George Will

WASHINGTON -- Eyes glaze over at the mere mention of entities such as the Pension Benefit Guaranty Corporation or the Governmental Accounting Standards Board. But the PBGC's sudden prominence is symptomatic of the increasingly troubled relationship between America's welfare state and American capitalism, or those portions of capitalism that are appendages of the welfare state. And the GASB is pertinent to the parallel crisis of state and municipal welfare states.

     Last week a judge said that United Airlines, now in its third year of bankruptcy protection, can, as a step toward leaving bankruptcy, default on four pension programs covering about 120,000 current and former employees, programs currently $9.8 billion underfunded. The PBGC will guarantee payments of $6.6 billion, so promised benefits will be reduced by $3.2 billion.

     This will improve United's competitive position by relieving it from making more than $3 billion in pension fund payments over the next five years. But what, then, of United's competitors?

     When the PBGC took over responsibility for $3 billion of US Airways' promised benefits for current and retired employees, that put pressure on United to lighten its load. And now that the PBGC has lightened it, what is Delta, which has lost $6.3 billion in the last five quarters, to do? What about American, Continental, Northwest? The mere existence of the PBGC encourages a chain reaction. And outside the airline industry, many other corporations under stress are watching.

     Under a progressive formula, the PBGC pays only portions of the pension obligations it inherits, but larger portions for lower-income retirees. It is funded, inadequately, by fees on corporations with the kind of pensions the PBGC guarantees. Its current obligations exceed its assets by $23.3 billion. Private-sector defined-benefit pension plans are underfunded by an estimated $450 billion. Who will bail out the PBGC? Taxpayers beware.

     The judge, practicing industrial policy, said the deal reached through collaboration between United and the PBGC will help United attract financing to keep flying. But perhaps United -- or US Airways, or a carrier contemplating bankruptcy as a means of escaping ``legacy'' costs -- should go out of business. The airline industry is afflicted with excess capacity and is hemorrhaging red ink -- more than $30 billion since 2000 -- largely because of the older carriers' promises of medical care and pensions for current and retired employees.

George Will

George F. Will is a 1976 Pulitzer Prize winner whose columns are syndicated in more than 400 magazines and newspapers worldwide.
TOWNHALL DAILY: Be the first to read George Will's column. Sign up today and receive daily lineup delivered each morning to your inbox.