the agency in its 30-year history have come from the steel and airline sectors.

United said last week it would stop making payments to its pension plans but says no decision has been made on whether to terminate them. Airline representatives are expected to meet PBGC officials to discuss the matter this week.

While the agency has pronounced United's move to skip payments to its pension plans illegal, PBGC officials have not said what they might try to do about it.

The PBGC's options are limited, said Gary Ford, a former general counsel at the agency.

He said the agency could ask a court to terminate United's plans, taking them over before a default, if it felt its costs with respect to the plans were increasing unreasonably,

Ford said the Secretary of Labor also has standing to sue United in bankruptcy court, seeking an order to require the company to make the pension funding payments it is skipping. A request for such action would have to originate with the PBGC.

But Ford said he believed the storm could be weathered.

``The agency's way of measuring pension liabilities is the most conservative possible way,'' said Ford, who now works at the Groom Law Group in Washington, specializing in employee benefits law.

``My personal view is, no, they won't be swamped,'' he said. ``They've had big claims before. I think the agency will weather these claims and remain as a safety net for pensioners.''

No matter what happens with United, Kandarian says Congress should change pension funding rules so underfunding does not keep threatening the agency. He thinks companies with junk bond ratings should have to fund their plans at a higher level.

``They may also need to make some tough decisions about the size of the benefits they offer to their workers,'' he said.
                                                                            ###

The New York Times - July 27, 2004 – Entire Article

U.S. Wants Details on United's Pensions

By MARY WILLIAMS WALSH

The federal government said yesterday that United Airlines acted illegally in halting contributions to its pension plans and gave the airline until Thursday either to explain how it would revive the plans or acknowledge that it was abandoning them.

The Pension Benefit  Guaranty Corporation took the unusual step of setting a deadline and making it public because of the extraordinary size of the pension funds at stake. United's four largest pension funds have a total of about $7.5 billion less than the amount they need to pay all promised benefits, according to a government estimate. The pension agency has calculated that it would be liable for about $5 billion of that should United default on all four of the plans. Certain airline employees would bear the rest of the losses as reductions in their benefits.

 Losses on that scale would eclipse the current record, set by  Bethlehem Steel's pension fund in 2002. When the government took over Bethlehem's failed pension plan, it incurred losses of about $3.6 billion. Thousands of retired steelworkers also experienced reductions in their benefits, totaling about $500 million.

Employees of United have been expressing grave concerns about their pension plans since mid-July, when the airline missed $72.4 million in mandatory contributions. Their worries intensified on Friday, when United disclosed that it had amended its agreements with the lenders who are financing its operations under bankruptcy protection and that those amendments "effectively" prohibited it from making any more pension contributions.

 It is all but unheard of for a troubled company to cease making pension contributions while in bankruptcy, then revive the plan later.

 When a company shuts down a pension plan, it is required to give employees and the federal government 60 days' notice. So far, however, United has said only that it is researching its options and trying to determine whether it can emerge from bankruptcy without terminating one or more plans.

In a letter to United's chief executive, Glenn F. Tilton, the pension agency warned that keeping the plans alive without contributing to them "increases the risk of loss to plan participants and to the federal pension insurance program." The unfunded obligations rise because the employees continue to build their benefits, even though the company has stopped setting aside the money to pay them.

 "The interests of plan participants are best served" by keeping the pension plans going, wrote Bradley D. Belt, the pension agency's executive director. "Therefore, the P.B.G.C. would like specific information regarding how UAL intends to close the growing funding gap in these plans." The UAL Corporation is the airline's parent.

United is scheduled to pay more than $4 billion into the four plans in the coming years.

"Please provide a detailed explanation of how the company's business plan will enable it to meet these obligations," Mr. Belt wrote. "On the other hand, if UAL intends to terminate any of its defined benefit pension plans, the P.B.G.C. and plan participants should be made aware of that fact as soon as possible."

 Mr. Belt recalled that representatives of United were scheduled to meet with the pension agency on Thursday and said the matter should be addressed then.

 A spokeswoman for United said that the airline's board was scheduled to meet on Thursday and that United therefore might not be able to send the appropriate people to the pension meeting on that day. She said United would try to reschedule the pension meeting.
                                                                        ###
 

The New York Times - July 23, 2004 – Entire Article

United Airlines Ends Pension Plan Contributions

By MICHELINE MAYNARD and MARY WILLIAMS WALSH

United Airlines said today it would not contribute to employee pension plans while it remains in Chapter 11, a move likely to save it billions of dollars in cash and make it more attractive to the investors it needs to emerge from bankruptcy protection.

United also said it was considering its options on the plans' future, which union leaders interpreted as a signal that it will move to terminate the plans. The action came a week after United skipped a $72.4 million pension payment that it owed to three of its four pension plans. United also faced making hundreds of millions more in pension payments in September and October.

The plans have enough assets to keep paying benefits to retirees for now, but none of the four plans has enough to assure that employees will receive future benefits they have already earned. If the airline abandons the plans, billions of dollars in liabilities for those future benefits will fall on the Pension Benefit  Guaranty Corporation, a government-sponsored agency whose finances have already been ravaged by the collapse of pension plans at other bankrupt companies in the airline, steel and other industries.

Leaders of some of United's unions reacted with outrage to United's decision. Industry experts said they could not remember another instance when a bankrupt airline had not made pension payments. Indeed, until last week, United had met all of its pension obligations since filing for bankruptcy in December 2002.

The action by United came as it told a bankruptcy court in Chicago that it had replenished its debtor-in-possession financing, originally arranged soon after its bankruptcy filing. It said the newly arranged financing would be good until June 30, 2005.

Originally, United borrowed $1 billion to keep its operations going while it waited for an answer from a federal loan board on its bid for a guarantee package, which it hoped to use as the basis of its restructuring.

But the Air Transportation Stabilization Board turned down United's application on June 28, saying it believed United could find lenders without government assistance. Soon after, the airline, which had already cut costs by $5 billion a year, warned union members they had to expect to make further concessions.

Industry analysts said lenders would be unwilling to invest in United, which owes its pension plans an estimated $4.1 billion over the next five years. On today, United acknowledged that.

"In the absence of a federal loan guarantee, United's long-term business plan must have cash flow and liquidity levels that the capital markets are willing to finance," the airline said in a statement.

It went on, "Because existing pension plan contributions will remain a huge financial burden after exit, it is incumbent on United to study all possible options and to determine whether United can sustain this burden and still attract exit financing." United said the move would not have any day-to-day impact on union members' pension payments.

Robert W. Mann, an industry consultant based in Port Washington, N.Y., said the airline was bowing to fiscal reality. "New lenders and new equity don't like to pay old bills," Mr. Mann said.

But Patricia Friend, president of the Association of Flight Attendants, termed the action "demoralizing." Said Ms. Friend, "Current management should explain to us why the flight attendants should continue to support their restructuring, if this is the best they could do."

Ms. Friend said she believed United would terminate its plan, a step that labor experts said would be a historic blow to the labor movement. David Gregory, a labor law professor at St. John's University in Queens, said pensions have long been one of the three basic tenets that a union can provide its members, the others being health care coverage and good wages.

"This goes against what unions were set up to provide," said Professor Gregory.

He said the move was even more notable given that United was an employee-owned company, before it sought bankruptcy protection. Union leaders, in fact, had the power to hire and fire the chief executive. Now, 19 months later, they faced the prospect of management dissolving their retirement plans. "This is a blow to the concept of employee ownership," Professor Gregory said.

Should United terminate its pension plans, it will have to negotiate replacements with its labor unions, most likely at much less generous levels. Gary Chaison, professor of industrial affairs at Clark University in Worcester, Mass., said United's statement today was the first move in what he expected would be bitter bargaining.

"They'll be working off a sense of anger and betrayal," said Professor Chaison.

Last year, United obtained concessions worth $2.5 billion in a year in savings from its unions, a few months after it sought bankruptcy protection. But it made few adjustments to its pensions, at the time, a move that may have given unions a false sense of security, he said.

"What we saw was act one," Professor Chaison said. "Now this is act two. It may turn out to be a tragedy. It's a terrible thing for a union to have to negotiate something like this."

###

The Denver Post - July 15, 2004

Qwest retirees sue for audit data

By Sandy Shore
The Associated Press

Angry over a lack of information from the government, Qwest Communications retirees have sued the Labor Department to get details from an ongoing audit of a company pension fund that lost about $6 billion over a three-year period.

Qwest blames the plunge in value on the faltering economy and an increase in benefit payments, but retirees worry there may be problems in the wake of federal investigations into the company's accounting practices.

"Our concern right now is that there is potential - potential because we don't know - misuse or not responsible fiduciary management of that pension fund, and that would be perhaps one of the primary reasons why the fund dived," said Nelson Phelps, president of the Association of US West Retirees.

A Labor Department spokeswoman declined to comment because of the lawsuit and the agency's own investigation involving the Denver-based telecommunications company, which serves 14 states.

In 1999, the pension fund totaled $14.6 billion, which included a surplus of $5.7 billion. By the end of 2002, the fund had a $314 million deficit. It improved by the end of 2003 to $9.01 billion - slightly more than fully funded, which is the level necessary to pay every participant, said Kimberly Walker, Qwest vice president of finance.

Qwest said a big reason for the drop in value was a $5 billion-plus increase in benefit payments due to downsizing.

"That hits the liabilities as well as the assets," said Walker, who is also president of Qwest Management Co., which handles investments of employee benefits. "It explains a lot, obviously, of the asset drop; in fact, almost all of it."

The fund also took a hit because of the economic downturn and declining interest rates.

The retirees say there may be more to it.

For example, they say the fund lost about $67 million in a high-risk investment between October and December 2001. Qwest spokesman Steve Hammack declined to comment on that claim.

In March, retiree Mimi Hull of Denver submitted a Freedom of Information Act request to get documents the Labor Department has gathered as part of an audit begun in 2001. The request was rejected a day later by agency officials who said they could not release the information because of the ongoing investigation. An appeal was denied.

The company has as many as 70,000 retirees.

###

BusinessWeek - July 19, 2004 Issue – Entire Article

The Benefits Trap

 

Old-line companies have pledged a trillion dollars to retirees. Now they're struggling to compete with new rivals, and many can't pay the bill.

June 28 was the day hope ran out for United Airlines' 35,000 retirees. That was the day the government announced it would not guarantee the bankrupt airline's loans -- virtually assuring that if UAL Corp., (UALAQ ) the airline's parent, is to remain in business it will have to chop away at expensive pension and retiree medical benefits. The numbers are daunting. UAL owes $598 million in pension payments between now and Oct. 15, and a total of $4.1 billion by the end of 2008, plus an additional $1 billion for retiree health-care benefits, obligations the ailing airline can't begin to meet. And if United finds a way to get out of its promises, competitors American Airlines (AMR ), Delta Air Lines (DAL ), and Northwest Airlines (NWAC ) are sure to try to as well.

UAL workers are about to find out what other airline employees already know: The cost of broken retirement promises can be steep. Captain Tim Baker, a 19-year veteran of US Airways Inc. (UAIR ), was one of several union representatives sorting through that airline's complicated bankruptcy negotiations in March, 2003. Of the airline's many crises, the biggest was the pilots' pension plan, a sinkhole of unfunded liabilities. Baker reluctantly agreed to back US Airways' proposal to dump the pension plan on the Pension Benefit Guaranty Corp. (PBGC), the government agency that is the insurer of last resort for hopelessly broken plans. It's a move that practically guarantees that retirees will receive less than they were promised, in some cases less than 50 cents on the dollar. But of a raft of bad options, it seemed the only one that could keep the company afloat. "It was the pension underfunding and its future requirements that were going to put in jeopardy the airline's ability to get out of bankruptcy," says Baker. "At some point you have to look around and say that is all there is."

Baker has paid dearly for that decision. He was voted out of his union position by angry fellow pilots and instead of the six-figure annual pension he was promised, when he retires in 15 years he'll get just $28,585 a year from the PBGC, plus whatever he can save in his 401(k).

Stories like Baker's are becoming dreadfully common as employers faced with mounting retiree costs look to get out from under. It's not just troubled industries like airlines that are abandoning their role as retirement sponsors to America's workers, either. The escalating cost of retirement plans is a critical issue at a range of long-established companies from Boeing (BA ) to Ford Motor (F ) to IBM (IBM ), many of which compete against younger companies with little or nothing in retiree costs.

SHIFTING THE RISK
As employers abandon ever-more-costly traditional retirement plans, the burden is falling on individuals and taxpayers

Why are retirees being left out in the cold? An unsavory brew of factors have come together to put stress on the retirement system like never before. First, there's the simple fact that Americans are living longer in retirement, and that costs more. Next come internal corporate issues, including soaring health-care costs and long-term underfunding of pension promises. Perhaps most important, in the global economy, long-established U.S. companies are competing against younger rivals here and abroad that pay little or nothing toward their workers' retirement, giving the older companies a huge incentive to dump their plans. "The house isn't burning now, but we will have a crisis soon if some of these issues aren't fixed," says Steven A. Kandarian, who ended a two-year stint as the executive director of the PBGC in February. Kandarian is not optimistic about how that crisis might play out, either. "By that time it will be too late to save the system. Then you just play triage."

As industry after industry and company after company strive to limit -- or eliminate -- their so-called legacy costs, a historic shift is taking place. No one voted on it and Congress never debated the issue, but with little fanfare we have entered into a vast reorganization of our retirement system, from employer funded to employee and government funded, a sort of stealth nationalization of retirement. As the burden moves from companies to individuals -- who have traditionally been notoriously poor planners -- it becomes near certain that in the end, a bigger portion will fall on the shoulders of taxpayers. "Where the vacuum develops, the government is forced to step in," says Sylvester J. Schieber, a vice-president at benefit-consulting firm Watson Wyatt Worldwide (WW ). "If we think we can walk away from these obligations scot-free, that's just a dream."

EVIDENCE OF THE SHIFT is everywhere. Traditional pensions -- so-called "defined-benefit" plans -- and retiree health insurance were once all but universal at large companies. Today experts can think of no major company that has instituted guaranteed pensions in the past decade. None of the companies that have become household names in recent times have them: not Microsoft (MSFT ), not Wal-Mart Stores (WMT ), not Southwest Airlines (LUV ). In 1999, IBM, which has old-style benefits and contributed almost $4 billion to shore up its pension plans in 2002, did a study of its competitors and found 75% did not offer a pension plan and fewer still paid for retiree health care.

Instead, companies are much more likely to offer defined-contribution plans, such as 401(k)s, to which they contribute a set amount. In 1977, there were 14.6 million people with defined-contribution benefits; today there are an estimated 62.5 million. Part of their appeal has been that a more mobile workforce can take their benefits with them as they hop from job to job. But just as important, they cost less for employers. Donald E. Fuerst, a retirement actuary at Mercer Human Resource Consulting LLC, notes that while even a well-matched 401(k) often costs no more than 3% of payroll, a typical defined-benefit plan can cost 5% to 6% of payroll.

Despite the stampede to defined-contribution plans, there are still 44 million Americans covered by old-fashioned pensions that promise a set payout at retirement. All told, they're owed more than $1 trillion by 30,000 different companies. Many of those employers have also promised tens of billions of dollars more in health-care coverage for retirees. Even transferring a small part of the burden to individuals or the government can have a profound impact on the corporate bottom line. The decision by Congress to have Medicare cover the cost of prescription drugs, for example, will lighten corporate retiree health-care obligations by billions of dollars. Equipment maker Deere & Co. (DE ) estimates that the move will shave $300 million to $400 million off its future health-care liabilities starting this year.

The U.S. Treasury, on the other hand, pays and pays dearly. That drug benefit, which takes effect in 2006, is expected to cost the government the equivalent of 1% of gross domestic product by 2010, and other potentially big taxpayer costs are looming, too. In mid-April, over the objections of the PBGC, Congress granted a two-year reprieve from catch-up pension contributions for two of the most troubled industries: airlines and steel. Congress also lowered the interest rate all companies use to calculate long-term obligations, lowering pension liabilities. While these moves lighten the corporate burden, they increase the chances taxpayers will have to step in. "The less funding required, the more risk that's shifting to the government," says Peter R. Orszag, a pension expert and senior fellow in economic studies at the Brookings Institution. "The question is: How comfortable are we with the risk of failure?"

Company-sponsored health care, which generally covers retirees not yet eligible for Medicare and supplements what Medicare will pay, is likely to disappear even faster than company pensions. Subject to fewer federal regulations, those benefits are easier to rescind and companies are fast doing so. It's much harder to renege on pension promises. So instead, many profitable companies are simply freezing plans and denying the benefits to new employees. Last fall, Aon Consulting (AON ) found that 150 of the 1,000 companies they surveyed had frozen their pension plans in the previous two years, a dramatic increase from earlier years. Another 60 companies said they were actively considering following suit.

STRESS ON A FRAGILE SYSTEM
The government bailout fund is $9.7 billion in the red, and Social Security and personal savings are hardly going to be enough

The cost of honoring PBGC's commitments could be higher than anyone is expecting. The government bailout fund has relied on having enough healthy companies to pony up premiums to cover plans that fail. But in a scenario of rising plan terminations, healthy companies with strong plans still in the PBGC system would be asked to pay more. For corporations already fretting that pensions have become a competitive liability and a turnoff to investors, this could be the tipping point. Faced with higher insurance costs, they could opt out, rapidly accelerating the system's decline as the remaining healthy participants become overwhelmed by the needy. In the end, the problem would land with Congress, which could be forced to undertake a savings-and-loan-type bailout. It's almost too painful to think about, and so no one does. But when the bill comes due, it will almost certainly be addressed to taxpayers.

Most worrisome is the record number of pension plans in danger of going under. According to the PBGC, as of September, 2003, there was at least $86 billion in pension obligations promised by companies deemed financially weak. That's up from $35 billion the year before. And it's on top of a record number of companies that managed to dump their troubled pension plans on the PBGC last year: 152. In 2003, a record 206,000 people became PBGC pensioners, including 95,000 from its biggest takeover ever, Bethlehem Steel Corp.

Even for healthy companies, pensions have become a serious drag. The companies of the Standard & Poor's 500-stock index, for example, continue to run an aggregate pension deficit of $149 billion, according to David Bianco, an accounting analyst at UBS (UBS ). That's despite a strong stock market in 2003, which pushed up pension plan assets, and despite the billions companies contributed, including $18.5 billion from General Motors Corp. (GM ) alone. If conditions don't change, Bianco figures the S&P 500 companies will end the year $192 billion in the hole.

WHAT TODAY MIGHT be seen as an isolated problem for a limited number of companies promises to bloom into big trouble for us all. By conventional math, the PBGC is already insolvent: As of September, 2003, it had $46.5 billion of liabilities and only $35 billion of assets, a deficit of $11.5 billion that had close to tripled in one year. The agency paid 2003 benefits of $2.5 billion, but only took in $1 billion of premium income from companies with defined-benefit plans. (The PBGC says the deficit had dropped to $9.7 billion as of March, but can't give further details.) The PBGC is not directly funded by the taxpayer, but it is backed by the U.S. government, which would likely bail it out in a crisis.

The fragility of that system only increases the stress on other sources of retirement income and insurance: Social Security, Medicare, and personal savings. Social Security has its own $11.9 trillion deficit. And the still-recent history of personal savings vehicles like 401(k)s shows that people generally save too little, pay too much in fees, and fail to adequately diversify their risk. Olivia S. Mitchell, executive director of the Wharton School's Pension Research Council, is among the many who think one result is that we will all have to work longer than we thought. "It used to be thought Social Security was the safe leg of the retirement stool, but that's not safe either," says Mitchell.

Demographic trends will only make matters worse. As recently as 1985 there were three U.S. workers for every retired person. Now it's close to even. And we're still six years away from 2010, when the first of the baby boomers will hit 65. Not only are more people retiring, but they're living longer once they get there. Today 17% of the U.S. population is age 60 or older. According to Census Dept. data, that figure will rise to 26% by 2050, when college graduates entering the workforce today can finally begin to think about retiring. It's the complete reversal of the years after World War II, when companies first began offering pension plans in great numbers. In those days the workforce was young and retirees were only a sliver of the population. It was easy to make promises.

The world has changed dramatically since then. In the '40s and '50s, if a company offered retirement benefits, its competitors probably did too. Pattern bargaining by unions held entire industries to the same standard. But companies that once could rely on geographic boundaries and market dominance to minimize the threat of upstarts and outsiders are now struggling to keep up in a global marketplace full of new competitors. Companies like IBM, Verizon Communications (VZ ), and even General Motors today must contend with rivals who don't bear the cost of old-style benefits. For every lumbering US Airways there's an agile Southwest or Jet Blue Airways Corp. (JBLU ), newer rivals with cheaper benefits. For every GM, there's a Toyota Motor Corp., with a leaner and younger U.S. workforce.

Nowhere are pension obligations a greater competitive millstone than in Detroit. The U.S. carmakers today have some of the biggest pension obligations and pool of retirees anywhere. By contrast, their Japanese competition only started U.S. manufacturing in the late 1980s, and have far lower costs. General Motors has 514,120 participants in its hourly-rate employee pension plan, all but 142,617 of whom are retired. Pension and health-care costs for those retirees added up to about $6.2 billion in 2003, or roughly $1,784 per vehicle according to Morgan Stanley (MWD ). Compare that to Toyota's U.S. (TM ) plan, which had only 9,557 participants, just two of whom were retired as of Toyota's latest Internal Revenue Service filing covering 2001. Toyota's pension cost is estimated at something less than $200 per vehicle.

The impact on profits is dramatic. Excluding gains from its finance arm, GM earned $144 per vehicle in the U.S. in 2003. GM's margins are now 0.5%, among the worst in the industry. But without the burden of pension and retiree health-care costs, the auto makers' global margins would be 5.5%, according to Morgan Stanley. That's not great, but a lot closer to Asian carmakers like Honda Motor Corp., which earns 7.5% on its global sales.

GOODBYE, RETIREE HEALTH CARE
Companies are racing to cut or drop retiree medical benefits to give a quick boost to their bottom lines

Retiree health-care coverage, which is easier to eliminate than pensions, is disappearing even faster. Unlike pensions, which are accrued and funded over time, retiree health care is paid for out of current cash accounts, so any cuts immediately bolster the bottom line. Estimates are that as many as half of the companies offering retiree health care 10 years ago have now dropped the benefit entirely. Many of those that have not yet slammed the door are requiring their former workers to bear more of the cost. Some 22% of the retirees who still get such benefits are now required to pay the insurance premiums themselves, according to a study by Hewitt Associates Inc. (HEW ). Some 20% of employers told Hewitt that they might make retirees pay within the next three years. This hits hardest those who retire before 65 and are not yet eligible for Medicare. But even older retirees suffer when they lose supplemental health benefits like prescription coverage.

IT'S NOT JUST struggling companies, either. IBM, which is already fighting with retirees in court over changes made to its pension plan in the 1990s, is now getting an earful from angry retirees about health-care costs. In 1999, IBM capped how much retiree health care it would pay per year at $7,500 of each employee's annual medical-insurance costs. Although IBM is certainly in no financial distress -- the company earned $7.6 billion on $89 billion in sales last year -- Big Blue says its medical costs have been rising faster than revenue. Last year the company says it spent $335 million on retiree health care.

This year, for the first time, many IBM retirees are beginning to hit the $7,500 limit. Sandy Anderson, who worked as a manager at IBM's semiconductor business for 32 years, and today is the acting president of a group of 2,000 retirees called Benefits Restoration Inc., saw his own insurance bill triple this year. He suspects that the company is trying to make the perk so expensive that retirees drop it, a cumulative savings calculated by the group at $100,000 per dropout.

But more than that, Anderson is angry that as a manager, IBM encouraged him to talk to his staff about retirement benefits as part of their overall compensation. The job market was tight, and IBM's message was our salaries aren't the highest, but we will take care of you when you stop working, he says. Now he feels the company is reneging. "I feel I've misled a lot of people, that I've lied to people," says Anderson. "It does not sit well with me at all." IBM says its opt-out levels are low and that it often sees retirees return to the plan after opting out for a period of time. The company also argues that it has not changed its approach to retiree medical benefits for more than a decade and that the rising cost of health care is the real issue.

Even with the reductions, Anderson and his generation of retirees are better off than many. In 2003 the giant computer maker said it would pay nothing toward health insurance for future hires when they retire.

THE PERFECT PENSION STORM
Three years of stock market declines plus record-low interest rates have left pension funds woefully underfunded

One reason companies have hit the accelerator on dumping their benefits is because of sharp price increases. Retirement plans have become radically more expensive in the past two years alone. Due to smoothing mechanisms built into pension accounting, their investments are still suffering from the equity market declines of 2000, 2001, and 2002. That has put a big dent in the value of their stock holdings, generally 60% or more of their total assets. At the same time, interest rates, which are used to calculate the size of a company's liability, have remained stubbornly low, implying a bigger pension liability. Although the recent legislation eases the problem somewhat, it doesn't nearly close the gap between what these funds owe and what they have in assets.

Combined with the rise in retirees, those market conditions have led to two years of record underfunding in company-sponsored plans. A recent study by analysts at CreditSights Ltd. found that 85% of the defined-benefit plans in the S&P 500 don't have enough assets to cover their pension obligations. Together the underfunding equals 15% of their 2003 cash flow. As a result, companies will have to put billions of dollars of cash into these plans this year to help close the gap.

It's a drastic turnaround from the late 1990s when these plans had more than enough money. In 1999, the average S&P 500 pension was overfunded by $726 million, according to CreditSights. Four years later, at the end of 2003, it was $463 million underfunded, a swing of almost $1.2 billion. A steady rise in interest rates and a strong stock market could help to solve that underfunding, but experts worry that the whipsaw effect of the past few years and the billions companies have been forced to contribute has heightened executive discomfort with the volatility of pensions. According to Credit Suisse First Boston (CSR ) analyst David Zion, the companies in the S&P 500 have contributed $88 billion to their pension plans over the past two years. They're likely to have to add another $31 billion over the next two years. Despite an $18.5 billion infusion into its pension plan in 2003, it will take years before General Motors, for example, has fully funded plans. "These things have a fairly long tail," says GM Chairman and CEO G. Richard Wagoner Jr.

Companies didn't make it any easier on themselves by contributing as little as possible to their pensions in the booming 1990s. As recently as 2001, half of the large pensions monitored by actuaries at Milliman USA were generating pension income, contributing an aggregate $12.5 billion boost to their parent companies' reported earnings. Companies with overfunded pension plans were often able to fund retiree health care with pension overage. Many companies contributed little or nothing to their pension plans as the bull market drove up assets more than enough. Former PBGC chief Kandarian notes that adjusting for inflation, in the early 1980s plan sponsors were putting $63 billion per year into their plans. By the last half of the 1990s that had dropped to $26 billion, and companies had become used to getting expensive benefits on the cheap.

WHEN THEY DID contribute, it was often not with cash but with stock, real estate, and other less liquid "alternative" investments. With pension promises basically free, companies were also offering pension increases in lieu of salary raises, increasing their obligations. From 1980 to 2000, the size of the promises made grew 2.3 times, Kandarian says.

Among those making the most extravagant retirement pledges were the steel mills, and it was in their plans that the industry's weakness was most dramatically realized. In a massive wave of bankruptcies, the steelmakers have shifted $7.5 billion of their obligations to the PBGC in the past 3 years.

But in that disaster some have found an opportunity to arbitrage the difference between the old retirement model and the new. International Steel Group Inc. (ISG ) has in the past two years grown into the largest steelmaker in the country by acquiring the mills of old steel companies, including Bethlehem Steel, LTV, and Acme Metals out of bankruptcy, once they've been freed of pension and health-care promises. These companies had been pummeled by cheaper international competition as well as lower-cost U.S. mini-mills, and as they shrank to cut costs, their retiree bases mushroomed to many times the size of the active workforce. Faced with the possibility that they would lose all the remaining jobs left at these companies, the United Steelworkers union was eventually willing to compromise.

RISK ARBITRAGE
A company free of its retiree promises can become a tougher competitor -- though former workers suffer

Free of those pension promises, ISG chairman Wilbur L. Ross Jr. enjoyed the big run-up in steel prices on a much cheaper cost base than many of his competitors. ISG's predecessor companies shed $12 billion of legacy health-care costs and another $9 billion of pension obligations. The company today claims to be competitive with both international steelmakers and efficient U.S.-based mini-mills. ISG's defined-contribution cost for employees was $45 million in 2003. Its very modest retiree health-care benefits cost $4.3 million. By contrast, Bethlehem Steel alone was paying out $500 million a year in pension benefits. Today, U.S. Steel Corp. (X ) has moved to an ISG-style defined-contribution pension plan, but only for future retirees. It still owes $8 billion to existing pensioners.

It's a bit of retiree-cost arbitrage that won't last forever. But before it's over, Ross predicts other industries will follow this harsh path to competitiveness. Those most at risk: textile makers, airlines, tire and rubber companies, auto-parts suppliers and, potentially, he says, the auto makers. "There is a huge unfunded liability that's building up because of the defined-benefit system," says Ross. "If nothing changes, the stone they [PBGC] have to roll up the hill will just get heavier."

Workers bear the brunt of it. Bill Luoma, head of the Mahoning Valley Steelworkers Retirees Council, which counts bankrupt LTV retirees among its members, says that with their health insurance gone, many have stopped visiting doctors other than for emergencies. For companies struggling to compete in the global economy, carrying those burdens themselves is like strapping on a 200-pound weight to run a 40-yard dash. But to shed them is to leave decades of workers devastated. In the end, someone will have to pay. The only question is who.

By Nanette Byrnes with David Welch in Detroit

###

The New York Times - July 15, 2004 – Entire Article

United Delays Payments to Pensions

By MICHELINE MAYNARD and MARY WILLIAMS WALSH

United Airlines said yesterday that it would put off making $72.4 million in payments to its employee pension funds, a move that experts said signaled that the airline was likely to seek deep cuts in one or more of its retirement plans.

The action, disclosed in a filing with the Securities and Exchange Commission, was the first significant step taken by the bankrupt airline since its application for federal loan guarantees was rejected at the end of June.

Though United - a subsidiary of UAL - has been in Chapter 11 bankruptcy since December 2002, it has been operating normally; until now it has made good on all its mandatory pension contributions, even as it negotiated other wage and benefit cuts from its unions.

Pension specialists said that United's move was an ominous sign. "In our experience, it's exceedingly rare for companies that miss legally required contributions to later make up the shortfall," said Randy Clerihue, a spokesman for the Pension Benefit Guaranty Corporation, the federally sponsored agency that insures pension plans against default.

United's move came just two days after executives of the airline cautioned employees that the company would have to dig deeper on costs, as it strives to line up new lenders and investors to help it emerge from bankruptcy. The airline said in its filing that the deferral would have no immediate effect on the monthly benefits received by its retirees.

Leaders of some of the company's unions reacted with dismay to the deferral. The International Association of Machinists and Aerospace Workers issued a statement saying United's failure to meet its pension obligations "clearly threatens the stability of those plans." The Association of Flight Attendants said it was worried that the airline might take even more drastic action, by terminating one or more of the plans. Officials for both unions said they had no warning of the airline's move.

But Herb Hunter, a United captain who is a spokesman for the Air Line Pilots Association, said the action made financial sense. "They are trying to do the responsible thing, to conserve cash and get themselves situated to come out of bankruptcy," Mr. Hunter said.

The four pension funds United operates for its workers are in varying states of financial health; by some measures, the pilots' plan is the strongest, and it was not scheduled to receive any of the deferred payments. By another measure, however, United's decision suggested that the pilots were shouldering a growing, but invisible, degree of risk.

If measured as a continuing pension plan with an unlimited future - the method used for calculating contributions - the pilots' plan appears to be fully funded now, and United owes it no additional money. But if it is measured as if it were about to be shut down, the pilots' plan would have a $2.5 billion shortfall, and some pilots would suffer large and painful losses. The government insurance program, already weak, would bear part of the blow.

The other three pension plans at United all have contributions coming due today: $38.6 million for the mechanics, $19.7 million for the flight attendants and $14.1 million for counter representatives and others who deal with the public. All of those are being deferred by the airline.

Since it entered bankruptcy, United has cut its annual costs by some $5 billion, half of it through wage and benefit reductions accepted by its unions last year. Some of those reductions were achieved by slowing the rate that current employees build up their pensions. But the benefits that United's employees and retirees have already earned cannot legally be reduced - short of a full-blown pension default - and they are still being carried on the airline's books as a form of long-term debt. The payments due today were supposed to keep United current on that debt.

Technically, United said it was deferring a decision on whether to make the pension payments, the minimum contributions that airlines with traditional defined-benefit plans must make each quarter. Companies with plans that are fully funded are required to contribute only annually, but most airline plans are currently below that level.

The airline said in its filing that it took the step to "manage resources and preserve its options."

###

The New York Times  - July 14, 2004 – Entire Article

Medicare Law Is Seen Leading to Cuts in Drug Benefits for Retirees

By ROBERT PEAR

WASHINGTON, July 13 - New government estimates suggest that employers will reduce or eliminate prescription drug benefits for 3.8 million retirees when Medicare offers such coverage in 2006.

 That represents one-third of all the retirees with employer-sponsored drug coverage, according to documents from the Department of Health and Human Services.

No aspect of the new Medicare law causes more concern among retirees than the possibility that they might lose benefits they already have.

 Democrats are likely to cite the new estimates as evidence to support their contention that the new law will prompt some employers to curtail drug coverage for retirees, forcing them, in some cases, to rely on Medicare's leaner benefits. Republicans do not want to see the government supplant employers in providing drug benefits to retirees.

 Senior officials at the department have been saying for weeks that they believe federal subsidies will induce more employers to continue providing drug benefits to retirees. Under the new Medicare law, the government expects to spend $71 billion on subsidies to employers from 2006 to 2013. To qualify for assistance, an employer must certify that its retiree drug benefits are worth at least as much as the standard Medicare drug benefit.

 Federal officials have substantial discretion in deciding how to measure the value of drug benefits. They said they would use that discretion to encourage employers to continue providing drug coverage - a goal ardently favored by retirees, labor unions and members of Congress from both parties.

 When Medicare officials held an open-door forum on June 9, they were deluged with complaints from Medicare beneficiaries alarmed at the prospect of cuts in retiree drug coverage.

 Gale P. Arden, director of the private health insurance group at the Centers for Medicare and Medicaid Services, said: "This is a new line of business for us. We have never been engaged in paying subsidies to employers or unions before.''

In last year's debates, Republicans repeatedly said the new drug benefits would be completely voluntary. "Seniors happy with the current Medicare system should be able to keep their coverage just the way it is,'' Mr. Bush said in his State of the Union Message in 2003.

But Representative Pete Stark of California, the senior Democrat on the Ways and Means Subcommittee on Health, said it now appeared that the new law would "force millions of retirees out of comprehensive retiree drug coverage and into a flawed, inadequate program.''

 Still, Republican supporters of the new law and many employers said it would help stabilize retiree health benefits. "Rather than worsening the situation, it works to stop the trend of employers' dropping retiree coverage,'' said Representative Bill Thomas, Republican of California, one of the principal architects of the law.

Employers lobbied for the subsidies, saying they would slow the erosion of retiree health benefits, a trend that began more than a decade ago.

E. Neil Trautwein, assistant vice president of the National Association of Manufacturers, said Tuesday that he believed the new law "has the potential to slow or even reverse the decline in the level of retiree health coverage provided by employers.''

Medicare officials said that 11.5 million beneficiaries would have retiree drug benefits from their former employers in the absence of the new Medicare law.

Under the law, according to the documents from the Department of Health and Human Services, 7.6 million of those retirees are expected to receive drug benefits through employer plans subsidized by the government, and 3.8 million are expected to receive their primary drug coverage from Medicare. This number is expected to grow to 4.1 million by 2010.

 Employers who curtail drug benefits could still try to help retirees by offering drug coverage to supplement or complement what Medicare offers. But the government would not subsidize such assistance.

In another sign of Congressional concern about drug costs, the House voted on Tuesday to allow Americans to import prescription drugs from other countries, where prices are often lower. The provision was included in the annual spending bill for the Agriculture Department and the Food and Drug Administration. Republican leaders said it would probably be dropped from the bill in negotiations with the Senate. The White House opposed the provision, saying "it would be virtually impossible'' to guarantee the safety of imported medicines.

Medicare officials plan to propose standards for employer-sponsored drug benefits later this month.

 Employers say their decisions about whether to continue offering benefits to retirees will depend to a large degree on the federal rules - in particular, the criteria for deciding whether their retiree drug benefits are as generous as those provided by Medicare.

 The standard Medicare drug benefit will be worth about $1,200 a year. But its structure - with a large gap in coverage when the beneficiary must pay all drug costs - is much different from the type of drug benefit typically offered by employers.

 Frank B. McArdle, a health policy expert at Hewitt Associates, a benefits consulting firm, said: "The subsidy will be very popular with large employers, whose No. 1 concern is to minimize disruption to their retirees. In many cases, employers who take the subsidy will be able to continue doing just what they did before.''

 But employers said that if the federal rules and requirements proved too burdensome, they would be more likely to drop their retiree drug coverage.

Under the Medicare law, the government will pay a subsidy equal to 28 percent of drug costs from $250 to $5,000 a year for any retiree who has employer-sponsored drug coverage as generous as the standard Medicare drug benefit. The subsidies will be tax-free to employers, who can still take tax deductions for the cost of retiree health benefits.

 Anthony J. Knettel, senior health policy adviser at the Erisa Industry Committee, which represents 130 of the nation's largest corporations, said that "some big employers have dozens of different retiree health plans'' - for different lines of business, different units of the company or employees hired at different times. It will be difficult to determine whether the "actuarial value'' of drug benefits under those plans is equivalent to that of the standard Medicare benefit, he said.

 John J. Schubert of PricewaterhouseCoopers, a director of the American Academy of Actuaries, said, "It will be a real challenge for the government to write a set of rules that can be applied to every retiree health plan because every plan is different.''

###

USA Today - July 11, 2004 – Entire Article

Drugmakers benefit most

Imagine being a senior citizen with asthma or emphysema who depends on the prescription drug Combivent, which costs well over $100 a month. You look forward to a promised discount under Medicare's new drug benefit only to discover that the manufacturer raised the price for the breathing-aid drug nearly 9% early this year. The result: At least half of the savings from the discount card is swallowed up by the price increase.

The story is the same for dozens of other popular drugs used to treat ailments common among seniors. Prices jumped after the Medicare law was signed in December. A study commissioned by AARP, the giant seniors' lobby that gave crucial support to enactment of the Medicare drug benefit, found that the average price to wholesalers for the 200 most-used brand-name drugs increased 7.2% during the 12 months ending March 31, more than triple the inflation rate of 2%.

Price hikes that limit discounts are the latest evidence of deep flaws in a law pushed by President Bush and hastily passed by a Congress more focused on winning seniors' votes in the 2004 elections than finding a way to slow Medicare's out-of-control costs. Democratic presidential candidate John Kerry did not cast a vote on the legislation.

Instead of embracing reforms that would restrain Medicare's growth as well as provide needed drug coverage, lawmakers opted for an ill-conceived program that has become a disappointment for seniors, a boondoggle for drug companies and a rapidly rising burden for taxpayers.

Backers of the new law said it would help millions of seniors afford vital medicines, particularly the 40% with little or no drug insurance. But the measure prohibits the government from bargaining with the politically potent pharmaceutical industry over the prices Washington will pay for seniors' drugs, even though the Veterans Affairs and Defense departments already do that for their massive health care programs.

The temporary discount-card program, which will last until Medicare provides coverage in 2006, got off to a woefully slow start amid complaints about the difficulties of choosing among the more than 70 different national and regional cards, each with different discounts for different drugs.

Of 41 million eligible seniors, fewer than one in 10 are enrolled for savings that average 10% to 25%. But the Bush administration is resisting calls from across the political spectrum for more aggressive efforts to sign up 8 million low-income seniors who would benefit most, saying enrollment is voluntary.

Meanwhile, a government investigation confirmed last week that a top Medicare official had threatened to fire the program's chief actuary last year if he told Congress the true estimates of the program's cost. They ranged 25% to 50% above the 10-year, $400 billion cost Congress was told.

The industry says the boost in drug prices is in line with increases in overall health costs. Considering the recent explosion in medical expenses, that's small comfort.

A drug benefit that rewards manufacturers more than seniors and forces taxpayers to pick up an inflated tab is the wrong policy prescription for the nation.

###

The Washington Post - July 4, 2004 - Excerpts    

Health Care Costs Darken Sunset Years

Through the first half of the 20th century, a long and comfortable retirement was something few workers experienced. Pensions were not common, Social Security was just getting started, and anyway, most workers died on the job or shortly after retiring.

Then things changed. Social Security flowered. Unions extracted better pensions and other benefits from employers. New federal laws made if difficult for employers to renege on promised benefits and provided government-backed insurance for pensions if employers went broke.

Now, that latter period, especially the years from about 1975 to 2000, is beginning to look like the golden age of retirement in America. In other words, those were the good old days, and if you're still working, there's a good chance you've missed out.

The retirement that looms for many of today's workers is likely to be quite different. While some will still have that magic combination of Social Security, a private pension, a 401(k) and company-sponsored retiree medical insurance, their numbers are shrinking steadily.

The conclusions of experts who study the situation are depressingly uniform. Retiree medical insurance is fading fast. Private pensions -- the kind that provide a lifetime stream of income -- have declined drastically over the past two decades, though they are slipping more slowly now. Social Security's future is problematic, and workers are not doing well in their 401(k)s.

The do-it-yourself trend in retirement -- and the low participation in 401(k) and similar plans -- is the heart of the problem, and has been getting some attention lately. But not widely appreciated is the impact of the disappearance of retiree health insurance.

A new study finds that medical costs can equal 20 percent of pre-retirement income for a worker who retires at 65 and who has no employer health care benefits. In other words, a worker who has savings and pension income adequate to replace all of her pre-retirement income is really 20 percent short of that unless she has some form of employer medical subsidy. And that assumes Medicare eligibility. Workers retiring early without employer medical are projected to have only 59 percent of pre-retirement income left after medical expenses.

 The study, by Hewitt Associates, a benefits-consulting firm based in Lincolnshire, Ill., notes that other research indicates that retirees need to have enough resources to replace 85 to 90 percent of their pre-retirement income to maintain their standard of living.

Hewitt found that only workers who have the entire package, including a traditional pension and retiree medical, seem likely to reach that level.

 Those who have only a 401(k) and Social Security start off at 80 percent of pre-retirement income and go down from there, depending on whether they have employer medical and how generous it is. In fact, the study projects that retirees with only Social Security and a 401(k) and no employer medical benefits will be left with only 57 percent of their pre-retirement income to live on.

 In fact, the assumptions in the study are such that, if the findings are correct, many workers will be even worse off. The retirement income projections assume, among other things, that the worker retires at 65, lives 20 years in retirement and draws down 100 percent of her 401(k) balance during that time. Since that's right around the actuarial life expectancy of retirees today, all those who live longer -- and half can expect to -- will exhaust their 401(k) funds before their death.

Lori Lucas, director of participant research at Hewitt, call the findings "a wake-up call" for employees.

 "Employees need to make their 401(k) programs work harder for them," and they "need to anticipate the potential cost of paying for much of their retiree medical themselves," she said.

Lucas added that essentially no employer today thinks seriously of starting a traditional pension. Companies argue that such pensions are too volatile in their funding requirements and that their competitors don't have them. Indeed, those that still have traditional pensions "are wondering if someday their [retirement plans] will look like this," with only a 401(k) plan.

The study covered 62 large companies with nearly 1 million employees.

Employers' response to Hewitt's findings is that they need to increase 401(k) plan participation and help workers figure out how much they should be saving. But don't look for additional financial help.

 For many workers, the answer is going to be simple and not very pleasant: They will have to work longer and be retired fewer years. Hewitt found that working until age 67, instead of 65, and contributing an additional 2 percent of pay to a 401(k) would allow many younger workers to reach 80 percent of pre-retirement income, even with health care costs included.

And, while it's hard to do with jobs in short supply in many parts of the economy, workers lucky enough to have a choice of employment should look hard at potential employers' pension offerings, give weight to the best one, and let the companies know that a good pension is a serious factor in choosing among them.

Colorado Springs Gazette – July 4, 2004–Excerpts (reprint from San Antonio Express-News)

Despite outcry, CEOs continue raking in bucks

            Much has been said in the past couple of years, but in effect, little has been done about the increasingly high incomes of the nation’s chief executive officers.

            Last year, the median salary for CEOs of S&P 500 companies was 27.16 percent more than in 2002, when the median salary was 11.48 percent higher than the year before that.

            CEO’s earned a median annual compensation of $2.3 million, and received an additional $2.3 million in restricted stock or realized stock options.

This year and in years to come, executive compensation specialists believe CEOs will earn even more, despite new Financial Accounting Standards Board regulations encouraging accounting of stock options and enforcement of the Sarbanes-Oxley Act.
                                                 ###

The New York Times - July 2, 2004 - Excerpts

United's Pensions on Increasingly Shaky Ground

As United Airlines prepares to ask workers for a new round of cutbacks, its pension plans look increasingly vulnerable. The airline has four big plans, and shedding any one could lop off more than $1 billion in debt.

Such a drastic step could nudge other airlines to trim their pension plans as well, to keep their labor costs competitive. The long-term prospect could be a series of failed pension plans and lost benefits reminiscent of those in the steel industry, a costly outcome for the government.

As long as this pattern continues, United could conserve more cash in the short term - and make itself more attractive to lenders - by chopping one or more of its skimpier pension plans. It could either freeze the benefits at their current level, or terminate one or more plans outright - a far more drastic step that would require approval by the bankruptcy court.

                                                                                  ###

The New Jersey Star-Ledger - July 2, 2004 - Excerpts  

Lucent and union paint bleak picture on pact talks
Retiree health-care coverage is one problem area

Lucent Technologies was so eager to wrap up a new labor pact this summer that it began negotiating with union officials months earlier than expected.

But after two weeks of talks, the two sides have made such little progress, they may break off bargaining efforts until October, company and union officials say. The current labor contract runs out on Halloween.

A major sticking point is retiree health-care benefits, an increasing burden for Lucent. The Murray Hill-based telecommunications gear company is looking to eliminate dental coverage for retired union workers within four years, and to sharply increase their out- of-pocket expenses for other care, according to the Communications Workers of America, the company's main union.

Lucent expects to pay $240 million out of operating expenses this year for management retiree health-care costs, a number expected to rise to $300 million for the next two years.

The crunch is expected to get much worse in 2007, when a fund the company set aside to take care of similar costs for its 77,000 union- represented retirees is expected to run out. During Lucent's previous round of labor negotiations last year, union officials agreed to some benefit cuts in exchange for a company contribution of $76 million to the fund.

 

                                                                               ###