By: Analisa Nazareno

October 23, 2004, San Antonio Express-News (Texas)

Alana Lucas retired from United Airlines two years ago feeling fairly secure she would be receiving the pension promised to her after 35 years of service. This was despite her former employer facing financial difficulties and declaring bankruptcy.  

There was, after all, the government-sponsored Pension Benefit Guaranty Corp. to make good on some of the airline's pension obligations, should United falter altogether.

These days, though, the buoyant former flight attendant is feeling a bit insecure.  

"I just think it's pretty scary that all these big companies are struggling," said Lucas, 58. "More companies are going under without income, and more people will be without pensions."  

U.S. Airways joined United Airlines this summer in bankruptcy, and Delta Air Lines is expected to join them soon. If they all fail to meet their pension obligations, the Pension Benefit Guaranty Corp. could be facing tens of billions of dollars in additional pension payment burdens.  

At the same time, PBGC itself is facing its own financial crisis. Last year, the government insurance program ended with an $11.2 billion budget deficit. With this year's shortfall sitting at $9.7 billion at midyear, the government insurance program expects to announce a deficit this year that would dwarf last year's deficit.  

"It would be impossible for them to make all those payments," Lucas said. "It's like what you're hearing them say about Social Security, that it might last just 10 years."  

While representatives of the PBGC say they have enough money to make pension payments for several years, its leaders are worried that the collapse of the airlines industry could bankrupt the program.  

It's a bit of an irony that Congress created this government insurance program 30 years ago to secure the pension benefits of America's corporate workers and to encourage private employers to offer pensions.  

Since the mid-1980s, pension plan offerings have been declining, with 112,000 corporations offering such plans decreasing to 31,000 today.  

On the former and the latter goals, the government insurance program seems to be struggling.  

"When underfunded pension plans terminate, three groups can lose," PBGC Executive Director Bradley Belt said during Senate testimony earlier this month.  

"Workers face the prospect of benefit reductions; other companies, including those that are healthy and have well funded plans, may face higher PBGC premiums; and ultimately, taxpayers may be called upon by Congress to bail out the pension insurance fund, just as was the case more than a decade ago with the savings and loan bailout."  

Right now, in every industry, corporations have failed to make $400 billion in payments to their pension programs. The airline industry alone is short $31 billion on payments.  

While PBGC officials said the $400 billion underfunding figure is "startling," a record-breaking amount that concerns them, they are more concerned about the failure of airline companies to fully fund their pension programs because that sector is facing collapse.  

"Two major carriers are in bankruptcy, and another, Delta, is openly talking about bankruptcy," said PBGC spokesman Jeffrey Speicher. "And the other (legacy carriers) are also in bad shape. So you have a situation where the whole industry sector is bleeding. So the underfunding in those pension plans are of concern to us, because the vast majority of pension plans that we take on come to us in bankruptcy."  

Industry analysts said that if United succeeds in pushing off its pension obligations on the PBGC, other carriers would almost certainly follow their lead because of the ongoing low-fare environment and high fuel costs.  

"Legacy airlines right now do not generate enough cash flow to fund their pension deficit and fund operations," said Vaughn Cordle, chief analyst with Airline Forecasts LLC in Washington, D.C. "We build a case that all of them will eventually be in bankruptcy. And that will happen sooner than later because of higher fuel costs. If United terminates their defined benefit plans, others will have no choice but to follow."  

Even in the midst of an election season, when Washington insiders keep their concerns and problems to themselves until after Nov. 2, the PBGC's executive director is heeding those predictions and raising alarms in the halls of Congress and in public settings.  

Among his litany of concerns is that for too long, under a set of "Byzantine" set of rules governing pensions, corporations have been allowed to skip pension payments and renege on premium payments to the PBGC.  

"Simply put, companies should be held accountable to make good on the pension promises they have made to their workers and retirees," Belt said. "The consequences of not honoring these commitments are unacceptable. The retirement security of millions of current and future retirees is put at risk."  
Ultimately, if legacy carriers collapse and the PBGC were expected to pay out a portion of the $31 billion the carriers owe to their pension programs, the PBGC could face its own demise sooner than later and taxpayers could be asked to finance the insurance program.  

"The PBGC is not backed by the full faith and credit of the U.S. government," said Olivia Mitchell, executive director of the Wharton School of Business Pension Research Council. "So no one knows what will happen on the day that the PBGC runs short of cash.  

"Maybe Congress will be willing to bail it out. It could be that people's benefits are cut," she said. "That in itself creates a huge amount of uncertainty and it makes people nervous. People thought they had safe benefits, and they found out that benefits are being cut if their firms go bankrupt. Once they thought at least the government is there, and now that looks a shaky. We are in a pretty tight situation."  

Already the PBGC limits the payout to pensioners whose companies have terminated their pension programs.  

If United Airlines terminated its pension program, Lucas would receive $19,330 a year instead of the $24,000 she currently receives from United. The maximum that someone could receive if they retired this year at age 65 is $44,386 a year.  

"The average person is not going to have sympathy for you, for us, because of the amount we make," she said. "And we may not be in as much in jeopardy, if it gets funded by some means. But it is a big concern for me, really, the uncertainty of what will happen to it. No one is totally clear how much the PBGC trust can pay people."  

Companies are supposed to pay $19 per pension participant every year. And those companies that underfund their pension plans are supposed to pay $9 per every $1,000 they fail to fund to reflect the risk it poses on the PBGC.  

But most companies get around the additional risk premium by playing with the current accounting rules. Last year, corporations owed the PBGC $3.6 billion in additional premium payments, but ultimately paid less than $300 million for underfunding.  

"If Congress wanted to do one thing to substantially reduce the problem at the PBGC, it would be to say: 'When we said $9 per $1,000, we meant it. So from now you will calculate everything to market value and you will pay this $9 charge,'" said Richard Ippolito, former chief economist for the PBGC. "If they did that, there would be less underfunding because firms don't like sending their money to the government.  

"And at least the PBGC would have some revenue to deal with exposure presented them."  

Ippolito wrote an analysis piece for the conservative think-tank, the Cato Institute, arguing that Congress should take action to reform the rules governing pensions. He called PBGC financing a "Ponzi scheme."  

"With new claims and more bankruptcy comes an infusion of assets. The liabilities are paid over 30 or 50 years, but the assets can be used right away," he said. "The more suckers pay into the pool, the more they can pay the exorbitant returns that are promised. And at some point, you have to face reality that you can't do this forever. The PBGC is hopelessly bankrupt. If it were a corporation, it would be brought into bankruptcy court and dissolved."  

While Ippolito favors the idea of privatizing the administration of the PBGC, he also proposed a set of reforms echoed by other economists and Belt. The reforms revolve largely around enforcing the risk premium payments so that there is no incentive to avoid those payments.  

"When you take an airline that is bankrupt like United and you're the CEO, we can spend money on operations, put it into planes and better service and increase revenue, or put it into the pension," said Mitchell Petersen, associate professor of finance at the Kellogg School of Management at Northwestern University. "Even if we don't put money into the pension, the PBGC guarantee, that backup creates an incentive to avoid payments. There's less benefit or incentive to put money into a pension plan than to spending on current necessary expenses."  

Petersen said if the PBGC were a private insurance company working under market forces, it would charge companies at greater risk of defaulting on pension payments a higher premium than the government-administered program currently does.  

But while these economists and the PBGC have been making proposals for reform in the past several years, they have low expectations that Congress will actually take action.  

"Compared to lots of stuff that Congress has to worry about, you might see the PBGC as a relatively small problem," Ippolito said. "Congress just sent $14.5 billion to Florida to pay for damages due to hurricanes. You have to put things into perspective. They have a lot of problems, lots of multibillion-dollar problems. So it's easy to see how the PBGC gets lost in the haze."  

The PBGC crisis is in many ways like the Social Security calamity that economists have been concerned about for several years.  

But the biggest difference is that Social Security is purely a government-administered program that in theory is meant to cover all taxpaying Americans, and the PBGC is supposed to be a corporate-financed insurance program used to finance the pensions of a relatively small percentage of retirees.  

And while fewer and fewer people are actually receiving pension plans, those who do said they feel betrayed by their companies and concerned about their futures.  

"It's incredibly disconcerting," said Sara Nelson Dela Cruz, an eight-year United Airlines employee and an Association of Flight Attendants spokesperson. "Our past actions in securing a pension plan, sacrificing increases in pay and benefits so we could secure our pensions, show the importance of the plan. Flight attendants do not make the kind of salary to have the ability of having a good chance to have financially sound retirements. So in that way, our pension is extremely important to us."  

Dela Cruz said flight attendants earn between $17,000 and $45,000. The AFA represents 21,000 working flight attendants and 5,000 who are retired.  

The buzz over the insecurity of the PBGC overall has also left pension plan holders feeling like they, too, are teetering on the edge of insecurity.  

"Retirees read in the newspaper about bad things happening to retirees of Bethlehem Steel and Polaroid and the airlines industry, and now there's this worry about the pension insurance and that it won't be there," said C. William Jones, president of the 100,000 member Association of Bell Tel Retirees. "These things are disturbing to seniors. We have many seniors who have no way of going back to work and they're caught in a pickle. It really is concerning everybody."