Retirement In Peril
August 12, 2004
Guaranteed pensions—a pillar of the middle class in America—are on the chopping block. Tasini blames this on the Wal-Martization of the economy and decline of unions. But, he counsels, it's not too late to turn things around.
Jonathan Tasini is president of the Economic Future Group and writes his "Working In America" columns for TomPaine.com on an occasional basis.
United Airlines’ attempt to shed responsibility for its multi-billion pension promises isn’t just an ominous warning for workers at United and other companies in the airline industry that may follow United’s lead. It’s another sure sign of the Wal-Martization of America: the coming collapse of the traditional private sector pension plan system, mainly because of the decline of unions.
United is in financial trouble, as are several of its larger competitors such as Delta and Northwest. To emerge from bankruptcy, United has to pretty up its books. It’s taking aim at its $13 billion pension debt—money that it owes because of a commitment made to the workers of the company over the past several decades; it only has $7 billion set aside to meet those debts. United will likely try to get bankruptcy court permission to unload its pension debt on to the Pension Benefit Guaranty Corporation (PBGC), which is essentially an insurance plan for companies.
Let’s start with some quick background about pensions. At stake are what are called defined benefit plans: Upon retirement, a worker gets a specific benefit, which she or he partly funded through deferred earnings during the years on the job; the company’s share was negotiated mainly through collective bargaining. In the corporate world, defined benefit plans falls into two categories: single and multi-employer, the latter typically evolving in one industry where several companies figured it was smart to pool their pension promises together to spread the risk.
Younger workers have no idea what a defined benefit plan is because what’s in vogue today are defined contribution plans, which mainly take the form of 401(k) plans: A certain amount of cash is deposited in such a plan, but it does not guarantee any specific benefit. If you’re lucky to retire when your 401(k) investments have done well, you may be able to feed, clothe and house yourself. If you retire when the market is down or if your 401(k) just happened to be chock full of your company’s now-worthless stock (names like Enron and WorldCom come to mind), tough luck: It’s time to choose between food and prescription drugs.
Once workers’ pensions get moved under the PBGC’s authority, many workers never see the level of benefits they counted on getting. And the PBGC is staggering under the weight of companies going belly-up—in March 2004, the General Accounting Office reported that the PBGC had an $11.2 billion deficit because of the termination of a number of single-employer plans. If the PBGC was a private insurance company regulated by a state insurance commissioner, it would be in receivership.
Indeed, the underfunding of pension plans is a looming disaster: Single-employer pension plans are $350 billion short of what should be in their plans; historically, the plans have only been short $20 to 25 billion. If United tosses its plan to the PBGC, you can bet other airlines will rush to the trough, followed by other non-airline companies. Such a turn of events could trigger a financial avalanche; one agency estimate pegs the potential pricetag at more than $100 billion. Ultimately, facing such a catastrophe, PBGC would likely plead with Congress for a bailout. Loyal taxpayer, welcome to the next savings and loan industry debacle. And yet Congress (with the notable exception of Rep. George Miller, D-Calif.) and the White House have paid little or no attention to this debacle.
The Road To Pension Ruin
How did we get here, and what does this mean for the future of the middle class? A short-term answer is simply that companies used every loophole possible to avoid fully funding their pensions with annual contributions—but made sure that executives were still paid obscene amounts of money. Companies—like too many Americans—felt fat and happy in the 1990s when the stock market inflated the market values of the pension fund portfolios; those companies moved from safer investments like bonds into the riskier, casino-like atmosphere of the stock market. When the bubble burst, billions of dollars of pension fund value disappeared, creating the mess now facing a number of companies, which, at the same time, face competitive pressures. Workers and investors had no clue of the scope of the disaster because, shockingly, the law allows companies to keep secret the true health of the pension plans.
Here’s where the Wal-Martization of the economy enters into the picture. The old-style defined benefit pension plans are really a testament to the power of collective bargaining. As unions have lost power—thanks to a relentless drive by employers to break unions and prevent organizing of new members, with the helping hand of anti-union laws—the number of these plans has declined dramatically. In 1980, 27 percent of private sector workers belonged to single-employer plans; by 2001, that number had dropped to 15 percent. Since 1992, only five—five—multi-employer plans have been formed. Translation: no unions, no decent pensions.
Instead, workers are now forced to accept 401(k) plans as a so-called retirement plan. But that’s not what 401(k) plans were meant to be. When they first were created in the 1970s, they were meant to be added-savings vehicles to supplement retirement plans. In the 1980s, investment firms, hungry for commissions, started marketing the plans—and corporations grabbed on to them as a replacement for real retirement security.
Ironically, long-time companies with defined benefit plans (these are called “legacy costs” in the pension lingo) find themselves at a competitive disadvantage with so-called “new economy” companies like Microsoft or JetBlue, who do not offer defined benefit plans and are, not coincidentally, non-union. So, in today’s Wal-Mart economy a new company doesn’t have to have a better product or even be better managed to compete against older-line companies—it simply has to make sure it doesn’t give its workers any secure benefits.
Turning Things Around
Here’s how we can fix this mess: Congress needs to act. Companies should be forced to make public information about the health of pension plans. We also need laws that close loopholes that allow companies to underfund pensions. In addition, companies should be allowed to contribute more than what they owe when times are flush. (Right now, companies can only contribute 100 percent of their liabilities because Congress did not want the federal budget to take a bigger hit; companies can deduct their pension plan contributions as a business expense).
But that’s simply crisis management. The bigger question remains: How do we turn back from a Wal-Mart economy to an economy in which, among other things, real pensions become the standard? One long-term solution would be to create a national defined benefit pension plan that would be portable; such a device would absorb the administration costs, encouraging small and medium-sized businesses to start real pension plans for their workers. More important, as I’ve argued in previous columns, the best way to guarantee middle class livelihoods is to encourage unionization and collective bargaining. Unless unions thrive, the end of pensions is near, signaling the obliteration of yet another pillar of the middle class.