BCT Editorial – 5/15/05

This page was last updated on May 15, 2005.

Dump and run; Editorial; Beaver County Times; May 15, 2005.

Below is a detailed critique of the subject editorial.

“The class war is being fought in U.S. bankruptcy courts, and the investor class is winning.”

[RWC] Lest we forget, the Times views the world through glasses with a class warfare coating. The editorial fails to note over half the population – directly or indirectly – has investments. With that participation rate, it’s obvious the “rich” aren’t the only investors. For the 2000 tax year, 45.8% of income tax returns with dividend income had less than $50,000 of adjusted gross income. Lest we forget, this figure does not detect investments in a lot of IRAs and 401(k)s because they are tax exempt until your withdraw income after retirement. The figure also doesn’t count members of pension plans. Remember, all pension plans invest their funds.

In summary, the “investor class” in the U.S. is a solid majority cutting across all demographic lines, not a small minority of the “privileged.”

“Last week, a federal bankruptcy judge gave United Airlines permission to dump its pension liabilities on the Pension Benefit Guaranty Corp., the federal government’s pension insurer, and run away from its obligations.”

[RWC] The editorial fails to note PBGC funding comes from the companies covered by the PBGC. According to the PBGC website, “PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over.” That said, I don’t know if the PBGC is allowed to get into a position where its liabilities exceed assets such that “general tax revenues” would be required to make up the shortfall. Given that the PBGC is a government operation, I suspect it can get into such a situation.

Regarding “running away from obligations,” like it or not, that’s the whole purpose of bankruptcy.

“The airline’s pension plans were underfunded to the tune of $9.8 billion, and PBGC will guarantee about $5 billion of that. Those who are eligible for the plans will make up the difference via reduced benefits. For many, that translates into thousands of dollars of lost income every year.

“Delta Airlines might not be far behind. It announced last week that if its business doesn’t improve, it would need to file for bankruptcy next year.

“A pattern is developing here. US Airways, United and Pan American Air dumped their obligations to their employees and retirees in bankruptcy court, and no doubt other domestic airlines that are flirting with insolvency will be tempted to do the same.”

[RWC] If the author is only now seeing a pattern develop, he hasn’t been paying attention for a very long time.

“In doing so, they would be following in the footsteps of the steel companies that were bought up by the International Steel Group. These companies were allowed to dump their pension plans in bankruptcy court and PBGC assumed their so-called legacy costs.

“In the cases of LTV Steel and Bethlehem Steel, that amounted to $1.8 billion and $3.7 billion respectively. When the other, smaller steel companies that ISG bought up at rock-bottom prices are included, The Philadelphia Inquirer reports PBGC ended up assuming $6.4 billion in pensions the firms had promised. When it was all said and done, ISG-related firms were able to eliminate $15 billion in retiree obligations, including health care, from their books.

“The situation is growing more ominous. The Inquirer reports the government now insures pensions that are underfunded by $450 billion and that PBGC itself has a $23 billion deficit, to which United will add $9.8 billion.

“It’s possible to argue that these decisions are necessary because they allow companies to stay in business and therefore provide employment to thousands of Americans - in ISG’s case, it was 15,000 jobs - and that some pension benefit is better than nothing, which is what would have happened to retirees if PBGC had not assumed their former employers’ obligations.

“But the only reason investors were willing to take that gamble was because they were able to buy into companies that were able to rid themselves of pension obligations, including health-care coverage. This is corporate welfare masquerading as capitalism, and the investor class is laughing all the way to the bank.”

[RWC] The editorial refers to “that gamble” but never says what “that gamble” is.

Given that companies pay a premium to participate in the PBGC insurance program, how is that “corporate welfare?” Is it welfare when you submit a claim to your insurance company?

Don’t get me wrong; I don’t agree with how many – most? – businesses with pensions deal with funding. Unfortunately, this is an entirely predictable result when you give someone else responsibility for your financial well-being. Until we get away from the socialist concept of defined-benefit programs and move to defined-contribution programs, we’ll continue to see organizations walk away from their responsibilities.

Did you notice the editorial failed to mention its fellow travelers, labor union management? To the best of my knowledge, all of the companies that made PBGC claims had a strong labor union presence. Wasn’t it also the responsibility of labor union management to make sure pension plans were adequately funded? This is yet another example of where I believe labor union management lets down its members. I can only assume labor union management saw no revenue potential for itself by helping to ensure the financial security of retirees. In other words, labor union management can collect so-called “dues” on worker paychecks, but not on company contributions to a pension plan.

It’s clear the author wants us to believe the “investor class” is a small group of rich “robber barons.” As I noted above, over half of us belong to the “investor class.”