IT WAS movie mogul Sam Goldwyn who explained that a verbal contract isn't worth the paper it's written on.
After the events at United Airlines last week, workers may be wondering if the same might be said about their pension agreements.
On Tuesday, a bankruptcy judge cleared the way for United parent UAL Corp. to dump some $6.6 billion in pension obligations on the federal Pension Benefit Guaranty Corp.
The government agency will take over responsibility for the benefits promised about 120,000 United workers and retirees, in the largest corporate pension default in history.
This would be shocking, except that United's move was long expected. The troubled airline had to escape its pension obligations in order to attract the new investment it needsThursday, November 04, 2004 9:38:15 PMend up getting smaller retirement checks than they were promised.
Workers at other airlines also will feel the impact if United's competitors decide to take a similar route with their own pension plans.
They may have to: Freed of the need to contribute about $654 million a year to its pension plans, United could emerge from bankruptcy as a leaner, lower-cost competitor.
The rest of us also could be affected if such a rush for the exits ends up bankrupting the PBGC itself.
The federal agency already operates at a deficit, last year totaling $23 billion. And there's a growing gap between the assets it holds and the amount it owes the million or so U.S. workers and retirees who depend on it for their pensions.
If all this seems confusing, recall the savings-and-loan crisis some 15 years ago. The pension board's predicament is similar to that faced by the federal agencies that guaranteed deposits at banks and S&Ls. When those institutions began to fail in large numbers, the guarantee funds were overwhelmed, and taxpayers had to bail them out.
No one knows if a similar taxpayer rescue might be needed to keep payments flowing to pensioners, or how large the bailout would be. There is already talk in Washington of reforming the PBGC to try to head off such a crisis, but it's not clear if such a move would make the average pension more secure or less.
The fundamental problem lies in the nature of traditional corporate pensions, also known as "defined-benefit" plans. Although these have been largely supplanted by "defined-contribution" plans, such as 401(k)s, they are still major issues for big employers in industries such as autos, steel and airlines.
These defined-benefit pensions often represent promises made in a different business world, by managers who never imagined how globalization, deregulation and technology would transform their industries.
In the Fifties and Sixties, pensions and health-care plans helped blue-chip firms attract and keep good workers. Now, the cost of keeping those promises can make it impossible to keep up with new foreign and domestic competitors.
Defined-contribution plans avoid this problem by essentially shifting risk to the individual. For better or worse, workers become responsible for making sure they have enough to sustain them in retirement.
The same principle lies behind President Bush's plan to replace Social Security with private retirement accounts. Individuals would assume greater responsibility for their money, along with the risks that go with it.
In fact, supporters of Bush's plan see the United Airlines default as a taste of what could happen if Social Security isn't reformed soon. Sudden benefit cuts or big tax increases will be needed to plug the looming gap, they warn.
But you can also argue that United's pension crisis illustrates why we need Social Security in something like its current, defined-benefit form.
If guaranteed corporate pensions are soon to go extinct, after all, then doesn't it make sense to balance the risks of market-based retirement funds with something else?
For nearly 40 years, defined benefit pension plans were the norm in the United States. Employers contributed most of the money, managed the finances and guaranteed workers a set monthly income upon retirement.
But in the Eighties and Nineties, companies shifted toward the less expensive defined contribution plans in which workers also contributed to and managed their individual retirement accounts.
While not as secure for workers, defined contribution plans are portable, allowing workers in most cases to take their retirement account with them when they change jobs. And during the booming stock market of the late 1990s, those accounts often posted impressive growth but soured in the dot-com bust earlier this decade.
Some experts consider defined benefit plans better for workers because they guarantee retirement income. Numerous old-line firms such as DuPont, General Electric and Raytheon still offer them as an incentive to retain workers, said Norman Stein, a University of Alabama law professor and pension expert.
But United's problems illustrate that such plans aren't rock-solid. And that situation could worsen.
The Pension Benefit Guaranty Corp., which is funded by contributions from the nation's pension plans, may have to boost premiums to absorb the cost of the United bailout. That could prompt some companies to end or freeze their defined benefit plans and shift to 401(k)-type programs, further weakening the PBGC safety net, said Jonathan Barry Forman, a pension expert at the University of Oklahoma Law School.
For those workers with 401(k)-style pensions, the responsibility of managing their own retirement account is critical and could determine how comfortable a retirement they can expect.
"The choices have been shifted to employees, many of whom don't have a clue," said Jack VanDerhei, a professor of finance at Temple University.
Though financial advisers urge workers to invest the maximum amount allowed in their 401(k) plans, many don't and will not have enough money for retirement, said Mark Johnson, president of ERISA Benefits Consulting near Fort Worth, Texas. "When you have a lot of people not investing correctly, that will cause a lot of long-term problems."
---------------------------------------------------------- Andrew Cassel writes for The Philadelphia Inquirer. This article includes information from The Record's wire services.