Abolish Federal Pension Guarantee
Just as the squeaky wheel gets the grease, a government program gets Congress’ attention by going deep in the red. And the Pension Benefit Guaranty Corp. has certainly gotten noticed. PBGC, the federal agency that insures private pension plans, recently assumed responsibility for the largest pension default in U.S. history—that of United Airlines—when it already faced a multibillion-dollar deficit.
Federal intervention into private pensions has created an atmosphere of moral hazard in which companies undertake, or continue, overly risky behavior.
Although the PBGC is a federal program, its funding comes not from tax revenues, but from fees collected from employers that sponsor insured pension plans. But the PBGC doesn’t act like a private insurer; it has taken unfunded liabilities a private firm would never accept, and these costs are sure to fall on taxpayers. PBGC recently reported a deficit of more than $23 billion.
Over the past three years, the PBGC’s liabilities have ballooned as the federal government seeks to help industries that it considers “too big to fail.”
For troubled major carriers—also known as legacy carriers—relief from pension obligations is bankruptcy’s most important benefit. Huge pension liabilities put the established major carriers at a competitive disadvantage against the low-cost carriers.
Decades of generous labor contracts have left many carriers saddled with billions in pension commitments. Airlines have for years provided their employees with defined-benefit pension plans, which pay out a fixed benefit regardless of the employee’s contribution to the pension fund.
By contrast, many other sectors of the economy have moved largely to defined-contribution plans, such as 401(k) accounts, in which the employee invests into an individual investment fund.
These plans have proved successful—and are less expensive than the defined-benefit plan. So why do the latter persist in some industries?
Why should airlines trim their costs when federal assistance is waiting in the wings?
The best option for legacy carriers is to move from defined-benefit pension plans to defined-contribution retirement plans, such as 401(k) accounts, for their employees. Fortunately, some major carriers—including Northwest and Delta—have begun to consider this.
In a free air travel market, carriers would be allowed to succeed—or fail—on their own merits. The best thing government can do is to get out of the way.
Without the moral hazard of government help, America’s airline industry may finally run smoothly, without squeaking along.