US pension system deteriorating

It will cost corporate America plenty to shore up the county’s private pensions system. But judging by what happened at United Airlines, it’s looking like an expense taxpayers could eventually have to pay.

Just a month ago, the bankrupt airline dumped nearly $10 billion (Euro 8.2 billion ) in pension obligations on the federal government, making it the largest corporate pension default in the US history.

Current pension funding rules allowed United to make its retirement plans look as though they were in much better shape, and didn’t require the airline to make any cash contributions in recent years despite its pension plan’s declining health.

From that example alone, it certainly seems like a pension system overhaul is a must. “We may be approaching a tipping pint for defined benefit pension plans, “said David Zion, the accounting analyst at Credit Suisse First Boston. “The accounting rules and funding rules have protected companies from their pension plans for a long time. With the use of smoke, mirrors, and various smoothing mechanism, these rules make it appear as if the plans are not volatile, when they really are and make plans appear healthier than they really are.”

Defined benefit plans, which promise retirees a monthly check and often health coverage, were under funded by $354 billion (Euro 290 billion) through April of this year, meaning their liabilities outweighed their assets. That’s a 27% increase in the shortfall compared with a year ago, according to the Pension Benefit Guaranty Corp, the federal agency that insures pensions.

At UAL Corp’s United, the carrier is terminating pension programs covering 120,000 active and retired workers to help it emerge from bankruptcy court protection. United’s pension funds have $7 billion (Euro 5.7 billion) in assets, but benefit liabilities total $16.8 billion (Euro 13.5 billion). Of that $9.8 billion (Euro 8 billion). Difference, the PBGC will cover $6.6 billion (Euro 5.4 billion), meaning benefits for United’s retirees will be considerable less than if the plans were still active and healthy.

But going back, it becomes clear that the situation at United didn’t have to turn out this way. According to a recent testimony to Congress by Bradley Belt, the PBGC’s executive director, the financial health of United and its pension plans had been deteriorating since, at least, 2000.