Thursday, May 12, 2005

United Airlines and Social Security

Two days ago a federal judge ruled that United Airlines, currently in bankruptcy, could terminate its pension plans. The pension liability, basically a portion of it, will be borne by the government under the Pension Benefit Guaranty Corporation. Former employees could see a significant reduction in pension checks. The deal allows United to be free from $3.2 billion in pension liabilities over the next five years with which it probably could not emerge from bankruptcy.

These defined benefit pensions have a become a significant corporate liability acrosses swaths of corporate America as promises made decades ago to now retired workers become harder and harder to pay as a firm's fortunes or entire market segments declines. It's a huge issue in the automobile industry as well as old-line manufacturing like steel. As the population ages and medical costs increase beyond projections, even well-funded plans may find themselves well short of funds. The best analogy I've seen is a firm with these liabilities is akin to having a house worth $100,000 with a $500,000 mortgage. Untouchable, unsellable.

This is an important lesson for the labor unions, the Left and the Democrats about Social Security. Social Security is the ultimate defined benefit plan. You pay in and according to a (changeable) formula you get back payments when you retire. The problem is you don't actually own any assets, they are simply obligations of the government. Now while you can't compare the creditworthiness of the US government to a private corporation, because taxpayers don't own their portion of Social Security benefits they can be eliminated, or cut. Eliminated, not likely. Cut, (in some way), almost certainly.

An idea where taxpayers could choose to OWN some portion of their retirement savings in exchange for a smaller defined benefit portion is a good trade - especially when younger workers can invest that at market rates and earn a much, much better return.

And worse case scenario, the day after you retire, you die. All those years of pay-in are GONE. (Though I believe surviving spouses can exchange the payments of the decedent if they are larger than the amount currently received.) Alternatively, in the President's proposed system some of the Social Security money becomes a defined contribution plan and a direct asset which can be passed along with the estate.

Seems like a clear choice.

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