Herbert Stein's law -- "If something cannot go on forever, it will stop" -- is being proven right once again. This time, what cannot go on is the Pension Benefit Guaranty Corporation (PBGC) taking on responsibility for more bankrupt companies' defined benefit pension funds.
Ford Motor Co. has announced that it will offer lump-sum pension buyouts to salaried employees beginning in July. This comes on the heels of American Airlines' announcement last week that it would freeze pensions for flight attendants and ground workers, rather than turn them over to the PBGC -- a move the agency had opposed. The PBGC already faces a $26 billion shortfall. Taking on more pension obligations would only add to that deficit.
A freeze allows workers to keep their existing pensions, but not earn additional benefits. While, as The New York Times reports, "The Transport Workers Union, which represents American’s mechanics and other ground workers, described the compromise as a victory," that "victory" may be short-lived. Yes, unionized American Airlines employees will keep their full pensions, but that is likely to accelerate other firms' transitions from defined benefit pensions to defined contribution retirement plans.
That would take away a big union selling to potential members: a guaranteed secured retirement. Individual workers who control their own retirement savings don't need unions to negotiate on their behalf in that regard. The possibility of passing on pension obligations to the PBGC allowed companies to delay making changes to their pension plans. As that becomes more difficult, we should expect more announcements like Ford's.