Pensions are in Danger of Bankruptcy

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The private pension system looks increasingly unstable. Tough economic times have led to the collapse of hundreds of private companies big and small alike. When private companies file for bankruptcy, they are for the most part unable to pay for retirement plans they had established. This inability to pay often is a result of under-funded pensions (companies failing to set-aside sufficient assets at realistic market performance returns to pay for the future liabilities.)

There are structures that compensate workers who lost everything in chapter 11 bankruptcies. The most notable of these is the Pension Benefit Guaranty Corporation (PBGC). The PBGC is a governmental entity that acts like a private corporation and is responsible for compensating workers after a bankruptcy.

The Employee Retirement Security Act of 1974 established the PBGC. To date the PBGC is responsible for the pensions of more than 44 million Americans in more than 29,000 private companies. The PBGC operates like a private corporation and does not receive any funding from general tax revenues. However, the PBGC is in very tough financial shape.

The PBGC announced on May 20, 2009 that, “The Pension Benefit Guaranty Corporation posted a $33.5 billion deficit for the first half of fiscal year 2009.” This is the largest deficit the organization has ever been in. Such uncertainty in PBGC raises worries about how workers will be reimbursed in today’s failing companies.

With major technological, automotive and financial companies nearing bankruptcy the PBGC is underfunded and unprepared to met the needs of disgruntled workers. The impending and perhaps inevitable tech company bankruptcies are a major cause for concern. Douglas A. McIntyre a partner at 24/7 Wall St., LLC writes, “Nortel keeps losing money and has cut about as many people as it can and still stay in business.

With the need for its products and services falling as the recession grows. Nortel has a pension obligation, which may approach $3 billion. Selling divisions in a poor credit market will be hard. A bankruptcy filing would let a court run an auction.” The PBGC will most likely have to provide for the pensions of the workers in some of these major companies. The fact that the largest pension safety net is in complete disarray does not bode well for millions of workers that plan on retirement. In wake of companies going bankrupt there are major interesting case studies on how pension reimbursement has played out following a bankruptcy, as well as the potential ramifications if certain companies go under.

Perhaps even more significant than the technological industry is the auto industry. The auto industry is often viewed as the bread and butter of the American, economy. According to a 2003 study conducted by the Center for Automotive Research on the “economic contributions of the motor vehicle to the U.S. economy, to a multitude of U.S. industries in retail, manufacturing and service sectors, and to individual Americans.”

One in ten American jobs are related to the auto industry. There are many critics of the study because of the way it included professions like taxis and many steel industries. Whether the study is bullet proof accurate or not it still highlights the importance of the auto industry in the American economy. One could imagine how badly the retirement crisis would be exacerbated if any one of the Big Three were to go under. Major car dealerships and manufactures are already having pension troubles.

Nanette Byrnes and Theo Francis, Business Week writers, elaborate in “Chrysler: The Next Pension Crisis?” “But for the PBGC, and for Chrysler employees, it’s quite possible that all that’s been done is to delay the inevitable. Chrysler’s pension plans are $9.3 billion underfunded. The company likely won’t have to make a contribution for about two years, because of the intricacies of pension funding rules, says Charles E.F. Millard, director of the PBGC until this past January. But once that respite is over, the company will have to hurry up to fill the gap, contributing as much as $1 billion a year.”

The financial sector is another interesting case study of private pensions that have gone under. The 2008 collapse of Lehman brothers is probably the best example of a banking industry filing for a chapter 11 Bankruptcy. U.S News and World Report elaborates on the Lehman Brothers pension, “ The pension plan is 95 percent funded, with $898.2 million in assets to cover $940.8 million in benefit liabilities. If the plan ends, the agency expects to be responsible for $17.9 million of the $42.6 million shortfall.” The Lehman Brothers is arguably the largest bankruptcy in American history.

While the many workers receive some compensation there was still a significant shortfall. In terms of a case study, Lehman Brother’s is analyzed more in terms of the banking industry’s mentality of “ too big to fail”, as politicians like to use as a common catch phrase. In terms of bunkrupcies with massive shortfalls, there are few better examples than United Airlines.

In May 2005, Judge Eugene Wedoff approved the airlines request to terminate pension plans for its pilots, flight attendants, mechanics and ground service support. This court ruling affected the livelihoods and retirement plans of over 122,000 people. United Airline’s retirement obligations amounted to about 6.6 billion dollars.

After United filed bankruptcy in 2005, there were many other companies that flirted with the idea. Mary Williams Walsh of the New York Times wrote in “ How Wall Street Wrecked United’s Pension”, “ Northwest is also seeking its unions’ permission to freeze the other three plans. The airline has been warning that if it does not get a break on its pension funding requirements, it may have to declare bankruptcy sometime next year. Bankruptcy is often a prelude to a pension default.”

The Pension Benefit Guaranty Corporation has acted as a safety net in the past, but in today’s economic climate they too are suffering. The PBGC Public Affairs announced on May 20, 2009 that “The Pension Benefit Guaranty Corporation posted a $33.5 billion deficit for the first half of fiscal year 2009, PBGC Acting Director Vince Snowbarger will tell the Senate Special Committee on Aging at a hearing today. Based on unaudited financial numbers as of March 31, the deficit represents an increase over FY 2008’s $11 billion shortfall, and is the largest in the agency’s 35-year history.”

With companies like United Airlines reneging on pension payments and with safety nets like PBGC deep in debt, reform is vital. These examples showcase the PBGC’s inability to provide for employees in the private sector. It will be incredibly difficult to reconstruct the only public safety net we have, especially because the company is does not receive any assets in tax payer dollars. There may have to be serious consideration on whether to turn the PBGC status as a semi private entity into a fully public enterprise.