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Home / Washington Business - July/August 2005 / Chair's Corner: Pension Problems Plague America’s Legacy Companies |
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Chair's Corner: Pension Problems Plague America’s Legacy Companies |
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Written On: July/August 2005 |
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Written By: By Tom Lemly - Chair, Board of Directors |
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Tom Lemly is a partner in the Davis Wright Tremaine law firm in Seattle, where he specializes in all aspects of labor law.
Earlier this spring, struggling United Airlines turned over its pension plan to the federal Pension Benefit Guaranty Corp. It’s a harbinger of what's to come as employers try to deal with skyrocketing pension costs.
Government and the private-sector employers are struggling to fund pension requirements as more baby boomers retire and life expectancy grows. Many of them are covered by defined-benefit pensions from which they receive a monthly check from the company or company's trust based on years of service and wages.
When lawmakers and employers attempt to deal with these costs by switching to 401(k) or defined-contribution programs, war breaks out because nobody wants to see his/her retirement plan changed in mid-career. However, the stark reality is that as the number of retirees grows and we live longer, lifetime monthly payments adjusted for the cost of living become prohibitively expensive.
Government and Older Industries Hardest Hit
The pension woes are greatest in older unionized industries and state and local government.
In fact, our state Legislature short-sightedly decided to skip a $325 million payment in this two-year budget cycle for the unfunded liabilities of the TRS and PERS 1 pension programs to balance the state budget. PERS 1 (state employees) and TRS 1 (teachers) are defined-benefits pensions. The actuaries tell us that the unfunded liability for those two plans is just over $4 billion, and growing.
Over the years some of the most heated legislative battles were fought over reforming state worker, teacher, police and firefighter pensions. In debt-ridden California, Gov. Arnold Schwarzenegger wanted to move toward a 401(k) state retirement system and stirred up a hornet's nest from police and firefighters.
Even though California's state contributions to the pension system grew from $160 million in 2000 to $2.6 billion this year, lawmakers were reluctant to address the issue and probably will not until it becomes a monumental crisis. We must avoid that happening in Washington.
In the private sector, the pension problem is reaching the crisis stage as General Motors and Ford (among others) teeter on the edge of bankruptcy.
Legacy Costs Add $1,500
Foreign competitors are eating into GM's market share and a major reason is "legacy costs," the enormous burdens arising from the pension plan and health care benefits American car manufacturers negotiated with the United Auto Workers in years when times ere good.
Times have changed. Today, foreign competitors are building cars with younger, non-union workers in places like Alabama, not Detroit. These companies have no legacy costs. When employees retire, they take their retirement savings with them and the company's obligation is finished.
Meanwhile, the pension and health care costs for GM workers and retirees amounts to about $1,500 per car and that burden is growing.
Furthermore, GM now has 2.5 pensioners for every worker. Asian and European automakers in the United States have none of these costs so their cost advantages are huge. Like Navistar and Caterpillar, GM and Ford need concessions from the UAW or they simply may not survive. That wouldn't be good for any of us because it is estimated that one out of every 100 jobs in this country is tied in some way to GM.
There is no easy answer. In the long-run government and the private sector must switch to defined-contribution programs or pension programs may collapse. That would make the Social Security problem seem small by comparison. As leaders in the business community, we must make sure the Legislature faces the issue of our state pension funds.
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