Yesterday, United Air Lines was allowed to dump it’s pension plan on the federal government. That’s bad news for pretty much everybody except UAL’s accountants and execs: employees and pensioners are going to get considerably smaller payments than they’d been promised, and everybody who pays taxes gets to pick up the tab. A number of other airlines, including Delta and US Air, are considering doing the same thing, and you have to think beleaguerd Ford and General Motors bean-counters are also looking enviously at the massive chunk of accounts payable UAL just scratched off its balance sheet.
I don’t mean to tread on Martini Boy’s turf here, but the pensions crisis among all of these old-line companies illustrates a great no-no of long-term investing: lack of diversification. In the end, even though they presumably didn’t have much choice in the matter, all those UAL employees who’ve been promised a defined-benefit pension are in the same boat as the Enron and WorldCom employees who voluntarily put all of their 401(k) money in their own company’s stock. They bet the house on one horse, and by they time old age caught up with the grizzled nag, there was barely enough left of it to cart off to the glue factory.
I’m not trying to say “I’m smarter than you” here to all those UAL folks, but for myself, I’d be terrified to have the majority of my retirement wrapped up in one company–any company. Not Microsoft, not Google, not Coca-Cola, not Wal-Mart, not anything. What happens if they go broke? (Answer: I go broker.) I try and spread my own retirement investments around as widely as possible, to avoid (as Daffy Duck would say) just such an emergency.
All of which begs the question, why does one of our political parties still insist that everybody in the country ought to be putting 12% of their income into a single rapidly-becoming-insolvent “company” that they have no control over, no ownership of, and no ability to diversify out of?
What is Social Security, if not a giant defined-benefit plan that’s outrageously underfunded going forward? And to the lefties who’ll yell, “Yeah, but United and Enron had greedy executives who took all the money,” my response is, “Sure did–and how is that any different from greedy politicians who spend all the tax money?”
Without reform in SocSec, the outcome will be the same. The beneficiaries will take big cuts, and the taxpayers will get a huge bill. And the people responsible for it all will be (a) insured by their own assets or (b) long since dead.
UPDATE: Reader Tim Higgins points out that the Federal Pension Benefit Guaranty Corporation (PBGC) is not currently taxpayer-funded, as I incorrectly noted above. According to the PBGC’s site:
PBGC is not funded by general tax revenues. PBGC collects insurance premiums from employers that sponsor insured pension plans, earns money from investments and receives funds from pension plans it takes over. PBGC pays monthly retirement benefits, up to a guaranteed maximum, to about 518,000 retirees in 3,479 pension plans that ended. Including those who have not yet retired and participants in multiemployer plans receiving financial assistance, PBGC is responsible for the current and future pensions of about 1,061,000 people.
I thank Tim for the correction, but I also note that the PBGC’s ability to pay out is very likely to be overwhelmed if and when other airlines and/or car manufacturers follow in UAL’s footsteps. You can bet the bank (so to speak) that there will be a bailout from the general fund if and when that happens.