United Airlines is not meeting its legal obligations to make cash contributions to its pension plans. Neither is the company exploring alternative options to meet those obligations, thus making it increasingly likely that the Pension Benefit Guaranty Corporation (PBGC), the government agency that insures pensions, will have to take over United Airlines' plans. This would hurt employees and retirees who have already sacrificed billions to keep United flying, and it would burden an agency that has been feeling the strain of a deep recession and a remarkably weak economic recovery. That is serious, but it is a far cry from signaling the failure of the entire pension system.
But that is exactly what many have argued recently. Surprisingly, being alarmist about this is a bipartisan effort that includes, among others, Steven Kandarian, former director of the PBGC, and former Secretary of Labor Robert Reich. The alarmist argument could hasten the demise of an already vanishing benefit, as it does little to further a discussion about how best to reform pension regulations.
According to the alarmist crowd, employers are supposedly using the system to their own gain, having acted irresponsibly by not putting enough money away into their pension plans when times were good. Because of the way current regulations are written, under-funding is very probable in bad times. Those who understand the arcane system of pension funding know that the current "crisis" was mostly a result of economic factors outside of employers' control – extreme drops in interest rates and the stock market. While arguably the stock market collapse was foreseeable, the decline in interest rates was not. And even if the magnitude of the decline in stock prices and length of the depressed interest rate environment had been predicted by employers, pension regulations impose punitive taxes on any employer wanting to contribute to an already over-funded plan, making it hard for employers to build up more reserves for the inevitable rainy day.
Another version of the irresponsibility argument says that pension plans should have been invested less in stocks and more in bonds. However, pension plans, whose investments are governed by pension regulations and subject to fiduciary standards, would face higher costs and more interest rate risk with a portfolio heavily weighted towards bonds. The PBGC itself has begun moving more into bonds with its assets and is now facing large losses as interest rates tended to rise late last year and earlier this year.
Because employers are currently facing large under-funding, they are, it is argued by some, looking to the government to bail them out. However, when pension plans encounter trouble, the PBGC – funded by premiums from pension plans – is not a slush fund that employers can simply tap into to cover their losses. For the PBGC to take over a plan, the employer has to be close to or already in bankruptcy. And bankruptcy, fortunately, still remains the exception and not the norm.
Because bankruptcy is a rare occurrence, it is also unlikely that the system is due for a large taxpayer bailout. Supposedly, the size of total under-funding rivals the size of the savings and loan failure. However, for the PBGC to end up with that many unfunded liabilities, recent improvements in the stock market and interest rates would have to be ignored and all employers with under-funded pension plans would have to go belly up simultaneously. While the PBGC is facing a serious shortfall from companies that are bankrupt and terminating their plans, the size of the problem does not come anywhere near the size of the savings and loan crisis.
Private pensions remain a secure retirement vehicle for millions of employees and retirees. This security has been endangered by funding shortfalls that exist largely because of extreme drops in the stock market, and interest rates that have remained low much longer than anyone thought possible. To avoid similar under-funding problems in the future, pension regulations should be carefully changed so that employers will put more money away during goods times when they can afford it, and make smaller contributions during bad times when they are more financially constrained. Without reasonable changes to help make pension plan contributions more predictable and smoother over time, many employers will abandon their plans. To achieve productive regulation changes that will not exacerbate the decline in traditional pensions, we need a reasoned debate and not alarmist outcries.
For more information see Insuring Pensions: Making the System Work for Retirees
Christian E. Weller is senior economist at the Center for American Progress.