The official blog of the Libertarian Party
May 19, 2005
United Airlines defaults on pension plan, could spark a new massive government bailout
By Matthew Dailey
A new government bailout could be looming on the horizon. United Airlines received approval by a bankruptcy judge recently to default on the company's pension plan, which covers 120,000 active and retired employees, according to USA Today.
Judge Eugene Wedoff permitted the airline company's burden of unfunded pension liabilities to be shifted to the Pension Benefit Guaranty Corp, a federal agency that insures benefits are paid to retirees in the event the employer is unable to pay the required premiums. The Pension Benefit Guaranty Corp is funded by insurance premiums paid by employers who sponsor insured pension plans, plus any money earned from investments and any funds from pension plans they acquire.
Even though the PBGC is not fund by general tax revenues, the American taxpayer in the end could be footing the bill as a result of misguided government policy. More and more companies in recent years have defaulted on their pension plans, transferring a great deal of under-funded pension liabilities to the federal government. According to the Wall Street Journal, the agency has taken on obligations exceeding its assets by $23.3 billion -- including the new United Airlines bailout.
The bankruptcy judge's decision in United Airlines favor could provide a perverse incentive for other companies to follow suit. Within the last week, Delta Airlines announced it may seek bankruptcy protection and could very well take the same path as United.
By shedding responsibility for its pension plan, United Airlines now has a cost advantage against competitors. In a time of high fuel costs and intense competition, other airlines could look to default on their own pension plans as a way to severely reduce costs and remain competitive.
The federal government, which allows pension plans to have a significant gap between pension liabilities and pension assets, is partly responsible for this growing crisis.
Current pension regulations have devised a recipe for disaster. Here are some startling numbers. The PBGC has estimated total under-funding of the pension system is $450 billion.
And according to Richard Ippolito of the Cato Institute, "$85 billion is held by pensions whose sponsors have a bond rating below investment grade."
This could very well turn into another massive government bailout along the same level of the massive S&L crisis of the 1980's.
[Matthew Dailey is an employee of the National Libertarian Party in Washington DC. He recently received his Master's degree in public policy from George Washington University, and has been active in the Massachusetts Libertarian Party for several years.]
Posted by at May 19, 2005 09:06 AM
Reader Comments:
Why be responsible if the government (or more accurately, the citizenry) will clean up my mess?
After all, isn't everyone entitled to get a government-sponsored mulligan?
Whatever happened to strict liability? The bankruptcy laws MUST be rewritten. The idea that corporations can go deep into debt, then use bankruptcy to screw their creditors and investors so they can "become competitive" and start the cycle all over again is not only revolting...it's anti-libertarian. Thank the Republicrats for that.
I believe they already have been. I remember a lot of whining about how it favored creditors and placed the poor at a disadvantage. That means something must have been done to make people actually repay their debts. Something about those who have means to pay should. I don't really know, I didn't pay all that much attention then. But something was done, at least.
Wasn't United purchased by its own workers in the mid 1990s? I remember reading a lot about that, and how employee ownership would right the wrongs inflicted upon the workers by the previous robber barons.
If United defaults on the pensions, aren't the worker-owners simply screwing themselves? Or if not, and this is a necessary step back to solvency, why so much grousing by the workers, who are also the owners?
If non-worker ownership flies the company into a mountainside, and worker ownership crashes it into a cornfield, what's left? Federal ownership? That definitely seems possible, if the taxpayer is going to be called upon to foot the bill for bailout. But I hope not: Please spare us the US's own version of Aeroflot.
From what I remember of the rewritten bankruptcy laws, it was all about going after individuals. Corporations weren't covered by the changes. They're considered "essential" you know!
Why not run a nationwide boycott?
Corporate pensions which promise to pay a monthly stipend at an age-based retirement date are as obsolete as Social Security for the same reason. The assets are "owned" and controlled by someone other than the individual worker. Corporate Pension assets have been siphoned off by corrupt corporate managements, while Social Security assets have been siphoned off by a corrupt Congress and President.
Fortunately for employees of most corporations today, an individually "owned" 401k/403b/IRA have replaced the "old model" pension. The obvious next step is do the same with Social Security.
The Social Security debate should be changed (by Libertarians) from whether to allow partial "ownership" of current SS taxes to how best to transition to 100% individual "ownership" of all SS taxes.
The airline industry is very much like the United States Federal Government: its fat, bloated and ridden with corruption, greed and waste. And it is run by people that are, quite simply, stupid.
The airlines are in the financial situation they are in now because they have had their heads buried in the sand for many years. Rather than cutting the lavish salaries of their pilots (who work 10 to 20 hours a week and make mid-six figure incomes), they instead refuse to give up the can of Pepsi to in-flight guests and put an end to a second bag of peanuts. Its very similar to former disgraced WorldCom CEO Bernie Ebbers counting coffee filters and cutting off free coffee at the company's HQ. They call this "Missing the Big Picture", or simply "Lunacy".
What I want to know is where my bailout is. My business has been hurting financially ever since that crook took office and started giving away all of my tax dollars to his buddies. Since everyone is created equal, I am entitled to a bailout. But I do not get a bailout. And neither should United Airlines. UA is not special. If it cannot turn a profit, it must close it's doors like any other business. No corporation has the right to pay its bills with taxpayer money.
Don't worry Keith, the airline revolution is beginning. Most of the rest of the airlines are falling apart at the seems, and USAirways is about to become a state-run airline itself. Not to worry as long as the new up and coming airlines kick their butts we'll be fine.
All I need to do is get rid of the rest of my WorldPerks miles and I'll start flying on Southwest, Spirit, and maybe JetBlue when it comes to Detroit.
The problem with airlines and transportation in general goes back to our abandonment of market based transportation in the 1950's. With massive Federal investment in transporation commencing in the 1950's the business became a client of the government. Self supporting private transit systems failed by the hundreds all over the country because they couldn't compete with the Federal handouts. Today's heavily subsidized airline industry is illegitimate on its face. The current pension mess in just a variation on a theme.
The Airline Pension funds of the "OLD MODEL" Legacy carriers are bad for employees and bad for employers. Low cost airlines like JetBlue have replaced the "OLD MODEL" pensions with 401k's. Therefore JetBlue will continue to have an advantage for years to come, because their employees "own" their retirement.
Most of the PBGC commentaries avoid getting at the root cause of the problem: unrealistic pension assumptions. Extremely loose accounting standards basically allow companies to make up whatever numbers they want when forecasting investment returns. So if a company wants to stop putting money into its pension plan, it just says, "No worries! We believe our pension investments will grow 10% per year forever. So we don't have to fund the pension plan any more!"
To see how unrealistic these return assumptions are, do the math. Assume a typical 60% stock / 40% bond pension plan. If the fund is earning 5.1% on its bonds, a full percentage point over the 10-year Treasury yield, it has to earn more than 13% annually on its stocks to make the total fund return 10%. With dividend yields at a sickly 2%, that means we'd need earnings growth of 11% annually for the long term. How the entire stock market grows earnings 11% annually in an era of 3-4% GDP growth is beyond me.
If you are an employee of a company with a traditional pension plan, or if you are a shareholder, find out what your company's pension return assumptions are. They are in the annual report. If it's anywhere near 10%, you're not dealing with an honest company.
More here: http://wcvarones.blogspot.com/2005/05/corporate-bankruptcy.html
The airlines are suffering from the same problem that many state, county and city jobs are suffering from. Any time you get a union involved in the public sector (of which the airlines are included right along with the railroads when the bailouts are paid for by the taxpayer)you have a problem. The unions and profitable companies fight each other to the point that they become un-profitable and nobody wins.(Unless of course uncle sam comes to the rescue by stealing more of our hard earned dollars to be used to bail out a otherwise bankrupt business). Until the taxpayer demands that the unions get the hell out of the public sector and contain their liabilities to bankrupting companies in the private sector, we will always be forced by uncle sam to bailout bad investments. The unions have absolutely no business being in the public sector at all, whether it be a county sherrifs job, a state workers possition or a airline pilot,and this bailout more than proves my point.It's not my responsibility to keep bankrupt businesses afoat The management and unions need to take responsibility for their own stupidity.
WHAT EVER HAPPENED TO CAPITALISM? IF UNITED CANNOT PAY THESE PENSIONS THEY SHOULD FALL BECAUSE THEY MADE THESE BAD DEALS AND THE TAXPAYERS SHOULD NOT BE RESPONSIBLE FOR THE MISTAKE THEY MADE.
the main cause of all of this is a removal of responsibility at all levels (personal, Corporate,and Government) of American society, largely created by government & big business writing favorable laws at the expense of the people. Unless we re-establish reponsibility in american life, we will become just another third rate country with inferior living conditions.
http://libertyforsale.com/?p=95
Re: Lew Jeppson's comment ..Federal investment in transportation (1950's)
I agree! Eisenhower (as President) decided that we needed Fed subsides to the transportaion system for economic and military purposes. Since then, the entire transportion system in the US has been regulated, manipulated and controlled to major extents by government and governments (city, county, state and federal) to the point that no one agrees on whether tranportation is a right, a responsibility or a priveledge. The wars (plural) we now fight in the mideast (oil) are a reflection of our lack of free market principles (in US) concerning transportion, a condition that will likely get worse with either the D's or R's in government.
Timothy West: Not only are they working to remove personal responsibility, but they are working to shift the tax burden to the people as well. In some states, local officials can give companies multi-year abatements on property taxes in exchange for "creating" jobs. Local governments do all kinds of things like reroute roads, offer loans and upgrade utilities so that companies will locate there.
It?s a big free for all raid on the treasury. The people are, of course, stupid enough to fall for all this jobs crap. People seem to forget that we wouldn?t need so much money if we didn?t have to pay so many taxes.
"The people are, of course, stupid enough to fall for all this jobs crap. People seem to forget that we wouldn?t need so much money if we didn?t have to pay so many taxes."
I agree, but I've never been able to figure out why that is the way it is. After all, our GDP would not suggest that we have a stupid populace.
Anybody know what this bailout will look like?
It's unfortunate that we will have to bail out some companies due to the low interest rate environment. However, I think it is rather late at this point to fix the situation. As much as I hate giving money to cover the debts of some corporation, I'm willing to shell out a little if it means I don't have to trip over the corpses of 80-yr-old beggers on my way to work.
This is one of those unfortunate "lesson learned, let's not let it happen again things" that we have to put up with now, and beat Republicrats over the heads with later. Let's not forget the hardworking folks who need these pensions to support themselves after a couple of decades with UA.
It goes without saying that most republican and democratic voters are not interested in personal responsibility and freedom.It seems to me that the small numbers of the LIBERTARIAN PARTY is wasting a lot of resources trying to push freedom down the throats of so many people who are so brainwashed that they obviously don't want our IDEA of freedom. Why not pool most of our resources and try to get our best people elected in states such as montana, idaho and north and south dakota and then work peacefully towards cesession. Some might say that this whole country is our country and we wont give up on it but to that end I say this, (the titanic was one huge magestic ship worth fighting for, but when it went down, the only survivors were the ones in the lifeboats). This government is sending this country into socialism as china sent its country into communism. The citizens of taiwan have seperated themselves from communist china and we should consider doing the same.
it says here http://www.moneysavingfreetips.com/403b-retirement-plans.html
that 403b retirement plans can make you good income during retirement... "Also when government officials, doctors, nurses etc retire, they will receive pension wages. But is this pension enough to fully cover your living costs? Probably not. The additional income provided by a 403 retirement plan will fill that gap for you, and make you enough and adequate income!"
anyone invested in these plans? do they really help during retirement?
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Why be responsible if the government (or more accurately, the citizenry) will clean up my mess?
Posted by: Allen W. Jerkins at May 19, 2005 09:58 AMAfter all, isn't everyone entitled to get a government-sponsored mulligan?