Chrysler Bankruptcy Forces Retirement Evaluation
What is the Future of Pensions in America?
May 4, 2009
Aside from the pain that will be felt by all directly involved in the Chrysler bankruptcy, the American taxpayer and citizen is forced to ask a more fundamental question. Not a question about Chrysler’s workers, bond and stock holders, nor even the hedge funds and banks that hold loans; but a fundamental question that goes to the heart of American capitalism. Should America continue to allow large corporations to manage defined benefit (pension) plans? Should taxpayers be on the hook for failed corporate decisions?
Corporate Defined Benefit Plans (DBP)
Over the years DBPs have been instituted by employers to attract qualified and talented employees. A corporation sets aside an amount of money (proportional to the employee’s income) that is to be used for retirement purposes. In 1974 Congress enacted the Employee Retirement Income Security Act (ERISA) to protect employees from unscrupulous employers; furthermore, the Pension Benefit Guarantee Corporation (PBGC) was established to protect the value of benefits owned to employees.
Problems with Modern Corporations and DPBs
- Taxes – DPB payments are non taxable to companies (who have the money) and deductible as payments to employees (who may never receive it.) Retirees pay the tax burden upon receipt after retirement; however, when corporation declare bankruptcy DBPs are modified or eliminated completely. Upon restructuring the American treasury is denied the rightful taxes corporations would have paid if not for the DBP. Furthermore, the treasury is denied the taxes that would have been paid by the retiree had they received the funds.
- Immediate Costs – More than the combined cost of the bank bailouts, the AIG bailout and the auto maker bailout, the American taxpayer is on the hook for over 1 trillion dollars in pensions. Congressman Earl Pomeroy wrote in a letter to Charles E. F. Millard, Director PBGC on November 26th 2008, “According to the Center on Retirement Research, the equities in private defined benefit plans declined…representing a one trillion dollar loss in plan assets…with a deficit exceeding that figure.”
- Liability – Aside from the personal crises that arise from the loss of a pension, the American taxpayer has another problem. PBGC, while receiving insurance funds from corporations, is severely under funded. CNN senior writer Chris Isidore said in a May 17th 2005 article, "…defined-benefit plans…are about $450 billion short of the assets needed….71 percent of Fortune 1000 firms have assets covering less than 90 percent of promised benefits….causing PBGC itself to be under-funded.” The PBGC is guaranteed by the American government meaning the taxpayer.
- Human Burden – This is an enormous cost to the citizens of the USA. In the Chrysler case not only will tens of thousands of Chrysler workers loose their jobs but also a million former workers and dependents will loose their retirement. And while devastating to those individuals, this is becoming a pattern in the USA. An OMB Watch report dated June 13th 2005 stated, “From 2000 to 2003, the agency went from a surplus of $9.7 billion to a deficit of $11.2 billion to $353.7 billion deficit [in 2004]. Things have only gotten worse….”
- Long term Costs – With the addition of millions of retirees loosing pensions, the nation will have to bare that cost in many ways. Lost pensions not only mean lost income but also lost health care coverage. Along with the lost tax revenue the American taxpayer will also have higher health cost for the newly uninsured. This human tragedy represents over 20 million Americans and rising rapidly.
Hence the problem, what is the future of pensions in the USA? Should America allow corporations to take all the tax benefits of DPBs and then abolish the plans and stick the America citizenry? Since the USA is paying for many of these payments already, along with shrinking IRAs and 401Ks as well as unstable stock markets and housing prices, wouldn’t a Federal system (benefiting both the worker and taxpayer) be a better system – a more internationally competitive system as well?
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