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.
But muscular interests have huge stakes in keeping all existing airlines flying. The government has invested $9.5 billion in various subsidies for the big carriers which, in dire straits, might try to hand another $20 billion in pension obligations to Washington. Since 9/11, General Electric, which manufactures and maintains jet engines and leases more than 700 aircraft to airlines, wants all carriers to survive. American Express has paid Delta $750 million for frequent flier miles to award certain card users.
The public sector's problems with retirees are about to become more visible. The GASB, which writes accounting rules for state and local governments, is going to require them to reveal the cash value of their retirees' health care entitlements. Janice Revell, writing in the May 2 Fortune, notes that when in 1990 such rules were applied to corporations, revealing huge health care liabilities, Wall Street blanched. So between 1993 and 2003 the percentage of companies offering medical coverage to retirees plummeted from 40 percent to 21 percent.
But what are corporations to do, given their duty to enhance shareholder value and their need to compete in the global economy? They should start by encouraging workers to use health savings accounts.
The public sector is facing similar pressures. All but two states, and a majority of municipalities, have increasingly crushing legacy costs because they provide health care to their retired workers. Buffalo, Revell writes, pays $26 million a year -- equal to a fifth of property tax revenues -- for such benefits. After just five years on the job, any North Carolina state employee is eligible for free retiree health insurance for life, and the GASB's new accounting rules will reportedly add a $13 billion liability to the state's books -- about 40 times the state's annual retiree health care costs.
In what is perhaps anachronistically called the private sector, Standard & Poor's recently reduced its rating of General Motors' and Ford's bonds -- nearly half a trillion dollars of debt -- to junk status, largely because of upward spiraling legacy costs. But, then, to what extent is there a really private sector in an economy that socializes huge obligations through the PBGC?