In just four years, the number of monthly checks PBGC sends to retired workers has swelled from 344,770 to 683,000, doubling annual payouts from $1.54 billion to $3.69 billion and turning the PBGC's budget from a tidy $10 billion surplus in 2000 into a $23 billion deficit last year.
This is a growing problem. According to the latest report from the
Pension Benefit Guaranty Corporation:
In 2005, companies sponsoring underfunded pension plans filing under section 4010 of ERISA, reported a record shortfall of $353.7 billion in their latest filings with the PBGC. This represents a 27% increase over the $279 billion in underfunding reported a year earlier. The 2005 statistics are based on 2004 information that 1,180 plans filed with the PBGC covering about 15 million workers and retirees. These underfunded plans had $786.8 billion in assets to cover more than $1.14 trillion in liabilities, for an average funded ratio of 69%. As of September 30, 2005, the PBGC estimated that the total shortfall in all insured pension plans exceeded $450 billion.
The airline industry is the latest major US industry to use bankruptcy to get out of its contractually obligated pension plans. Within the last 5 years, United, TWA Pan American and US Air have already given their pensions over to the Pension Benefit Guaranty Corporation. It appears more will follow:
Meanwhile, the problem continues to grow. Delta Air Lines, Inc. said this past week it plans to terminate its underfunded pilots' pension plan as part of its bid to get out of bankruptcy, as did US Airways Group Inc. on their recent sojourns through bankruptcy court.
However, the problem is not limited to the airline industry:
Deep in the red: Companies in the Standard & Poor's 500 are still short $164.3 billion in covering their expected payouts to pensioners, S&P says. That's only a slight improvement from the $164.8 billion deficit of 2003.
Broadly underfunded: Of the 369 S&P 500 companies that offer pensions, 311 do not have enough money in their pensions to cover their obligations.
*Disproportional shortfalls. There's a large spread between some companies that are slightly underfunded and those with massive shortfalls.
Look at those figures for a minute and let them sink in. 84% of the companies in the S&P 500 that offer pensions are underfunded. These companies know about their upcoming obligations. However, they have done nothing to alleviate the problem.
One of the primary problems with turning a pension over to the PBGC is the payments they pay out may be less than those promised in the original contract. According to the PBGC's website:
For plans with a 2006 termination date, the maximum guarantee is $47,659.08 yearly ($3,971.59 monthly) for a single life annuity beginning at age 65. The maximum is adjusted downward for retirees younger than age 65. For example, the maximum guarantee for a participant who retires at age 62 is $37,650.72 yearly ($3,137.56 monthly) for a single-life annuity. At age 55, the maximum guarantee is $21,446.64 yearly ($1,787.22 monthly).
Imagine a retiree who is expecting and planned his retirement based on an annual income of $60,000. When the PBGC gets that pension, he immediately takes a pay cut of about $12,500. All this for doing nothing but working for a company for his entire life and expecting the company to make good on its promise to provide for the retiree's retirement.
The bottom line is simple. It appears corporate America has decided to underfund their pensions with the hopes of an eventual bailout by the Federal government. Funny, I bet most of those captains of industry are die-hard Republicans who also argue for the days of personal responsibility.
Update [2006-6-21 10:11:12 by bonddad]:: According to the Federal Reserve's Flow of Funds Statement corporations as a whole are doing very well in this expansion. Corporation's profits as a share of total national income have increased from 8.54% in 2001 to 13.88% in the first quarter of 2006. Undistributed corporate profits (also referred to as corporate savings) have increased from $193.3 billion in 2001 to $606.3 billion in the first quarter of 2006. It's not like these companies don't have the money to contribute.