Against the Current, No. 117, July/August 2005
Is This Sick or What?
— The Editors
Vigilante Man, 2005 Style
— Mike Davis
An Anti-Imperialist War Resister
— ATC Interviews Carl Webb
— Malik Miah
Scamming Social Security
— Susan Weissman interviews Michael Hudson
The PATRIOT Act: Darkness With No Sunset
— Julie Hurwitz
"Born into Brothels" Controversy
— Frann Michel
Guatemala: The Violence of "Free Trade"
— Cyril Mychalejko
Bolivia: The Fall of Carlos Mesa
— Jeffery R. Webber
The Battle for Democracy in Mexico
— Dan La Botz
- Haiti in Crisis
Haiti in Crisis
— Honor Ford-Smith and D. Alissa Trotz
The Second Fall of Aristide
— Robert Fatton, Jr.
Haiti: Racially Profiled!
— Patrick Bellegarde-Smith
- Celebrating the Revolutionary Centenary
Understanding Imperialism: Old and New Dominion
— David McNally
Gifts of the IWW
— Joseph Grim Feinberg
Reading Red: Art & Social Revolution
— Alan Wald
Water War in Bolivia
— Phil Hearse
Noor: Casting Light on History
— Mahmud Rahman
Studying State & Capitalist Development
— Raghu Krishnan
Making Trouble Today
— Pam Galpern
Women of Color & Reproductive Rights
— Dianne Feeley
Recalling U.S. Trotskyism in the 1960s
— Paul Le Blanc
PENSIONS HAVE BEEN an example of a major social wage that most Americans took for granted, both in private and public sector employment. That’s no longer the case. Ask the workers at United Air Lines.
The latest setback for pensions occurred in the airline industry with the termination of four defined benefit pension plans at Untied Airlines, the world’s second largest air carrier. The major unions at the carrier opposed the terminations, but were unable to stop a bankruptcy court from ruling in favor of the corporation’s plans to “save” the company.
UAL has been under Chapter 11 bankruptcy since December 2002. Through an 1113c process, the court allows the company to radically alter legal contracts to lower its labor and other costs. In 2003, UAL forced through major labor concessions on its unions and salaried employees. The process was repeated in early 2005 even though the unions opposed at first the company’s demand.
Attacking Defined Benefit Plans
The corporations’ beachhead attack is on “defined benefit” pension plans — those that provide a guaranteed income for employees who gave up higher wages to secure a better pension. In a major shift in the last 20 years, corporations and governments now choose to fund, at a much lower cost, “defined contribution” plans, which do not provide a guaranteed income after retirement.
There are some important lessons to learn from this experience. This column will focus on the pension issue.
On June 7, the U.S. Senate’s Finance Committee held a hearing on “Preventing the Next Pension Collapse: Lessons from the United Airlines Case.” A month earlier, UAL, parent of United Airlines, won the approval of the Illinois bankruptcy court overseeing its reorganization to terminate its four defined benefit pension plans.
That rubber-stamp ruling means the Pension Benefit Guaranty Corporation (PBGC), a federal agency, is in control of pensions for 120,000 active and retiree employees — the largest pension collapse and takeover in the PBGC’s 30-year history.
The first UAL plan to be officially turned over to the PBGC is the Ground Plan, covering mechanics and other ground employees. The PBGC only covers about two thirds of the $9.8 billion pension obligation. The shortfall — a result of ERISA (Employee Retirement Income Security Act of 1974) regulations — means a reduction of benefits for all future retirees and workers who retired since July 2000.
Wider Pension Crisis
The crisis of the country’s defined benefit pension plans go beyond airline workers. The Congressional Budget Office told a House panel that the federal agency insuring private pension plans would have a deficit of $71 billion over the next decade.
Discussions are underway by the Bush White House to raise premiums paid by corporations to the PBGC, and to allow companies up to 25 years to bring their underfunded pension plans up to a fully funded status. Some executives in the industry like the idea of stretching the “catch-up” period to 25 years, as this legally allows them to significantly underfund pensions.
This plan, however, places undue risk on workers and could prove disastrous. At any time during this long catch-up process, a company could declare bankruptcy and unload its liabilities onto workers and the PBGC. Instead of saving the defined benefit pension system, the likely result is the demise of all these plans as companies bail out of their negotiated pensions.
Only 24% of workers in the private sector have defined benefit plans today. No new plan has been started in five years.
The crisis in the public sector grows too. Ninety percent of public sector workers are still covered by defined benefit pension plans. According to the June 12 Business Week, “The 125 largest public-pension plans are short $278 billion, a gap created by underfunding, poor stock market returns and costly hikes in benefits.”
It is common for management and the media to parrot that pensions are simply “promises” as though they fell from the sky. In truth, in both the private and public sectors, defined benefit pensions are benefits negotiated by unions representing the workers. Workers accept lower wages now in a tradeoff for better pension benefits in the future. To cut pensions or terminate plans is simply another way to reduce hourly wages.
The termination and replacement of pensions at United Airlines has led to a broad discussion in labor and society about pensions. At the Senate hearing Glenn Tilton, CEO of UAL, gave his analysis of the pension crisis for airlines. It reflects the beliefs of most corporate executives in airlines, auto manufacturing and analysts on Wall Street.
“The major carriers have massive legacy costs,” Tilton told the Senators. High on the list of “legacy costs,” he explained, were an “uncompetitive cost structure, restrictive labor agreements; a lack of alignment between management, employees and customers; and a governance structure that fundamentally weakened United.”
The “uncompetitive cost structure,” he said, includes “restrictive labor agreements” and overly expensive defined benefit pension plans. These had to be restructured, he said, for the company to be saved.
Unions’ Response and Politics
The pension debate was handled in a similar manner to all other items under 1113c. Once the court ratified a PBGC-UAL deal to terminate the plans, the negotiators for my union, the Aircraft Mechanics Fraternal Association (AMFA), sought the best replacement plan allowed under the law.
At this time, AMFA is preparing a lawsuit against the PBGC in an effort to secure a higher benefit from the terminated plan. Provisions in the law only allow full credit for pension increases that are at least five years old. The Railway Labor Act, however, delayed adoption of the last pension increase for two years. The AMFA lawsuit hopes to move the termination date forward by just a few days so as to allow an increased benefit to flow to members and retirees.
The pension issue could not be resolved outside the context of the bankruptcy proess, and the greater advantage management had because of the third party at the table — the judge. Once the government agency and UAL struck a deal that was upheld by the judge, the union strategy was to negotiate the best pension replacement plan as it pursued legal action to salvage what it could from the PBGC.
The issue of pensions, like Social Security (the federal pension program for workers who pay into the system in the private sector), requires governmental action. No single company can solve the crisis.
Even GM and Ford, the second and third largest auto manufacturers in the world, face the prospect of pension adjustments and possible terminations. The lack of national health insurance and national pension plans for all citizens is at the root of the pension crisis.
Private and publicly funded pensions suffer from this failure of federal policy. It is not the “legacy costs” of big airlines that caused “overcapacity” of unprofitable seats and a competitive disadvantage. It is failed leadership.
Wall Street and many politicians in Washington support the shift away from defined benefit pension plans. The attempt to roll back and limit social wages such as Social Security and Medicare programs won over decades is an issue before all unions and citizens.
The Senate and parallel hearings in the House on the lessons of the United Airlines pension collapse help to expose the depth of the broader crisis. The longterm solutions to defend and protect social (and hourly) wages require the type of strong labor and social movement that existed in an earlier era of American politics.
ATC 117, July-August 2005