There have been several major bankruptcies over the last year. Delta and Northwest declared bankruptcy within the last few months. Yesterday Delphi declared bankruptcy. Following United Airlines lead, I would expect all three to pass their underfunded pensions to the Pension Benefit Guaranty Corporation (PBGC) which is already showing a large deficit. If this happens, two parties will be hurt: US taxpayers and pension plan beneficiaries.
The pension crisis has been building for some time. Here is an oversimplified timeline. Until the early 1980s, most pensions were defined benefit plans. In these plans, each person will usually receive x% of their annual pay for their retirement income. For example, if a beneficiary’s annual income was $50,000/year, their retirement income would be 80% of $50,000, or $40,000 or something similar in structure. The beneficiary would consistently pay into the pension fund during their employment. Companies would have to contribute to these plans to enable the plans to pay their respective obligations. This is where on of the current problems occurs. Companies have routinely under-contributed or not contributed to their respective pension plans. Hence many plans are underfunded, or not able to pay all their respective beneficiaries.
In addition, when the PBGC takes over a plan, they do not pay all of the plans respective obligations. According to this table, the maximum benefit the PBGC will pay for a plan terminating in 2004 is $44,386.32/year. While this is not necessarily a bad thing, suppose the PBGC takes over an airline’s pension (like United’s) where some people (like pilots) were expecting a larger retirement payment – perhaps twice as large. These people who have been planning a retirement with income of X must now adjust to an income half as much as expected:
Murray Specktor, a first officer who flew Boeing 747-400s on Northwest Airlines’ Asian routes, took early retirement this year at the age of 52, knowing he wouldn’t get a huge pension.
But now that the carrier has filed for bankruptcy protection, he fears his monthly payments will be cut as much as 70 percent.
When the government takes over a pension plan, the payouts usually don’t change. But with airlines, pilots and sometimes other employees can take enormous hits when a plan is turned over to the PBGC. Federal law limits annual pension payments for plans canceled in 2005 to $45,613 for people who retire at age 65.
That would be a big hit for Les McNamee, who retired from Northwest in 2001 and draws an annual pension of $94,000. But McNamee, who still works fulltime flying corporate jets, said he’s saved diligently and is more concerned for other pilots than for himself.
Some people may have trouble sympathizing with well-paid pilots, said Norman Stein, a pension expert at the University of Alabama School of Law. But he pointed out that for many pilots, it’s almost too late to make up the difference.
“I think there’s something wrong with a system that can change, with the stroke of a pen, a $150,000 pension to a $35,000 pension overnight,” Stein said.
According to the PBGC’s latest annual report, they have a 23 billion dollar deficit. This is before they took over United’s pension plan, which was one of the largest pension defaults in US history. Now we have three new large bankruptcies with huge underfunded pension liabilities. According to the Heritage Foundation, Delta’s pension is underfunded by $10.6 billion, Northwest’s is $5.6 billion and Delphi’s is 4.7 billion. With these three bankruptcies, the PBGC’s deficit could double by the end of the year. The US taxpayer will be responsible for this.
For those of you reading this who are saying to themselves “it’s those damn unions”, please answer this question: “Why is democracy OK for Iraqis but not US employees?” A union is a group of people who use democratic principles to advance their objectives. Isn’t that what America is about?
