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Forget terrorism. Forget Bird Flu. In today’s New York Times, Roger Lowenstein takes 8,000 words to look at the country’s real threat—our dysfunctional pension system.

Corporate pension plans are underfunded by a staggering $450 billion. This is the world’s slowest-moving train wreck. The question is no longer if, but when. Years ago, companies promised their employees lifetime pensions, but now these “legacy costs” have overburdened companies. Employers simply don’t have the money to fund their pensions adequately. And newer companies don’t even bother; they just go the 401(k) route.

(In the movie Wall Street, Gordon Gekko was initially attracted to Bluestar by its overfunded pension. An airline with an overfunded pension! Only in Hollywood.)

Most pensions are insured by the Pension Benefit Guaranty Corporation. The problem is that this insurance invites “moral hazard,” meaning the companies don’t worry about underfunding because they know they have a government-insured safety net. This could be the S&L crises redux. Right now, the PBGC is in the red by $30 billion, and it’s projected to get worse. Much worse.

As bad as it is for the private sector, the outlook is even bleaker for public sector pensions. In San Diego, 8% of the city’s budget goes to pensions. In West Virginia, the teachers’ pension is only 22% funded. In Illinois, the pensions are underfunded by $38 billion.

Then there’s the issue of pension accounting. I remember I used to think accounting was simple. Take your revenues and subtract your cost. What’s left is your profit. That’s not even close. When accounting for a pension, a company selects a discount rate to price future liabilities. But companies are selecting higher and higher discount rate so they can set aside less and less money. You can completely alter your profit or loss simply by selecting a new number, and it’s all perfectly legal.

United Airlines didn’t make any contributions to its pension from 2000 to 2002. In 2003, it made the minimum contribution and it raised pension benefits by 40%. The company filed for bankruptcy and its pension is $10 billion in the hole by. But the accounting was all legit. Imagine that by a factor of 10 and it’s how our future might look.

Lowenstein is one of the best business writers around, but I think he’s too dismissive of 401(k) plans. Articles like this often follow the formula, here’s theme A, here’s theme not-A, here’s my resolution—watered-down A. But Lowenstein tries to find a self-defined middle ground that never addresses the problem directly. A pension by any other name is still a problem. Corporations are much more fragile entities that its critics realize. They can’t stand the weight of increased government outsourcing. I think 401(k) plans are the answer. Never underestimate the ability of people to solve problems for themselves.

The worst problems countries face aren’t natural disasters like hurricanes or infected chickens. The worst are manmade problems, like lack of political will. Ultimately, the pension mess can be solved if we abandoned pensions all together and move to 401(k) accounts for all.

Posted by edelfenbein at October 30, 2005 1:40 AM