Like many other people who follow pension matters, I have assumed that the Pension Benefit Guaranty Corporation’s assumption of $6.6 billion in United Airlines pension liabilities will aggravate the $23.3 billion deficit reported as of September 30, 2004, bringing the total to $30 billion. A fact sheet from the American Academy of Actuaries points out that such is not the case.
The PBGC includes, in their deficit, certain probable terminations (i.e., companies for which PBGC anticipates taking over pension plans in the near future). In its 2004 annual report, the PBGC included $16.9 billion for certain probable terminations, which included United Airlines’ unfunded guaranteed benefits. Therefore, despite some reports to the contrary, PBGC’s deficit does not increase with United’s termination. In fact, the $1.5 billion in securities from UAL could decrease the PBGC deficit.
We should also bear in mind a fact that the Academy doesn’t mention: that the PBGC uses rather conservative assumptions to value its liabilities. If its investment results are better than assumed, as they generally have been in the past, the actual liability may turn out to be considerably less than currently reported.
There’s no denying that the PBGC’s financial condition and the moral hazard that pension insurance creates for the economy are serious problems, as I have discussed elsewhere. We shouldn’t, however, exaggerate their magnitude.
The Academy offers one other interesting tidbit: A third of the benefits promised by the UAL plans ($3.2 billion out of $9.8 billion total liabilities) are not covered by PBGC guarantees. While I don’t have statistics at hand, that’s a much higher percentage than in a typical plan. (When I was at the PBGC, non-guaranteed benefits ran in the range of ten percent.) To a large extent, then, UAL has been paying its employees with unfunded pension promises. Since those promises aren’t insured, they can’t be attributed to moral hazard. The explanation also isn’t likely to be employer deviousness or worker stupidity. No work force in the world has paid closer attention to pensions than the airlines’. It makes more sense to seek an explanation based on economic rationality.
Ever since they were deregulated, the airlines have been running a high risk/high reward business. They now seem to have come a cropper, but it’s easy to picture the opposite outcome. If 9/11 had not occurred, and if oil prices had peaked a few dollars a barrel below their present level, the media would be full of complaints about unconscionable airline profits. Offering employees a lavish pension plan while not setting aside cash to fund it was a way of giving them a quasi-equity stake in the success of the enterprise. The workers (or, to be precise, their union representatives) accepted this offer instead of taking current compensation of equivalent risk-adjusted present value. When we talk about what UAL pensioners have lost, we should think in terms of the (probably small) paycheck increments that they could have had, not the profits that they hoped to earn if the airline business proved to be a bonanza.
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