A recent wave of bankruptcies has caused the benefit pension plans of many large companies to be significantly under-funded or fold, leaving millions of workers dependent upon the government-sponsored insurance system: the Pension Benefit Guaranty Corporation (PBGC). These bankruptcies have put additional pressure on the PBGC to cover the payments to millions of Americans who were planning on their pensions for retirement. This wave of corporate bankruptcies that is burdening the PBGC makes it all the more important that the Social Security system remain a guaranteed benefit that is risk-free, especially for workers who have lost their pensions through no fault of their own. It is also a warning that the PBGC could become the equivalent of the savings and loan debacle of the 1980s. The purpose of the PBGC is somewhat similar to that of Social Security. They both involve individual entities forming a collective agreement to help minimize future risk. The PBGC is an insurance system that guarantees pension plans to employees whose companies have gone bankrupt or have lost the means to pay their liabilities, while Social Security guarantees month-to-month benefits for anyone who contributed to the system while employed. The PBGC, first set up in 1974, is a federal corporation financed by fees from companies with defined-benefit pension plans. It provides retirees with monthly checks based on years of service and pay. Normally, companies with pension plans maintain funds to cover their liabilities, but in recent years a number of businesses have under-funded their plans and thrown their obligations onto the PBGC. This trend has become more prevalent since 2000, and can be attributed to a mixture of low interest rates, stock market losses, lower overall corporate earnings, and an increase in the number of retirees guaranteed payments. From 2000 to 2003, the agency went from a surplus of $9.7 billion to a deficit of $11.2 billion. Things have only gotten worse with a $23.3 billion deficit today and no sign of improvement in the future. Recently released data from the PBGC indicates the country's 1,108 weakest pension plans had an aggregate shortfall of $353.7 billion. These shortfalls mean probable benefits cuts for millions of people. While the program is able to make all payments owed to current retirees with failed benefits right now, the long-term solvency of the PBGC is questionable, and thus the pension plans of those who are working now. As United pilot Klaus Meyer, 47, of Bethlehem, PA, said, "I lost almost all my United stock value in the bankruptcy, and here's another part of the retirement I was promised that is gone. And now my Social Security is at risk. Where does it all end? You feel brutalized by the system." Spotlight on Pension Issues Under-funded pension plan troubles are currently in the spotlight because a number of large, high profile companies have been forced to declare bankruptcy over the past few years in part because of their pension liabilities. United Airlines recently defaulted on their pension plan and the PBGC made the decision to step in to rescue the company. While this decision will benefit the workers of United, PBGC does not always pay 100 percent of the amount promised to retirees by their employers. In the case of United Airlines, for example, PBGC will only guarantee $6.6 billion of the $9.8 billion promised to employees. If other companies default on their pension liabilities and PBGC covers the costs, other workers will no doubt experience the same loss. Unless Congress acts to prevent under-funding of private pension plans, a number of the larger airlines in the U.S. with defined-benefit pension plans will be heading down the same path as United Airlines. PBGC Executive Director Bradley Belt has stated in an interview that United is only the latest and largest example of what ails the federal pension protection system. The system allows companies to drastically under-fund pensions, escalating defaults and driving the PBGC $450 billion in the hole. In three years, Belt says, it has gone from having a $7 billion surplus to a $23 billion deficit. Delta Airlines is one company which may default soon, currently facing approximately $3 billion in pension shortfall payments over the next three years. The Congressional Budget Office estimates that a PBGC takeover of Delta's defined-benefit pension plan would add 40 percent to the corporation's pension coverage responsibilities. Airline and steel companies, in fact, account for 70 percent of total PBGC claims. General Motors is another large corporation showing signs of fiscal distress as well; on June 7 the company announced they would eliminate 25,000 jobs by 2008, partly due to the rising cost of their health care pension commitments. Similarities to the Savings and Loan Crisis of the 1980s Free market champions, who ruled the day in the late 1970s and early 1980s, argued that regulations would destroy the ability of banks to make money and generally argued that regulation was not good for the bank or the consumer. The result of this rather laissez faire approach was a period of deregulation in which government regulation was reduced or removed. Many savings and loan operations (S&Ls) took advantage of the lack of supervision and regulations to make highly speculative investments, in many cases loaning more money then they really should. When the real estate market crashed in the 1980s, the S&Ls were crushed. They owned properties for which they had paid enormous amounts of money but weren't worth a fraction of what they paid. Many went bankrupt, losing their depositors' money. This was known as the "S&L Crisis" as Congress stepped in to bailout the banks. In 1980, there were 4,600 thrifts, by the mid-1990's less than 2,000 survived. The S&L crisis cost about $600 billion dollars in "bailouts," which is over $900 billion in today's dollars. As Cato Institute's Richard A. Ippolito points out, the PBGC situation is very similar to the S&L of the 1980s.

"[T]he plans are permitted to hold assets that are mismatched to their liabilities (the main reason for the S&L crisis). Pension liabilities are like bonds and require a bond portfolio carefully matched for maturity to eliminate underfunding risks. But pensions hold large amounts of stock. Pension sponsors hope that stock investments will earn a higher return, reducing the need for contributions, but the PBGC holds the downside risks. In economic downturns, underfunding swells and bankruptcy rates increase, creating a potentially catastrophic rush on PBGC insurance."

Congress Adds Pensions to Other Retirement Security Work The Senate Finance Committee held a hearing on this issue on June 7 in order to explore ways to prevent under-funding and pension collapse. Committee members heard from government officials, corporate executives, and union representatives. In the hearing, CBO Director Douglas Holtz-Eakin and PBGC Executive Director Bradley Belt told committee members pension laws need to be tightened so ailing companies cannot "smooth over" financial difficulties when making pension reports, or take steps to increase pension benefits while at the same time under-funding their plans. A number of lawmakers have introduced bills addressing the pension issue. On June 9, Chairman of the House Education and the Workforce Committee Rep. John Boehner (R-OH) and Rep. Sam Johnson (R-TX) introduced a pension bill that would require companies with under-funded pension plans to fund them fully within seven years. Under the bill, companies would have less time to make up shortfalls in their pension funds. It would also require companies to disclose more information to employees about the financial status of their pensions. The bill has draw criticism from Democrats on the committee, most notably the ranking member, Rep. George Miller (D-CA). Miller said the bill would discourage the use of defined-benefit pension plans rather than ensure their stability. "These actions would seriously undermine the use and attractiveness of defined-benefit plans for both employees and employers and would fail to provide the protection employees need for their hard-earned nest eggs," Miller commented. Boehner defended the bill saying the collapse at United called for fundamental changes to the current pension systems. While this may be true, the explosion of this issue also underscores the need for generally reliable and risk-adverse retirement benefits for all Americans. With millions of people relying on shaky and at times unstable defined-benefit plans which may or may not pay out throughout retirement, the importance of the Social Security system grows exponentially. As Belt, head of the PBGC stated, "The defined benefit pension system is beset with structural flaws that undermine benefit society for workers and retirees and leave premium payers and taxpayers at risk of inheriting the unfunded pension promises of failed companies." Given the risks we are currently seeing with corporate pension plans, it seems particularly poorly timed to be pushing for the addition of private accounts in the Social Security system. Proposals to institute such accounts have universally been criticized as adding inherent risk to retirement security. Not only would they provide risk for those who depend upon Social Security payments to stay above the poverty line, but they would also provide risk for the millions of families who depend upon a combination of pension plans and Social Security to live comfortably during retirement. As United pilot Klaus Meyer, 47, of Bethlehem, PA, said recently in the Washington Post, "I lost almost all my United stock value in the bankruptcy, and here's another part [his pension] of the retirement I was promised that is gone. And now my Social Security is at risk. Where does it all end? You feel brutalized by the system." Yet it appears these two issues will be coming together in Congress. Rep. Bill Thomas (R-CA), chairman of the House Ways and Means Committee, which has jurisdiction over Social Security, has stated publicly he would like to combine Social Security reform with pension overhaul in a single piece of legislation. Given Thomas's strong support of private accounts, it is possible the combination of these two issues into a single piece of legislation could result in a dangerous bill that adds large amounts of risk in retirement for all American workers.