Pensions and bankruptcies aren’t usually front page news. But this week they were, when the taxpayers of the United States assumed ultimate responsibility for United Airlines’ $6.6b pension liability.

This is just the tip of a very large iceberg. The obligations of the agency that takes over plans from failed companies, the Pension Benefit Guarantee Corporation, currently exceed its assets by $23b. Yes, twenty-three billion dollars.

It gets worse. The agency thinks its “reasonably possible exposure” is $96b, based on underfunded pensions in junk-rated companies such as airlines, car and auto parts manufacturers, and retailers. The total underfunding across all companies, healthy or not, is estimated to be $450b.

If the PBGC can’t pay the pensions it assumes, taxpayers are on the hook for the shortfall. That $96b exposure translates to $1,000 per household (assuming all households paid taxes equally, which they don’t).

There is no better argument for personal retirement accounts than this. These defined-benefit plans — where you work x years, and get a guaranteed y dollars a month for life — have one critical assumption — that the employer will be around to pay the pension. Talk about having all your eggs in one basket! Maybe big companies seemed indestructible in the immediate post-war years, but they don’t any more.

This country needs to accelerate the shift to 401k-style accounts, where you know how much you have to retire with because you own and control the money. You get your contribution with every paycheck — not some nebulous promise to pay you in thirty or forty years.
Any parallels to the Social Security funding problem are not coincidental.

This entry was posted on Thursday, May 12th, 2005 at 11:26 pm by A Senior Administration Official and is filed under Brilliant, but uncategorizable, How Not To Succeed In Business. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.