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01/14/2005 Archived Entry: ""

My compliments to Michael Tanner of Cato Institute on a concise and clear explanation of the crisis facing the Social Security program. The analysis puts me in mind of a related issue: pension funds.

I think the scenes being played out by the Airline Industry and courts over pensions is an indication of things to come on a wider scale throughout the economy. A headline in the Denver Post this week read, "UAL turns ax to pensions." The article expanded, "Despite reaching wage deals, the United Airlines parent says it must cut pensions in order to stay aloft....'We still believe we need to terminate all our (pension) plans,' chief financial officer Jake Brace said to a swirl of news reporters in the hallway of the U.S. Bankruptcy Court here." Pay cuts have been ordered by the court but the arrangement does not cover the most controversial aspect of UAL's proposed route to solvency: chopping the pensions of flight attendants and mechanics. The article continues, "Termination of the pension plans would deal with two different sets of federal laws - the Employee Retirement Income Security Act and bankruptcy law. Brace said if the company can't reach agreements on the pension issue, the trial that would ensue could deal with both sets of laws." A court case (or cases) on these legal points could set a precedent that other companies -- in the airline industry and elsewhere -- could use to terminate or significantly reduce their own pension plans which, in most cases, is the single larest legacy cost Big Business faces today. (As with social security, the population of retirees on pension funds is expanding due to extended lifespans.)

To prevent the inevitable -- that is, to prevent an increasing number of companies defaulting on their pension plans -- the Bush administration is reportedly overhauling "the troubled federal fund that insures the pensions of 34 million workers. The proposal is designed to head off more pension plan failures, which result in retirees receiving reduced benefits. It also seeks to head off a taxpayer bailout of the government's Pension Benefit Guarantee Corp.Among its provisions: a boost in premiums paid by employers with defined pension plans to the government, and an added risk-based premium for troubled companies that get behind in funding their plans. In response to the proposal, some critics said that placing new costs and regulations on employers could lead them to abandon their defined-benefit plans and dump their obligations on the PBGC."

Business Week offers sage advice across the board on financial planning for your retirement. Regarding pensions, it advises, "the retirement story that just wouldn't go away -- and probably won't for some time -- is the future security of traditional pension plans. Only about 20% of workers still have a traditional defined-benefit pension plan. Many of them work in economically depressed industries such as steel or airlines. When companies go out of business, merge, or for other reasons close down their pension plans, the last resort for participants is the federal Pension Benefit Guarantee Corp. (PBGC), which takes over the plans and pays at least a portion of the pensions earned by the affected workers. As 2004 progressed, a spate of bad news came out about the PBGC's deficit of nearly $10 billion, exacerbated by the continuing economic crisis in the airline industry. Among policymakers, pension-rights advocates, and employers, a lively debate continues about just how shaky the PBGC's funding really is, the potential impact of future bankruptcies, and what's needed to shore up the fund. If you're part of the minority who's still in a traditional pension plan, continue to rev up your savings for retirement in an IRA or any other available vehicle -- especially a 401(k) if you're lucky enough to have that as well as a traditional plan. If your company closes down the pension plan, PBGC guarantees to pay only a certain dollar amount, which may be less than what you expected."