The following is an enhanced version of a story appearing in The Post’s print Business section.
Washington – Because of loopholes in federal law, millions of Americans run the risk of joining United Airline employees and losing “guaranteed” pension benefits, expert witnesses told a U.S. Senate committee today.
“Too many high-risk companies do what is legally permissible rather than what is right,” said David Walker, the U.S. comptroller general.
“Too frequently, employees and retirees are in the dark. ” … Reform is urgently necessary,” Walker told the Senate Finance Committee.
Responding to the failure of a number of large pension plans, Congress passed the Employee Retirement Income Security Act in 1974. It required companies to meet federal standards, and established an insurance fund to pay at least reduced benefits to workers and retirees whose pension plans are terminated by corporate bankruptcy.
But loopholes in the law have left more than half of the 100 largest “defined benefit” pension plans – those with guaranteed payouts – underfunded while allowing companies to disguise their shortfalls, said Walker.
Because of “leeway” in how firms measure pension assets and liabilities, hidden underfunding may be “more severe and widespread than reported,” the federal Government Accountability Office warned.
The current rules have “limited effectiveness” and may even encourage corporations to underfund their pension plans, the GAO said.
As a result, recent terminations of plans by companies like United Airlines have driven the insurance fund deep in the red.
As recently as 2000, the federal insurance program was almost $10 billion in surplus. But after a series of business failures, the fund now faces a record $23 billion shortfall, raising the specter that U.S. taxpayers may ultimately be asked to bail out future failed airlines, automobile manufacturers and other corporations.
“United … is unique only so far as its size and visibility draws attention,” said Bradley Belt, executive director of the federal pension-insurance fund, the Pension Benefit Guaranty Corporation.
The PBGC is already paying reduced benefits to a million workers and retirees whose pension funds have been terminated, and Belt estimates that U.S. corporations, operating within the law, have underfunded the private pension plans of some 46 million Americans by $600 billion.
Many of these firms will survive and meet their obligations, but other “financially weak” companies – with defined-benefit obligations of $100 billion – are facing distress that may cause them to terminate their plans.
The crisis threatens to overwhelm the PBGC, and pressure Congress and the White House to have taxpayers cover at least some of the pension obligations of failing companies.
“If PBGC exhausted all its holdings,” said Douglas Holtz-Eakin, director of the Congressional Budget Office, “either benefit payments would be drastically cut – perhaps in excess of 90 percent – or lawmakers would have to provide direct assistance from the Treasury.”
Representatives from United’s management and unions testified at the hearing. Belt used the firm as an example of how the law’s loopholes need to be closed.
“During the period from 2000 onward, when the true funded status of each of the company’s pension plans was deteriorating and the financial health of the company was becoming more precarious, the company put little if any cash into the plans; rarely made a deficit reduction contribution (and) never provided any notices of underfunding to participants,”said Belt. “Yet the company still could claim that its plans were ‘fully funded’.”
Democratic senators on the committee pressed United CEO Glenn Tilton to promise to maintain the airline’s defined benefit pension plans in any government bailout.
Tilton said there was “a possibility” that defined benefit pension plans could survive, but “not likely.” The airline industry is too volatile and competitive, he said, and is switching to defined contribution plans in which workers contribute to 401(k) and similar accounts and bear the risks themselves.
Under questioning by Sen. Ron Wyden, D-Ore., Tilton defended his own $4.5 million retirement package as something he earned over three decades as an executive with his previous firm, and guaranteed by United when he was hired.
