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May 20, 2005



PAUL GIGOT: When a bankruptcy court allowed United Airlines to default on its pension plans, and gave the federal government the responsibility for about seven billion dollars in payments to 134 thousand people, it was widely viewed as an alarm going off. Many Americans worried whether they could be next, and whether the government could afford to protect them. Good questions, with less-than-encouraging answers. We begin with a briefing from correspondent Celeste Ford.

GEORGE GARDNER: If this isn't a wake-up call, I don't know what is.

CELESTE FORD: How long have you worked on planes?

CELESTE FORD: George Gardner says airplanes were his life, starting in high school, then Viet Nam, followed by his first job in 1965 as a technician. But after 16 years at Eastern, the company went bankrupt and George's pension was frozen at less than 300 dollars per month.

Then he worked 12 years at United Airlines. Last week's court decision allowing United to dump its pension benefits could cost George one-third of his current monthly pension of 870 dollars.

GEORGE GARDNER: I'm one of the lucky ones. I had a home to sell, to where I could down-size. I lost my wife two years ago. I don't have to look at her and feel as a failure.

CELESTE FORD: The United decision could trigger a domino effect.

WOMAN: Everyone right now that has a pension plan needs to be out here with us.

CELESTE FORD: That's one reason the Federal Insurance Agency, which backs traditional pensions, is heading toward a crisis.

MAN: The status quo is broken. It's the rules that are currently in place that have led us to this point.

CELESTE FORD: The head of the Pension Benefit Guarantee Corporation says the insurance program's deficit is 23 billion dollars, and likely to get worse -- especially when you look at the risk posed by the least healthy companies, the ones with junk bond status. Their pensions are under-funded by nearly 100 billion dollars up from four billion dollars in the year 2000.

MAN: We need to stop the hemorrhaging in the system. We need to stop digging this hole, first and foremost, and then begin to fill it in a reasonable and measured way.

CELESTE FORD: Right now, pensions are insured up to a cap of 45 thousand dollars per year per retiree, with the money coming from premiums paid by companies.

PRESIDENT BUSH: ... and build an ownership society.

CELESTE FORD: The Bush administration wants to increase those premiums, make the profits more transparent allowing employees to know what's going on, and tighten the funding rules so that companies contribute more. The new funding rules would take into account annual changes in interest rates and the stock market. Companies say they can't do business that way.

MAN: Companies know, and they expect, that they're going to have to put more money into their pension plan. They don't really have a problem with that. What they do have a problem with are proposed rule changes that would make it impossible for companies to plan for what their costs will be two years from now, five years from now, seven years from now.

CELESTE FORD: The American Benefits Council, a corporate lobbying group, says the administration's plan will drive healthy companies out of the insurance fund, making it even more unstable. The Center on Federal Financial Institutions, a think tank, said the compromise won't be easy for the same reasons a broken system managed to last this long.

MAN: This is an issue where the corporations and unions march in hand in hand and say, ³Don't raise premiums. Don't make the rules tougher, because unions and the companies have the same economic interest. Shift risks away from them towards the federal pension agency and ultimately the taxpayer.²

CELESTE FORD: Take the United Airlines pension default, combine it with the Social Security debate, and what you get is a lot of anxiety over retirement benefits. One thing is clear: when it comes to savings, employees should expect to assume more responsibility and risk.

An angry work force has watched a number of pensions with guaranteed monthly benefits, known as defined benefit plans, nosedive by three-quarters since the 1980's. Companies are turning to an often overwhelming variety of alternatives, most driven by employee contributions. These defined contribution plans offer no guarantee of what a retiree can expect.

MAN: You really have to have your eyes open, and know what's happening. Most of us invest and forget about it.

CELESTE FORD: Occupational safety expert Terry Monahn has a plan similar to a 401(k). His retirement account travels with him if he changes jobs, and so far Terry has 170 thousand dollars set aside, much more than the average worker. Yet Terry is uncomfortable with the decision-making and the uncertainty, and would prefer a traditional pension.

TERRY MONAHAN: I'm worried about our future. I have a wife and four children. That's an enormous financial responsibility.

CELESTE FORD: And workers concerned about their own pensions could be forced to salvage the pensions of others. The problems at the Federal Insurance Program are being compared to the Savings and Loan crisis of the 1980's, and no one is ruling out a taxpayer bail-out to help workers like George Gardner.

Should taxpayers have to cover the shortfall in your pension?

GEORGE GARDNER: Yes, my pension should be guaranteed. By someone.

CELESTE FORD: By taxpayers, if not the federal government?

GEORGE GARDNER: Yes, I think so. This is not my fault. I didn't choose to do this. I didn't make bad decisions.

PAUL GIGOT: Kim, listening to those workers, it's hard not to feel sympathetic about their pensions. How could United get away with doing this, with dumping these obligations on the federal government?

KIM STRASSEL: Well, United's in bankruptcy, and the judge that is overseeing that case has one responsibility, which is to get United out of bankruptcy. And that judge looks at pensioners in the same way he looks at any other creditors for the company. Now the easy out for the judge here is to turn to a federal agency whose only job it is is to take over these failing pension plans, the PBGC. And so it leads to a lot of moral hazard having agencies like this exist, if you can just flip these pension plans.

PAUL GIGOT: Moral hazard, that's what economists call creating an opportunity to dump their obligations on taxpayers, right?


PAUL GIGOT: Dan, and isn't that the root cause here? That there's this agency, called the Pension Benefit Guarantee Corporation, created in 1974 by Congress, and it has existed without costing us a lot of money until now, but suddenly -- boom -- the bill is coming due?

DAN HENNINGER: Well, that's right. The public, the Pension Benefit Guarantee Corporation, PBGC -- they started with a bad acronym and it got worse. It's a case study in poor public policy-making. It was intended to address, I think back then the case was Bethlehem Steel. They were the first one to go in with dumping a pension plan onto the system. They had paid 60 million dollars in premiums into the agency over about 10 years. They dumped -- was it three and a half billion dollars in pensions? -- on to the agency. So there was a complete mismatch.

The law creates endless disincentives to do the wrong thing, whether you're management and funding your plan, paying premiums into the system, as well as unions over-promising their members on the assumption that if anything goes wrong, if it all hits the fan, we'll dump it on this agency. No one has an incentive to do the right thing with pension investments.

KIM STRASSEL: The airline industry is also a great example, too, of how one airline's actions drive the rest of them to feel they have to do the same thing. I mean, there is no greater problem the airlines are dealing with at the moment than their pensions. These old-fashioned plans are just ruining their chances of being financially successful. So the question now is, if United gets these pension liabilities removed from it and can finally function better, won't every other airline feel the need to do the exact same thing?

PAUL GIGOT: Yeah, they're all stacked up in a landing pattern, aren't they, waiting to do the same thing? Jason?

JASON RILEY: Delta, Northwest, Continental, American and Alaska.

PAUL GIGOT: And it doesn't just end with the airlines. We're talking about, we have some auto parts companies that have these plans, and ultimately ...

JASON RILEY: GM and Ford are facing these legacy costs as well. And you're right, what this judge did is give United a competitive advantage against the rivals. These other airlines are carrying these legacy class. Now United got a bunch of, or a good deal of their -- they're not completely relieved of them, but they got a good portion of them taken care of. And they're now at a competitive advantage with their rivals.

PAUL GIGOT: I think the total figure, potential liability here, is something like 450 billion, which is enormous. Okay, Jason, what are people in Congress and the administration proposing to do about it?

JASON RILEY: Well, the first thing to so is, this is funded by premiums paid by the companies to this quasi-federal agency. So one solution is to increase those premiums and make these companies pay more. The companies will fight this, of course, but it's important that not only do you increase the premiums, but you make sure that before these unions offer their employees more benefits that the premiums they're paying to the PBGC cover the risk that's going to take place. The big problem here is that the PBGC itself is running a deficit, long-term, and so it hasn't been forced to dip into taxpayer money yet. But if it comes to that, the fear -- as our segment mentioned -- is that we're looking at another S&L type bailout.

PAUL GIGOT: The magnitude of under-financing, just to give you an example of it -- United paid only 75 million dollars into the fund over the last 10 years, and now it has dropped 6.6 billion dollars in liabilities onto the taxpayers. So we're talking really about raising -- it's almost required that these companies paid more. But Dan, as you said, they don't really have an incentive to do so because current managers of good companies don't want to say, I want to finance the bad companies, the risks of the bad companies. And the bad companies say, if you force us to pay in more, then we're going to go bankrupt faster. So there's going to be a lot of resistance to this in Congress. And of course with unions, too, because they don't want to have their pensions cut back at all.

DAN HENNINGER: Well the good news is, that there probably is enough expertise now to get this right if the right incentives are created. Senators Rockefeller and Isaacson, a Democrat and a Republican, have proposed allowing, just last month, that pensions be allowed to fund over 25 years rather than the current years. Now if you got some breathing room, you could start to do things like create a private market for pension insurance which would be run, driven by market signals rather than the false signals of the Pension Benefit Agency.

You could also match -- get a more clear economic picture of liabilities and assets. One of the fundamental problems under this is that no one has understood exactly how to match assets with liabilities in these pension funds. But we do have the financial expertise to do that, if we have the right incentives.

PAUL GIGOT: But there's a real danger in that Isaacson/Rockefeller plan, Dan, that what you're going to do is give an opportunity to airlines that are going to fail anyway, not to put enough money into their plans, not to finance them adequately, and then in the short-run, or two, three years, they'll still end up dumping their obligations on the taxpayer.

KIM STRASSEL: Which is exactly what we did a couple of years ago when we were supposed to -- Congress said it was going to address fundamental pension reform. And instead, it allowed a lot of these airlines to simply limp along and look more healthy than they actually were.

JASON RILEY: And there's another political point to make here about defined benefit plans in general. Democrats complain that defined contribution plans are too risky.

PAUL GIGOT: Those are the ones where you put your money into a fund yourself, a portion of your income, and then you own it, you invest the money, you make the choices. It's your property.

JASON RILEY: And so people on the left argue that those are too risky, 401(k) style retirement plans are too risky. But here we see the risks of defined benefit plans, which make you dependent on the financial health of a single company. And as we're seeing here with United, that's a big risk as well.

DAN HENNINGER: I think there is a point there about giving people more individual responsibility, whether it is in pensions -- we talked about Social Security and private accounts -- and even in health care, giving people more responsibility. I mean, this pensions thing is a wake-up call. What would you rather do? Be more in charge of your own assets or let these morons run it, who are clearly screwing it up?

PAUL GIGOT: Do you know how many defined benefit plans have failed since 1974? Three thousand five hundred, representing about a million workers. Now people think that investing in the stock market is risky? Welcome to risk. Thirty-five hundred plans going bust. That's risk.

Kim, what are the implications of all this for the Social Security debate we've been having?

KIM STRASSEL: Well, I think it's sort of what Dan just said. The problem that we're finding with United is that -- and all these other defined benefit plans -- is that they are all based on future promises. And that is exactly what we're dealing with in the Social Security debate, too. Everyone who is looking at Social Security now is hoping that one day the money, the contributions will still be there to pay them back and that no congress is going to cut their benefits in the future. And they don't own this account that could be theirs. And that is what President Bush is actually advocating that we do, in the Social Security system, actually setting up something, the private accounts, that are the equivalent of 401(k) plans, which we know are a lot safer.

PAUL GIGOT: All right. Thank you, Kim. That's the last word. Thank you. Next subject.