United Airlines, Judge Screw Taxpayers and Workers

Yesterday U.S. Bankruptcy court Judge Eugene Wedoff approved a deal that would allow United Airline's parent company, UAL, to shift their pension obligations to the Pension Benefit guarantee Corporation, a federal agency. This deal is so bad, for so many people that I almost can's believe it. It is a sad commentary on the state of American business, and a looming disaster for taxpayers.

By shifting their pension obligations to the PBGC, UAL shifts the responsibility for paying employee retirement benefits to the Federal Government and to the taxpayers. This requires that UAL transfer all of its pension assets to the government as well, but since UAL has not fully funded its pension, in the end it is shifting a lot more liabilities than assets.

This is obviously a bad deal for taxpayers. The PBGC collects a small per worker premium from every company that has a pension, or defined benefit retirement plan. For this premium the PBGC essentially guarantees that if the company can't pay the pension then the taxpayers will step in and pay the benefits. In a world where companies adequately and responsibly funded their pensions only the worst companies would need to default on their pensions as they went bankrupt. However today that is not the case. Today many companies use overly optimistic return assumptions so they have to contribute less to their employee plans. A company may assume that pension assets will grow at 12% per year, even though the long run return on stocks is less than 11%, and half of their assets are in bonds which return even less than that. How you combine 11% and 6% to equal 12% is a mystery to me, but pension plans think they can do it. The result is that since they assume a higher rate of return, they put less into the plan, when they don't earn higher than normal returns, the plan is underfunded.

This is where the PBGC comes in. A company like UAL gets into distress, files bankruptcy and then wants to shed their underfunded pension. The result, according to the Wall Street Journal, is that taxpayers will pick up $3 billion in minimum funding contributions over the next five years. By the way, US Airways did the same thing three years ago.

If you think paying for UAL is bad, just wait until GM wants to do the same thing with their pension, which is currently $25.4 billion underfunded and pays for the retirement benefits of approximately 460,000 former GM workers, and will pay for their 120,000 current employees.

This is also a disaster for current workers and retirees who typically get 66-75% of their promised benefits. It is a real rip off for them, in most cases they took lower pay for years in exchange for these great "guaranteed" pension plans, and now they are going to get screwed out of them. This is really dishonest, UAL management has know for decades that they were underfunding those plans, and that paying benefits would be difficult yet they continued to negotiate deals, deals that their employees did their part of. This is really wrong.

A lot of companies have dropped pensions in favor of 401(k) defined contribution plans, where the employees share the burden, the employees own the assets and the company simply commits to providing a certain level of funding, rather than guarantee a certain level of benefit in retirement. 401 (k) plans are great because the employee controls them and knows what they own and how much they will be able to draw from it. It is not as popular with employees, but it is a lot more affordable for companies.

UAL competitors like Southwest have dealt with workers honestly and given them a 401(k), UAL hired people under the premise that they would get a pension and then didn't give it to them, it isn't fair to Southwest and its shareholders to bail out UAL. Bankruptcy court bailouts like this penalize honest competitors who operate in a responsible manner and meet the obligations they take on.

UAL will leave bankruptcy without many of the obligations they went into bankruptcy with. This will leave them with a lower cost structure and a better competitive position, and cheat a lot of people in the process.

In a free market I think you have to use whatever tools are available to you. UAL decided to use bankruptcy to get what they wanted. Frankly, I hope their employees use a massive "sick out" strike to cripple UAL on a busy holiday weekend, UAL management would get exactly what they deserve, unfortunately the passengers, who pay taxes would once again, get screwed.

Timothy Burger