USA Today - May 19, 2005
 
 Risks rise for taxpayers, retirees as employers bail
 

 

When Studebaker, one of the nation's last independent automakers, abruptly collapsed in 1963, 7,000 workers were left not only without jobs but also without the retirement pensions they had counted on. Millions of other employees of private companies realized they could be similarly vulnerable some day, and the public demanded action.

Congress eventually mandated a system of employer-financed insurance to provide a safety net for pensions. Over the years, 3,500 traditional pension plans have failed, United Airlines' being the latest and biggest. Cash-strapped United used the bankruptcy laws to shed its $10 billion pension obligation last week. The move raised questions about the safety of worker pensions in general.

The Pension Benefit Guaranty Corp. (PBGC), the agency created by the government post-Studebaker to insure private pensions, is looking at its own tide of red ink: only $39 billion in assets to cover more than $62 billion in pension liabilities.

That's a threat not only to 44 million workers and retirees counting on pensions for a secure retirement, but also to all taxpayers. If the pension-insurance shortfall, and the serious underfunding of many company pension funds, aren't fixed, the nation could face a rerun of the 1980s' savings-and-loan bailout.

PBGC makes good, within limits, on pension promises abandoned by private employers. Low-income workers, with small pensions, have the most protection, but senior pilots might get just 25% of their pensions.

United was following a route used by other troubled companies, including Bethlehem Steel, LTV Steel and US Airways. More trouble is on the horizon. PBGC estimates the 30,000 plans it insures are $450 billion short of what's needed to pay their promises.

If nothing is done, the agency itself could go bankrupt. Its funds come from premiums paid by employers that offer traditional pensions, but if they run out there would be heavy pressure for a taxpayer bailout.

Current law allows employers to get away with lowballing pension contributions and obscuring shortfalls, knowing that if they have to they can dump it all on PBGC.

Bethlehem Steel, for example, claimed to have 84% of the money needed to cover future benefits. When PBGC took control, the assets were only 45% of its liabilities. One US Airways' plan supposedly was 94% funded, but the figure turned out to be 33%.

And every employer pays the same basic premium, $19 a year for each covered worker. Thus companies that play by the rules wind up subsidizing those that don't.

The PBGC, backed by the White House, is asking for long-overdue reforms:

--Tightening the funding rules to make sure employers can keep their promises.

--Increasing the basic annual premium to $30 and adding a risk-based premium to force those in trouble to pay more.

--Toughening the disclosure rules so workers, investors and regulators get a more accurate picture of how well funded a plan is.

Business interests claim that the reforms would cause more employers to drop pension plans altogether. Maybe. But that's better than a system that lets employers shuck promises they've made for years.

With Social Security benefits also at risk because of long-term funding problems, protecting private pensions is even more important than it was 40 years ago. Unless the country is prepared to renege on its commitment to shielding workers against loss of their pensions, reform is essential.