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Monday May 16, 08:04
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Pension crunch looms in the wake of United’s default
(by Julia Jenson)
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United Airlines that was allowed last week to renounce its pension liabilities amounting to $9.8 billion, heaping its problems on the overstrained Pension Benefit Guaranty Corp. aggravates the burden put on the government agency that agreed to take on two-thirds of the liabilities, amounting to $6.6 billion. The rest of the debt will not be compensated, meaning that the company’s retirees will have to take a cut in paychecks.
The PBGC is going through tough times now. Its agreement to bail out United may trigger a chain of defaults in the industry as other endangered carriers seek to add the government assistance in paying pension liabilities to the subsidies they already received. At the moment the PBGC has a $23 billion deficit in its single-employer insurance program in contrast to a $10 billion surplus in the late 1990s. This compares to estimates of record $450 billion underfunding in US corporations.
Corporate America is now moving away from defined-benefit plans that used to pay out a set monthly amount in retirement and replace them with defined-contribution plans that involve contributions both from the employer and employee. Now the number of Americans covered by defined benefit plans has dropped by a third, going down to 41 million from 60 million. Besides, the stability of retirement benefits is endangered by the possibility that they will be reduced in a corporate merger that is often accompanied by a change in pension plans.
Congress definitely needs to come up with a solution to the problem of companies with surging pension liabilities and reasonable probability of default. By the PBGC’s own estimates, it may soon face $96 billion in possible liabilities, where manufacturing tops the list with $40 billion. Another $33 billion in liabilities looms in airlines, transportation, telecom and utilities. There is a risk that other industries will want to mimic airlines and add to the PBGC’s burden.
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