Pensions Plans in Peril

by Chris Sturr | April 25, 2009

If the auto industry is allowed to dump their pension plans through bankruptcy, it could put the pensions of millions of other retired workers at risk. The Pension Benefit Guarantee Corporation, the government insurer that backs pension plans, would quickly run out of funds and be overwhelmed with claims. It would be forced to slash promised benefits to retirees. It would also open the door to other companies looking to dump their pension obligations through bankruptcy court.

The dire state of the Pension Benefit Guarantee Corporation’s decision to gamble its money in the stock market certainly hasn’t helped things, as we noted here earlier this month.

The holes in the pension fund and related dire circumstances of 401(k) programs have been apparent for some time.

James Ridgeway reported on corporate America’s plans to ditch their obligations to retired workers back in this article from 1999.

We can only hope that the current situation will put an end to any more calls to privatize Social Security, which is becoming the default retirement plan for more and more Americans.

From the NYT:

Pension experts predict that a government takeover of the two giant plans would spur other auto companies and all types of manufacturers to abandon such benefits for competitive reasons.

“If one of these companies solves its pension problem by shunting it off to the federal government, then for competitive reasons the others have to do the same thing,” said Zvi Bodie, a professor of finance at the Boston University School of Management and longtime observer of the government’s pension insurance system. “That is the death spiral.”

Though the automakers’ plans each have a gap between what they have on hand and what they owe their retirees over the years, if they failed, most of that shortfall would be made up by workers in the form of smaller benefits – not by the companies or the government.

For years, traditional pensions – those that shield workers from market risk – have been in a slow decline, with troubled sectors like aviation and steel shedding their plans in bankruptcy court as new types of individually managed benefits like 401(k) plans have taken hold.

But big sectors, particularly manufacturing and financial services, have clung to the old plans. The Pension Rights Center, a consumer group in Washington, estimates that 18 million Americans are still building up such benefits every year, and millions more retirees are receiving guaranteed payments from their former employers.

“Those that are fortunate enough to have those plans are sleeping soundly,” said Karen Ferguson, director of the center.

The loss of the auto pensions would be devastating partly because Detroit sustains many other businesses and partly because of their history. It was the United Automobile Workers union, more than any other force, that pushed Congress to enact laws forcing companies to put money behind their pension promises and creating the federal guarantor. The failure of a major auto workers plan would be a blow to the whole system.

Not only would Ford have reason to opt out of the expense of maintaining a pension plan, but so would Toyota and Honda, which also have pension plans at their American plants, said Teresa Ghilarducci, a professor of economics at the New School for Social Research and former member of the P.B.G.C.’s advisory board.

For traditional pension plans, “maybe this is their last stand,” said Jeffrey B. Cohen, a partner with the law firm Ivins, Phillips & Barker in Washington who was chief counsel for the Pension Benefit Guaranty Corporation from 2005 to 2007. If the automakers’ plans fail, he added, “the biggest domino will have fallen for the P.B.G.C.”

–d.f.

2 comments

Comments (2)

  1. The United States at some point has to realize that we are competing with the rest of the world for jobs and while unions are necessary to protect the rights of workers, it has gotten to the point that the US can no longer compete against the rest of the world for manufacturing jobs.

    How is it that Toyota and Honda can make cars here in the US and survive without unions?

    And most unfortunately is while private sector retirement benefits continue to dwindle to damn near nothing we constantly have to hear about our counterparts in the public sector who are living it up…

    This is America… I’d like to think we can come up with soe solution that would provide for a decent retirement, protect employee rights and allow employers to be globally competitive.

  2. If you retired from GM after October 1, 1997, you know that your pension option decision time is coming to a close. On June 1, General Motors announced their plan to lessen their pension liability by approximately 26 billion dollars. This leaves you with the power to choose between a one-time lump-sum payment, continuing with your current monthly payment, or taking a new form of monthly benefit. You need to decide which option you’ll go with by July 20, 2012. Before you do, it’s important to understand the complexity of each and every option so that you can choose which is best for you. You can watch this informative video which outlines the three available options by following this link: http://youtu.be/32ZRne7AoTQ. Additionally, it’s highly encouraged that you seek the advice of a seasoned financial planner.

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