Yesterday, the New York Times reported Delta and Northwest airlines would file bankruptcy within the week. Together, these carriers employ around 100,000, implying job losses from the bankruptcy court could be large enough to hurt monthly employment numbers. However, the story did not mention the effect these filings would have on a worsening national problem: the growing pension crisis.
The Pension Benefit Guaranty Corporation (PBGC) insures "defined benefit" plans. A defined benefit plan guarantees a specific amount of money per month, usually a percentage of a person's salary. For example, suppose a person made $50,000/year, which is a little over $4,100/month. A defined benefit plan would guarantee that person a percentage of their salary when they retire. From an administration perspective, a defined benefit plan requires active management. Actuaries and financial advisors must continually monitor the program to ensure it will be able to pay specified benefits. This obviously costs money the company would rather not spend.
Starting in about the mid-1980s, companies replaced defined benefit plans with 401(k) plans, which are essentially employee centered. The company no longer has to hire a financial firm to manage their retirement plan. Instead, the employee is 100% responsible for insuring he will have enough money to live on in retirement.
Companies have underfunded defined benefit plans for a number of years. This simply means there is not enough money in a specific plan to pay all of the beneficiaries their contractually guaranteed retirement money. The auto companies and airlines are two industries that have underfunded their pension plans for the last decade or longer. Northwest recently lobbied Congress for help:
The financial troubles at Northwest Airlines run deep, but company officials say there's only one problem the airline can't fix on its own: the huge payments owed to its pension plans. Right now Northwest has less than 60 percent of the money it needs to make the retirement payments that are promised to present and future retirees. The airline -- and at least some workers -- say only Congress can help avert a pension catastrophe.
"In Northwest's case, in '06, '07, and '08 we would basically have to make up underfunded liability -- which as reported to the SEC is over $3 billion," Newman said. "And it's impossible. It is virtually impossible to make that happen."
This week, Northwest CEO Doug Steenland told the U.S. Senate Finance Committee the airline is in the equivalent of "debtor's prison," telling senators "it's the one problem we have that we can't solve ourselves. This requires a legislative solution."
Delta Airlines has made similar requests:
Delta Air Lines executives, employees and retirees yesterday sought support from lawmakers for legislation that would let airlines stretch out pension payments over as many as 25 years. Northwest Airlines and AMR Corp.'s American Airlines are lobbying for similar changes, which could help the airlines avoid a taxpayer-funded bailout if their financial condition continues to deteriorate. The Air Line Pilots Association, the largest U.S. pilots union, is backing the airlines in their pension-payment relief efforts.
The lobbying push also aims to undermine a Bush administration proposal that would force airlines and other companies with poor credit ratings to pay more into government insurer Pension Benefit Guaranty Corp. The administration's proposal is expected to be considered by the Senate Health, Education, Labor and Pensions committee soon. "The President's proposal is a death sentence for the airlines' pension plans," said Andrea Fischer Newman, Northwest's vice president of government affairs.
United Airlines - which is currently in bankruptcy -- recently won a bankruptcy victory that allowed it to dump its pension plan on the PBGC:
United Airlines gained a significant financial victory with court approval Tuesday to dump its four pension plans, but the airline faces a tough challenge to win back the support of thousands of angry employees.
While smoothing the path toward a targeted exit from Chapter 11 bankruptcy later this year, Tuesday's ruling in U.S. Bankruptcy Court inflamed United's unions, with some hinting at the possibility of strikes or other disruptive actions.
It also prompted a renewed warning from some members of Congress that taxpayers may someday have to bail out the deficit-riddled government pension agency, which now will assume an additional $5 billion in pension obligations from United.
The result was a drastic cut in benefits. According to the PBGC's website, the maximum monthly benefit they will pay a person 65 years old is $3,801.14.
The PBGC is already underfunded. It's 2004 annual report stated it was 24 billion in the red. That was before it took over the Untied plan, which added an addition 5 billion in obligations.
In short, this situation is worsening with no end in sight. The PBGC is underfunded and taking on larger financial obligations. When they take over a plan, they usually don't pay the same amount of benefits. Corporations - with Congressional help - have allowed pension underfunding for the last 10-15 years. And, the situation looks to get worse with two major airlines the employ 100,000 eyeing bankruptcy.
The only people to get hurt are the people who loyally worked for the company for their entire lives and asked for nothing more than a secure retirement.