First there was the Medicare prescription-drug benefit, an enormous expense that will eat up 1 percent of the gross domestic product by 2010. Then there was the announcement that Medicare would consider paying for fat-reduction treatments – a truly bottomless pit for spending, if ever there was one. Now get ready for the bailout of corporate pension programs, which will cost taxpayers billions upon billions.
What we’re seeing is no less than the government takeover of retirement. Take note that the sponsors are Republicans who chatter on about the virtues of small government.
In this time of blood-curdling terrorist threats, the public has not focused much on the pending collapse of the Pension Benefit Guaranty Corp. (PBGC). This is a government agency that insures corporate pensions. A lot of old American companies are burdened with expensive pension plans they have not adequately funded. They would love to declare defeat and hand their pension obligations over to the PBGC. That will ultimately mean the taxpayers.
What pensions are we talking about? We’re talking about the old-fashioned kind, known as defined-benefit pensions. These pensions promise workers a set number of dollars a month throughout their retirement. In modern defined-contribution pensions, such as 401(k) plans, the company and worker sock away money over the years, and the retiree collects only what is there, even if he lives to 200.
The defined-benefit pension is an artifact of an earlier age when the great American corporations swashbuckled the globe with little competition – and retirees could be counted on to die at younger ages. These are the IBMs, the Boeings and the Ford Motors. Younger and foreign companies – the Microsofts, Wal-Marts and Toyotas – don’t have these enormous weights around their necks. This puts the older – and more generous – companies at a competitive disadvantage.
No sane company would create a defined-benefit plan today, but 44 million Americans are still “covered” by them. In 2003, a record 206,000 had their pensions turned over to the PBGC. (Almost half came from Bethlehem Steel.) The fear is that bankrupt United Airlines will soon try to unload its pension obligations on the government agency, other struggling airlines will follow and the PBGC will collapse.
The PBGC gets its money from insurance premiums paid by employers. Companies with healthy plans subsidize the sick ones, and that can’t last when the hospital beds are filling so fast.
There are no winners here. Workers expecting a gilded corporate pension are in big trouble. When the PBGC takes over, the pension payments get cut – sometimes in half.
Taxpayers, of course, lose. Most Americans have no company retirement plan, or have been largely paying their own way, through 401(k) contributions. Now the table-wiper at McDonald’s may have to subsidize the United pilot’s retirement.
Certainly, many of these companies failed to properly manage their pension obligations, with Congress playing the enabler. Until the pension laws changed in 1974, pension contributions went into stodgy but safe bonds. Afterward, companies could play the stock market with their pension savings. (We know what has happened to the stock market.)
Last April, Congress gave the tottering airline and steel industries a two-year pass on playing catch-up on their pension contributions. The PBGC was not happy about this. Congress has also changed the way companies may account for their pension funds, which pretties up the picture while leaving the grim reality in place.
In a more pure capitalist world, we’d throw both the pensioners and the burdened companies to the hounds. If the insurer, the PBGC, runs out of money, well, tough luck. And why must America’s burger-flippers pay for the extravagant promises of old corporations – and, in effect, bail them out of their current woes?
But Washington doesn’t think that way. So we are headed for another savings-and-loan-type disaster. American taxpayers spent about $200 billion on that mess. Reagan-era deregulation had let the S&Ls invest their funds in junk bonds, while leaving taxpayers to guarantee their deposits.
The numbers being tossed about for a pension bailout are similarly immense. And again, the taxpayers will be holding the bag. The so-called conservatives running Washington won’t admit it, but this would be another step toward the nationalization of the American retirement. Wouldn’t it have been easier to just regulate the guys?
Froma Harrop is a Providence Journal columnist. Contact her by writing to email@example.com.