By Christopher Byron
New York Post
Monday, November 7, 2005
The news that Exxon Mobil netted a startling $9.92 billion
from rising oil prices this summer has brought quick demands
from legislators that Congress enact a windfall profits tax
on the industry.
It's a familiar way for vote-hungry politicians to look
indignant over soaring oil prices. But any legislator
interested in solving a
real problem should have demanded instead that
Big Oil's windfall profits be reinvested in the industry's
outrageously underfunded pension system.
Underfunded corporate pension and post-retirement
health-care plans are a ticking time bomb at the heart of
not just the oil sector but the whole of American business,
imperiling the retirement dreams of millions of workers as
well as the stability of the entire economy.
Yet Washington seems blithely indifferent to the burning
fuse in front of them, or the mountain of dynamite to which
it is attached.
Exxon alone is currently staring at an unfunded pension
obligation of $11.5 billion. And since the amount is even
larger than the company's reported third-quarter net income
from soaring oil prices, any legislator with a soapbox could
have performed a true national service by insisting — for
the symbolic value of the gesture alone — the money be used
to eliminate Exxon's pension plan shortfall.
But Senate Democrats Christopher Dodd of Connecticut and
Byron Dorgan of North Dakota trafficked instead in the quick
and crowd-pleasing demagogy of a federal excise tax on one
quarter's worth of oil patch profits.
Their goofball idea: to recycle the loot back to the public
as "rebates" — in effect, squeezing what amounts to
involuntary campaign contributions out of Big Oil to help
the two men get votes in the next election.
Too bad, for the situation at Exxon simply underscores a
larger and far more threatening problem that has been
growing silently on the balance sheets of many of America's
biggest and best-known companies for years.
From mining to transportation, from manufacturing to
computers, some 40 million American workers are heading
toward retirement relying on company-paid pension plans that
are propped up by grossly inadequate funding from the
Company-paid "defined benefit" pension plans are an
indispensable prop to the entire economy, providing more
than 20 percent of all income to Americans 65 years of age
and older. Nearly half the country's private-sector labor
force participates in these plans, which promise fixed and
guaranteed pension payments for life to retiring employees
who haven't spent their careers job-hopping from one company
to the next.
Under federal law, companies setting up these plans must
back them with portfolios of enough stocks, bonds and
similar assets to guarantee the plans will be able to
continue meeting their obligations to retirees even if the
companies themselves go out of business. If a company
collapses with an "underfunded" plan on its books, a
government-run entity called the Pension Benefit Guaranty
Corp. is supposed to take the plan over and run it for the
But scarcely did these plans start coming on line before
corporate raiders began dreaming up ways to loot them. The
raiding began in earnest when a series of 1980s-era court
decisions let the companies running the plans use
preposterous, pie-in-the-sky estimates regarding how big a
return they could reap for the plans by investing their
If the stock market was returning an average yield of, say,
8 percent annually, companies could get away with claiming
that they'd be able to generate twice that rate of return —
and no one batted an eye. Management was then able to begin
scaling back future fund contributions and start siphoning
off existing assets.
Nonetheless, the corporate pension system was still
self-sustaining and in the black as recently as four years
ago, with nearly all major corporate plans able to make
their obligated payments to beneficiaries from the yield on
their invested assets.
BUT that is no longer the case, with two-thirds of all
corporate plans now needing supplementary cash payments from
their sponsoring corporations to meet payment obligations to
The most troubled biggie on our list of corporate time
bombs: Goodyear Tire & Rubber Co. Its pension plan assets
of $4.6 billion amount to less than 60 percent of the plan's
obligations. So last year Goodyear had to contribute $264.6
million in cash to its plan (more than twice the level of
the year before). Meanwhile, the plan's unfunded
obligations have continued to swell, as the company
approaches balance-sheet insolvency, with no tangible net
worth at all.
If Goodyear's long-term slide were to end eventually in
bankruptcy court, the company's 84,000 employees would get
the shock of their lives. That's because, looming behind
the pension crisis is an even bigger problem: unfunded
retiree health-care plans. Like those of nearly all
companies, Goodyear's health-care plan for retirees is
backed by no assets at all and is instead funded totally out
of general corporate revenues. So a Goodyear bankruptcy
would be hard cheese for the company's health-care
beneficiaries, who would wind up with nothing.
Add it all together and our Top Ten list of corporate time
bombs forms a massive $146 billion black hole at the heart
of the U.S. economy. What's more, when the list is
broadened to include the corporate behemoths of the Standard
& Poor's 500 Index, the black hole swells to more than twice
As a result, many of the 76 million baby boomers, who are
only now beginning to move into life's checkout line, can no
longer be sure that the corporate retirement and health-care
plans they had hoped to rely on will be there when they're
In most cases, failed corporate pension plans become the
responsibility of the aforementioned Pension Benefit
Guaranty Corp. But the PBGC is itself now effectively busto,
with more than 200 failed plans having been dumped in its
lap since the start of last year. That has created about
$23 billion in unfunded obligations on the PBGC's own
balance sheet, a number that is bound to worsen.
Yet, since payouts from the PBGC are not
government-guaranteed, Washington is under no obligation to
keep funding the operation if the PBGC's pension burdens
Worst of all, there is no apparent consistency in the ways
the companies are basing their forecasts of future
obligations. For example, Goodyear pegs the current rate of
inflation in the health-care sector at 12 percent, United
Technologies Inc. puts it at 10 percent, and Exxon at 6
percent. They all can't be right, yet Washington regulators
do not even seem to have noticed such discrepancies, let
alone questioned them.
The Financial Accounting Standards Board is said to be
looking at setting some accounting ground rules in this
area. And some congressional squabbling is going on over
whether the PBGC should charge companies more to guarantee
their pension plans. But other than that, few in Washington
are showing any real interest in the financial calamity that
is boiling up in front of them.
Dodd and Dorgan certainly missed their moment. But how many
more chances will the rest of us get before it's too late to
do anything but stand back and watch in awe as the biggest
financial mess since the savings-and-loan crisis of 20 years
ago erupts before our eyes?