"George Will: Airlines shedding pensions"

Monday, January 17, 2005

Commentary
Airlines shedding pensions 
By George Will
The Washington (DC) Post


WASHINGTON -- Journalism sometimes involves reporting to readers the
considerable importance to them of something they never knew existed. Such
as the 30-year-old Pension Benefit Guaranty Corporation. Its existence may
be necessary, but it causes "moral hazard," and is pertinent to the debate
about how to guarantee the benefits of the biggest pension system, Social
Security. 

PBGC is a government entity created in 1974 after some bankruptcies left
thousands of retirees without pensions. PBGC insures -- but not completely
-- companies' pension funds. Since 1991, companies with pension plans have
been billed $19 annually for every worker and retiree covered by the plans.
The money -- about $1 billion a year -- funds the PBGC. 

Last week the Bush administration endorsed increasing the annual assessment
to $30 -- and more for financially shaky companies. This is because the
agency's $8 billion surplus in 2001 has become a $23 billion deficit, a
reversal largely the result of the airline industry's crisis, the worst of
which is still to come. 

United Airlines and US Airways are two of the so-called "legacy" carriers,
the older airlines -- older than the low-cost newcomers like Southwest. In
2002 the five strongest legacy carriers had costs of $95,500 per employee.
Southwest had costs of $59,100. 

The older carriers are being to driven to, or over, the threshold of
bankruptcy by the weight of their pay and pension costs. Some of these
commitments were made before the new low-cost carriers made it impossible
for the legacy carriers to pass on high costs to their customers, and some
were made to buy short-term labor peace because strikes could destroy the
companies. 

The PBGC is taking over the pilots' pension plan of United and will soon
have all of US Airways' pensions, just as in recent years it took over many
from the steel industry. Three other airlines are in bankruptcy court to
dissolve imprudent labor contracts. No legacy airline can compete with
another that has dumped its pension burdens in the government's lap. Some,
perhaps most, legacy carriers could be one price spike in fuel costs --
meaning serious terrorism against oil production facilities -- from
extinction. 

Moral hazard exists when government policy creates incentives that make bad
behavior rational. One example is a PBGC that assumes substantial
responsibility for pension promises that companies have found convenient to
make. 

The PBGC will reduce its potential contribution to moral hazard by
increasing fees paid by companies with poor credit ratings. Even more
important, the administration wants the PBGC empowered to prevent
financially parlous companies from making pension promises they are apt to
eventually make a government burden. All this could cause some companies to
abandon defined benefit plans, in which the amount of benefits paid to a
retiree is fixed in advance in accordance with the plan's formula. 

The PBGC probably is necessary to ease the political friction that must
attend what the airline industry must eventually experience -- a radical
reduction of excess capacity. Eventually this should mean the liquidation of
one or more of the major airlines that have stayed aloft by finding refuge
in bankruptcy courts. But this reduction of friction takes a toll on
America's economic system. 

Three decades ago sociologist Daniel Bell postulated the "cultural
contradictions of capitalism." He meant that capitalism, by its success,
subverts its cultural prerequisites. At first, capitalism depended on a
Protestant asceticism -- thrift, deferral of gratification, industriousness.
But capitalism produces wealth, and a shift from production to consumption
-- the marketing of hedonism -- as the economy's motor. The banishment of
asceticism by acquisitiveness means the systematic inflammation of appetites
and the undermining of stern capitalist virtues. 

The PBGC's increasing importance may herald a new cultural contradiction of
capitalism in the context of today's increasingly fierce competitive
marketplace, and of the regulatory, aka welfare, state. 

The financial fragility of the highly visible airline industry may be
spreading an infection of insecurity about pension promises generally. This
should not, but probably will, complicate the task of convincing the public
to make necessary changes in Social Security.


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