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05/11/2005 Archived Entry: "United's default"

I have been blogging for quite some while -- beginning back in early 2003 -- on the upcoming and massive pension defaults that I believe are inevitable...and now imminent. This morning I was amazed to hear a financial adviser on CNN give a rundown on how to survive the loss of your pension. I imagine her commentary was inspired by the breaking news of United Airlines' court-approved termination of four employee pension plans, which constitutes the largest default since the U.S. government began to "guarantee" pensions through the Pension Benefit Guaranty Corporation (1974). The South Florida Sun-Sentinel explains...

"The airline has $9.8 billion in unfunded pension liabilities, but the PBGC will pick up only $6.6 million of that, meaning current and former employees will lose more than $3 billion in retirement benefits. The agreement far exceeds the previous record, a $3.6 billion liability from Bethlehem Steel in 2003. The ruling fueled speculation that other major airlines also might try to ditch their pension plans to avoid being at a competitive disadvantage to United, the second-largest U.S. carrier behind American Airlines. Some analysts have said that operating without pension liabilities will give United a financial advantage over the other large carriers." The court's approval of the pension default may also encourage other large corporations which are burdened by benefit-defined (as opposed to contribution-defined) plans to unilaterally alter their arrangement with employees. The automobile industry comes to mind immediately. And predictably. According to Forbes, General Motors had its debt rating down rated by Standard & Poor's "to junk status [which] increased the risk to the company's long-term funding strategy." One of the main reasons for that down rating is the huge benefit-defined health and pension plans under which GM is staggering.

The advice offered by the CNN commentator was sound: don't expect your pension to be there for you when you retire; find new ways to save right now -- e.g. instead of sending your children through university, encourage them to take out a loan; downsize -- e.g. move to a less expensive house; learn how to budget and budget tightly; consider innovative steps like a reverse mortage. As I said, her advice was sound but I had a strong urge to bitch-slap her smiling face as she chatted brightly about people just "having to move into a smaller house, that's all." Where were those sage words from legions of financial talking-heads who have insisted for years that "gee whiz, the economy is great!" Big Business is your friend. And pay no attention to the man behind the curtain.