Wednesday, May 11, 2005

United Air Wins Right to Default on Its Employee Pension Plans - New York Times

United Air Wins Right to Default on Its Employee Pension Plans - New York Times

Are the dominoes beginning to fall on Corporate Defined Benefit Plans? It sure seems that way as United Airlines successfully defaulted on its pension plan in bankruptcy court yesterday. Many of you are probably thinking to yourself "so what, this has no effect on me." You would be wrong in that thinking. Contrary to what you may have heard the retirees of United will not lose their pension, but many of the retirees will recieve a much lower payout. The reason for this is that pensions in America are backed by a governement entity called the PBGC or Pension Benefit Guaranty Corporation. The PBGC takes over "underfunded" or defaulted pensions and continues to make the payments so that retirees still have an income. So whats the problem?

The PBGC is itself heavily underfunded by over $23 billion dollars and this is before taking into account the fact that pension programs in the US are underfunded by over $450 billion, some of which will filter down to become PBGC funding problems. The PBGC is backed by none other than you, the taxpayer. The PBGC will need a bailout at some point similar to what happen to the Savings and Loans - you, the taxpayer will foot the bill.

On the bright side it is likely that legislation will be passed in order to allow companies to spread out their pension liabilities over more years, which should help corporations keep their pension plans and not simply dump them off on the PBGC. Of course extending liabilities without new strucutural solutions would simply be another piece of bad legislation. In addition, any bailout of the PBGC will not likely affect our budget deficits too much, after all what's another $50 - 100 billion when you owe as much as we do (do you detect a hit of sarcasm).

The brightest spot however is that we have a strong economy and strong prospects for the future (despite what you hear on television every day). A growing economy leads to a growing stock market which leads to a reduction in underfunded pensions (ironically though it was the growing stock market that led to the underfunded pension problems.....long story, don't ask).

I am optimistic about the future of the United States economy. I fully expect that we will have bumps along the way, but am confident the bumps are only temporary. Sure, there are a lot of things that could "derail" the economy, high oil prices, high budget deficits, high trade deficits, but the fact of the matter is that there is always something that could "derail" the economy. Take a look at our history and you can find dozens of things that would make you pessismitic about America, but the pessimists are always proven wrong in the long term. Don't get me wrong we do have strucutural problems that need to be fixed soon - Social Security and Medicare/Medicaid being the most urgent. I don't care what party you hail from there is no doubt that if we don't act soon our long term prospects will be much dimmer.

Ironically as the defined benefit pension plans begin to fall in the corporate sector there are signs that they are beginning to fall in the public sector as well. The Governator in California has proposed getting rid of the pension plans and replacing them with 401(k) type plans (called defined contribution plans). The thought being that the risk should be on the employee not on the taxpayer. Of course, the trend toward 401(k)'s in the public sector is not exactly a slam dunk, West Virginia just nixed the 401(k) plan it has had for their teachers since 1991 and are replacing it with.......a defined benefit pension. My personal opinion is that defined benefit pension plans will rule in the public sector for quite awhile, but their time is coming; I give them another ten years before the pensions begin to give way to 401(k) type plans.

On a completely separate note, my vote for American Idol this year Keri Underwood. Yes, she is a beautiful blond, but she has the vocals and I love country music.....

I would love to hear your feedback....

Till next time....