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Pension Peril

May 27, 2005
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Want to demoralize and marginalize a large and once-vibrant workforce? Here’s the recipe:

  • Take a major player in a mature industry;

  • Saddle it with a high-cost structure built up over many years of matching what the other guys did;

  • Mix in several generations of bad managers making shortsighted decisions;

  • Deregulate;

  • Engage in a never-ending price war with lower-cost competitors;

  • Systematically penalize your best customers with red tape, high prices and dumb rules;

  • Demand that employees take pay cuts in exchange for profit-sharing and better pension benefits;

  • Bake for 15 years, then file for Chapter 11 bankruptcy protection and get a court to let you dump the pension obligations on the federal government.

    Sound familiar? It should, because it happened at United Airlines, where last month the company got court approval to unload $6.6 billion of pension obligations for 120,000 current employees and retirees on the Pension Benefit Guaranty Corp. (translation: the federal government) and, ultimately, American taxpayers.

    The United story got me thinking about my wife’s friend who is a United Airlines ticket agent in Honolulu. Back in the mid-1990s, when I lived in Hawaii, I remember commiserating with her about the latest round of salary reductions United employees were then taking to save the airline. "I don’t like it," I recall her saying, "but the tradeoff is that I am getting profit-sharing and a better pension. I may be losing money now, but I’ll get it back when I retire."

    Her plan sounded good, but not anymore. Now that the airline has pushed its pension obligation off on the PBGC, current and future United retirees will get no more than $45,600 a year in retirement. One former United pilot told The Christian Science Monitor that his six-figure pension will probably drop by about 75 percent.

    If you didn’t know it before, the United pension dump should make it clear: The future of the private pension is bleak. In 1980, nearly 40 percent of American workers in the private sector participated in a retirement plan. Today, that number is down to 20 percent, and more than 75 percent of those plans are seriously underfunded. Secretary of Labor Elaine Chao estimates underfunding at some $450 billion--a huge chunk that could eventually get dumped on the PBGC.

    There may be a silver lining in all of this, however. Over the same 25-year period, the share of workers participating in personal retirement accounts, such as 401(k)s, has risen from 7 percent to 28 percent. And in one of those sign-of-the-times moments, at the same instant that United was dumping its pension plan, Hawaiian Airlines was signing a new deal with its pilots union that converts its traditional pension to a defined-contribution plan for pilots under age 50.

    Two things jump out at me from all this:

  • Like it or not, workers need to take personal responsibility for their own retirement and not count on their employer to do it.

  • Companies need to do a lot better job helping workers adjust to life in a 401(k) world. Whether that means automatic enrollment, more education or a stronger focus on diversification, management needs to do more to help workers focus on building assets for retirement.

    It’s clear from the United action that no private pension is really safe. No matter how big or secure a company may seem, companies get bought, merged, changed and sometimes just go away. As one columnist said in The Wall Street Journal, "Whether or not you have a pension plan at work, consider United a wake-up call. Assume you alone are responsible for your retirement."

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