United Airlines claims it’s necessary for it to shed some US$13 billion of its pension obligations to emerge from bankruptcy. Some experts are beginning to say that United’s and other business failures are going to result in a multi-billion dollar taxpayer bailout similar to that of the savings and loan debacle of the 1980s. According to Mary Williams Walsh in this morning’s New York Times, “If every airline with a traditional pension plan were ultimately to default, the government would be on the hook for an estimated $31 billion. Its insurance coverage is limited, so some employees would have their benefits reduced. ‘The pension insurance program is there to protect workers’ benefits,’ said Mr. Belt, who took over the agency [Pension Benefit Guaranty Corporation] in April. ‘It shouldn’t be used as a piggy bank to help companies restructure.’”
Assuming we actually learned something from the savings and loan collapse, this one should be a slam-dunk litmus test for the progressivity of John Kerry. Progressives mistakenly endorsed John Kerry last week and should press Kerry for his position on this issue, assessing his response carefully. With the Pension Benefit Guaranty Corporation in debt up to its eyeballs from the more than 3,000 pension plans that have already failed, and new failures rising sharply, it’s time for drastic—perhaps even draconian—measures.
After all, Congress already took the steps necessary to prevent this from happening. Thirty years ago, laws were passed requiring companies that promise worker pensions to set aside enough money to cover that liability. The problem, as it turns out, is that the laws allowed companies to fund pensions with assets other than cash including, you guessed it, stocks and even junk bonds. To make matters worse, the current Republican Congress has loosened the laws governing pension funding to favor the industries in deepest trouble.
Because the airlines’ employees are, in effect, unsecured creditors for the airlines and because the other major airlines will almost certainly follow United’s lead in this pension shedding, the United States government should immediately offer failing businesses a binding choice. They can either fully fund the worker pensions or face immediate supervised liquidation and recapture of management salaries and severance packages with the worker pensions going to the head of the line of the secured creditors. In the case of the major airlines, recapture of assets and nationalization may be the only option. In any case, Congress must immediately tighten the pension laws by requiring pension obligations be secured with cash or cash equivalents.
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