Watching the pension dominoes fall
By Al Lewis, Business Columnist
Denver Post
Friday, October 14, 2005

The next savings-and-loan-like crisis is unfolding right before our eyes.

Bankrupt companies are defaulting on their pension plans. This week, bankrupt Delta Air Lines said it may default on its plan covering 28,000 retirees if it doesn't get some relief from Congress.

That would stick the Pension Benefit Guaranty Corp., a federal government agency that insures pensions, with a tab totaling several billion dollars.

The PBGC collects premiums like a private insurance company. But if it goes belly up, the liabilities for underfunded pensions are the responsibility of taxpayers, much like the liabilities of failed savings and loans were in the early 1990s.

The possibility of this happening looms larger each year. The PBGC had a $10 billion surplus in the late 1990s. Today, it has a $23 billion deficit, thanks to a rash of big corporate defaults.

In 2002, Bethlehem Steel stuck the PBGC with about $3.7 billion in pension liabilities. In 2003, US Airways dumped $3 billion worth. This year, United Airlines defaulted on $6.6 billion in pension liabilities.

United had a pension shortfall of $9.8 billion, a record default. Collectively, United employees lost the difference between that figure and the $6.6 billion that the PBGC picked up.

Also, the PBGC guarantees only a minimum pension. The most it will pay a beneficiary is $3,801 a month, or about $45,000 a year. Anyone who spent their career expecting more than that can spend their golden years moping about it.

Employees and retirees at freshly bankrupt Delta and Northwest are in similar trouble. Delta's pensions are short by $10.6 billion, Northwest's by $5.7 billion.

The pensions in peril are the old-fashioned defined-benefit plans found in mature industries such as steel, airlines and manufacturing. Over the last few decades, many companies have steered away from these plans in favor of defined-contribution plans, such as 401(k)s, which employees manage themselves.

Overall, 44 million workers are covered by 31,000 defined-benefit pension plans and U.S. companies are $450 billion short of meeting their obligations to these plans, according to PBGC estimates. Plans are coming up short because of bad planning, a faltering stock market, record-low interest rates and an increasing number of baby boomers about to retire and withdraw from the system.

"It was like a perfect storm," said Kirk Maldonado, a lawyer with Sherman & Howard in Denver who works on pension issues.

It's not difficult to see what's coming now. Companies have to find ways to make up for these shortfalls in a sideways stock market. If they don't, they threaten to overwhelm a woefully underfunded PBGC. That's why Congress has been working on pension reforms.

Lawmakers have been scrambling to protect employees, retirees, the PBGC and taxpayers from massive pension defaults. At the same time, they are trying not to make pension laws so onerous that companies will be forced to drop them.

Lawmakers have considered increasing the premiums that companies pay to the PBGC as well as several measures to discourage companies from underfunding their plans.

For the airlines, lawmakers mulled legislation that would allow them to extend their pension payments over 14 years instead of about four. The move would help Delta and Northwest preserve cash and possibly avert a default.

But why should bankrupt airlines get a break that solvent carriers such as American and Continental Airlines don't? And why should well-run companies have to pay higher premiums to the PBGC to subsidize poorly run companies?

Last week, the Senate was close to passing its pension-reform bill just before a one-week recess. But several senators protested a provision that required companies with bad credit ratings to pay more into their pension funds.

The Senate was then forced to indefinitely postpone a vote on the legislation. Now, observers say it's unlikely any major pension-reform legislation will get passed this year.

But pensioners needn't worry. I'm sure this will all get resolved. If it doesn't, well, there's always Social Security.

Al Lewis' column appears Sunday, Tuesday and Friday. Respond to Lewis at denverpostbloghouse.com/lewis, 303-820-1967, or alewis@denverpost.com.

http://www.denverpost.com/business/ci_3114355