PENSION FUND BLUES....As everyone knows by now, United Airlines has successfully dumped its pension fund obligations onto the federal government. The losers in this deal are (a) United's employees, some of whom will see their pensions cut, and (b) we the taxpayers, who are now responsible for about $6.6 billion of United's $9.8 billion shortfall.

Why is United's pension fund so woefully underfunded? Partly it's because the airline industry sucks right now and United is in dire straits. But there's more to it than that. Even in otherwise healthy corporations, managers routinely — and deliberately — justify underfunding their pension programs by wildly inflating their projected returns. Here is Michael Hudson in the latest issue of Harper's:

At the beginning of 2001, for instance, IBM proposed that it would earn $6.3 billion on pension-fund assets of $61 billion — about 10 percent. This was an astonishing demonstration of confidence given that IBM had earned only $1.2 billion on those assets the previous year. In the event, IBM actually went on to lose $4 billion in 2001. Barely daunted, the company’s managers predicted a 9.5 percent return in 2002. They lost another $7 billion. In 2003 they predicted a return of $6 billion, and — as the market began to recover — they at last beat their prediction, by $4.4 billion. The result of this “recovery” is that, since George W. Bush took office, IBM’s pension-fund assets have plummeted by more than $1 billion.

....Such errors in judgment are seldom accidental. In pretending that their funds could generate high returns, managers sought a real — albeit short-term — advantage. The faster companies projected their funds to grow, the less they had to set aside to pay their retirees. The lower set-asides in turn allowed them to report higher earnings, thereby driving up the price of the company’s own stock to “create shareholder value.” Faced with a choice between living up to their pension promises or reporting higher net earnings, companies simply decided not to live up to their employee agreements.

Hudson continues with a theory that the only way to prevent even more pension fund defaults is to drive up stock market returns, and this is the motivation behind George Bush's desire to privatize Social Security: it will flood the stock market with money from private accounts and boost returns across the board.

I don't buy that, but the article is worth reading anyway to get a better understanding of how pension funds work and what their problems are. I have a feeling this is something we're going to be hearing a lot more about over the next few years.

—Kevin Drum 2:24 AM Permalink | Trackbacks