The motor industry is following a well trodden path. Four of America’s leading airlines are now flying while bankrupt; in each case, the opportunity to shed unaffordable pension and healthcare costs has been a crucial factor in the decision to enter Chapter 11. America’s steel industry went through a similar process a few years ago, emerging less burdened with legacy costs, but far smaller. Already, Wall Street analysts are starting to worry whether telecoms will be next, especially if the spread of low-cost Internet telephony drives down the revenues of the remnants of the old Bell companies. Although their pension liabilities appear to be well funded for now, AT&T and SBC, which are currently merging, have combined unfunded OPEB liabilities of $20 billion.
Such high-profile financial difficulties are forcing many Americans to pay attention. Company bosses fear that they too may find themselves heading for bankruptcy or, if not, that legacy costs will at least make them uncompetitive. Workers fear that they will lose benefits that they are counting on in old age.
Politicians are fearful too, suspecting that taxpayers may end up having to pick up the bill. The Treasury secretary, John Snow, is worried that a meltdown of corporate pension funds could become the “next Savings & Loan crisis,” a reference to the scandals among thrift banks at the end of the 1980s that ended in a $200 billion government bail-out.
Already this year the Pension Benefit Guaranty Corporation (PBGC), the federal-government-backed insurer of company pension plans, has agreed to take on an unprecedented $6.6 billion in unfunded pension liabilities from bankrupt United Airlines, prompting allegations in Congress that airlines are trying to “dump” their pension obligations on taxpayers. The PBGC’s liabilities now far exceed its assets, making it technically insolvent, though it has cash reserves that will keep it afloat for a few years yet.
Dealing with pension and healthcare problems is distracting America’s bosses from their core business — assuming managing legacy costs has not become just that: GM has been described, not wholly in jest, as a pension hedge fund and health-insurance business that happens to make cars.
The burden of legacy costs is heavily concentrated in older manufacturing firms with (at least until recently) large workforces and unions strong enough to negotiate generous retirement benefits. Those firms are thus at a big cost disadvantage both to their younger domestic rivals — Southwest, America’s most successful airline, has no pension fund to restrain it — and to competitors from countries that either lack pension and healthcare provision or have it provided by the state.
In pensions, most of the problems lie in “defined-benefit” plans, under which the employer promises to pay a pre-agreed pension (usually a proportion of each employee’s final salary). In the past 20 years, firms have been closing such funds, at least to new workers. They now favor “defined-contribution” schemes, whereby the firm promises to make regular payments into a pot that will pay a pension that reflects the market performance of the money invested. This gives the employer certainty about its costs, whereas the employee — unlike in a funded defined-benefit scheme — faces uncertainty about what pension he will have.