The Dallas Morning News – August 26, 2004 – Entire Story

Who will pay for pensions?

By DANIELLE DiMARTINO

The Pension Benefit Guaranty Corp. was established by Congress in 1974. It rose up out of that economic downturn as a safety net for pensioners whose companies had gone bankrupt.

 I wondered what the framers would say about the current fears of a taxpayer bailout.

 So I asked Richard Ippolito, the agency's former chief economist. He said the lawmakers surely didn't expect future legislation to cripple the agency by breaking one bone at a time.

 Under the original law, the agency should be collecting $9 in insurance premiums for every $1,000 of underfunding in a given company's plan. What it now collects, after tinkering by lawmakers influenced by powerful corporate lobbies, is closer to 50 cents per $1,000 of underfunding. That $8.50 is a government subsidy awarded to mismanaged pensions.

 In 2002, when market-based underfunding swelled to $400 billion, the agency should have collected $3.6 billion in revenue. "Through various loopholes," Mr. Ippolito said, it collected $200 million.

 "Implicitly, the taxpayer backs the insurance agency and almost certainly will be called on to bail out the agency if it encounters catastrophic loss levels," Mr. Ippolito said.

 And just how big an "if" is it?

 Let's start with the agency's financial state. At the end of last year, its assets were $35 billion and its deficit was $11.2 billion.

 Now, if United Airlines parent UAL Corp. is allowed to proceed with the termination of its pensions by its bankruptcy judge, the other airlines will (rightly) claim that United has been afforded an unfair competitive advantage.

 Total underfunding in the airline industry as of the end of last year was $31 billion. So the airlines alone could cripple the agency. That is, unless fliers wake up tomorrow willing to pay a lot more to supplement the carriers' cost structures.

 I wish I could say the story ends there. But it doesn't.

 At the end of 2003, $83 billion in pension underfunding was in plans of companies whose bonds were rated as "junk." These companies also represent a threat to the agency.

 Then add $60 billion in underfunding among carmakers.

 U.S. carmakers? Surely they're not a threat, you say. But an oversaturated auto market has already triggered dealer pushbacks and production cuts.

 When Americans' rampant consumption slows, these underfunded pensions also could come knocking on the agency's door. United's bankruptcy could provide a dangerous precedent.

 Well-funded plans will balk at subsidizing weak ones, Mr. Ippolito said, leaving us with his final, unanswered question:

 "Who will be left to pay the bill?"