May 11, 2005

Lessons from UAL’s Pension Terminations

After a hectic day of pre-travel prep and actual travel, I was all fired up for a Link of the Day post last night when the UAL pension plan termination news hit me. Ouch-that deserves more thought than a few quick links.

A subscription e-mail I get from CNN Money this morning expresses my thoughts pretty well (I don’t think it’s available anywhere online):

CNN/Money Eyeopener Newsletter
Wednesday 05/11/2005
Wastler’s Wanderings

I feel sorry for airline workers this morning, especially the ones that are retired or close to retirement. It’s obviously because of the decision to let UAL to toss its pension plans to the government and the implications for the industry. Not that the move wasn’t needed. Costwise, the plans throughout most of the airline old guard are way out of whack. But it’s not the average Jane or Joe worker that let them get that way. It was unions that jacked up airlines at every opportunity, without regard for the long term effects, and path of least resistance management that figured it could just continually pass on costs to the consumer. Now somebody who simply worked hard will pay the price.

“Sustainability” is a word people kick around a lot when talking about the environment and urban planning. I’d like to use the word here. My late father (a chemist, not an economist) was predicting that things would come to this during the 60s and 70s as the airlines, the auto industry, and certain other industry sectors lavished down-the-road pension and health care promises on their employees that could only be “sustained” (I think he even used that word) if the industries didn’t otherwise change a bit.

Well, the only constant in life is, has been, and will continue to be, change. Pretending otherwise has proven to be consummate foolishness. The airline and trucking industries were deregulated, the Japanese and then the Germans began building cars in the US countryside, steelmaking mini-mills displaced supposedly untouchable Big Steel. Change goes on, and on, and on, in every aspect of business life, whether we like it or not. Organized efforts that attempt to stop it only delay the inevitable. The industries noted here, and certain others, built cost and benefit structures that made them unable to adapt to change as it occurred, and competitors ate, or are in the process of eating, their lunch (and those supposedly untouchable benefits).

It is a crying shame that employees and retirees who believed these promises will suffer greatly, despite the partial safety net of the Pension Benefit Guaranty Corporation (a topic for another time). My heart, and prayers, go out to them. Who are we to say that the “average Jane or Joe worker” should not have believed their company managements and unions? (But yes, we all should know better now.) It is a double shame that these same people, who in turn built lifestyles and personal cost structures around these promises, will in many cases be forced into, and fleeced by, the Brave-New-World bankruptcy regime that goes into effect in five short months.

There are lessons here for those not immediately affected, which we ignore at our peril:

  • Don’t assume your pension will automatically be there. It will be there only if it is adequately funded AND if the underlying business supporting is and continues to be healthy.
  • Don’t assume the retirement promises of politicians will be kept. Their promises are unsustainable too. Social Security in its current form is a promise to pay you retirement benefits that depends on the ability and willingness of the next two generations behind you to keep the promise. Two workers cannot support each retiree, which is where we will be with Social Security in the not-too-distant future if it isn’t changed.
  • You have what you own; the rest, if it is there, is gravy. 401(k)s and IRAs represent real money in real accounts in your name. In the current Social Security debate, only money that ends up in your account will be yours; the rest will depend on others’ promises and capacity to pay.
  • Practice defensive personal finance. Minimize debt, and have a reserve fund.

UPDATE: Meant to link to this Moderate Mainstream nugget from a while ago (scroll to nearly the end of the post): “United Airlines can declare bankruptcy and void the contracts it has with its employees. Nothing in the reform bill will change that. Does that mean when United employees start defaulting on debt taken out prior to their contract being voided they will get bankruptcy relief? Hell no. They have to take responsibility for their actions…pay their bills.”