Betting On One Horse

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.


33 Responses to “Betting On One Horse”

  1. Ed Says:

    The Canary In Social Security’s Coalmine

    Alex Tabarrok of Marginal Revolution says it’s dead, Jim. (Via Tech Central Station.) Will Collier of VodkaPundit has some most apropos thoughts on the topic as well, especially as it applies to investment diversification….

  2. michael Says:

    Given that the lifetime of a worker exceeds the lifetime of most companies, I don’t know why anyone thinks a company pension is a sensible arrangement!

    Social Security is of course a welfare program with benefits to the middle class as a political sweetener. It has never made any sense as an “investment”.

  3. robert Says:

    Probably one of the best analogies I’ve read on the subject!

    Show me one high level Executive, Congressman, or Senator who is running with one horse and I’ll show you an “EX” excecutive, congressman,…

    At 40 you can everything I’ve put in thus far PLUS a percent or two if I can call the shots.

    Great piece Will!

  4. charles austin Says:

    Of course, the Democrats are displaying their utter cluelessness about Social Security and how to fix it by now claiming that this proves “private accounts” are a bad idea.

    Don’t you wish you had taken the blue pill now?

  5. Sandy P Says:

    Eileen Byrne on WLS-am was talking about this today, only caught the last 10 minutes. Since I’m in greater Chicagoland, this is, of course, a hot topic.

    I don’t see why they’re complaining, Chuckie Schumer thinks 70% of our promised SS benefit is ok. UAL emps might only get 60%, but at least they won’t be means-tested.

  6. Sandy P Says:

    In short, if 70% and means-testing is good enough for the American people, it is good enough for Congress.


    All 535 are included, just because you’re 56 and above, you are not exempt.

  7. bud Says:

    I know a UAL retiree; she’s now trying to figure how she’s going to live on a pension about 1/4 of what she was supposed to get. I’ll bet that the pres, CEO, etc, etc,
    aren’t worried that they’re going to have to sell their house to live. Not because they were so intelligent as to diversify, but rather, they made sure that cow was thoroughly milked before sending it to the slaughterhouse.

    Too bad there’s no justice in this world because, if there were, they’d be sweating their roof and pot as well.

    And no, she didn’t have any choice about how the pension plan was created or managed.

    Why didn’t UAL employees get up on their hind legs and demand that the union insist on diversification?
    Why did they assume that their pension would be there?

    Because it had. For at least the 40 years before; from the end of WWII, the larger industial companies had been paying their retirees their pensions, including COL raises. My M.I.L. is still collecting a UMW pension, from her deceased husband who retired in 1968. Sure, that was a historical anomaly, but how many economists are working for UAL?

    The problem with SS is getting a lot more publicity, and at least the younger employees have plenty of warning.

  8. Gary B Says:

    I think whatever assets that were held in the UAL defined pension plan were certainly invested in a broadly diversified portfolio of stocks and bonds. UAL’s problem (like the steel and automotive industry) is the size of the promised benefits previously negoiated between the unions and management. The funding required (the present value of the annual deposits into the pension trust) couldn’t be sustained by the airlines business models. These claims on UAL’s assets in bankruptcy were abrogated in much the same manner as other creditors. The government, besides taking over the plans liabilities also takes pocession of the existing assets in the UAL pension trust. I’m not sure what, if any shortfall exists for future UAL reduced retirement payments coming via the government takeover of the plan that will be funded by the taxpayer.

    Just as the steelworker unions and big steels management agreed to unsustainable compensation models, so have the airlines and the automakers.

    Economics is a bitch.

  9. Robin Roberts Says:

    What is offending me about the UAL situation is that I think it is outrageous that UAL continues to operate as a zombie company. A zombie company is one that is insolvent but the bankruptcy court allows to continue to operate and compete with companies that actually have to pay their bills.

    UAL should have been liquidated long ago. It would have been a shock but by now we’d be past it and the other airlines could have a level playing field.

  10. wha Says:

    An absolutely fantastic editorial on the crap hole the government has gotten into and allows certain companies get into with a free get out of jail card. Too bad the NBC lefties would never shoot it this straight.

  11. Dan Morgan Says:

    Great post. This raises the question: why not make total privatization of Social Security a long term goal – like Chile. Here is a proposal to do this:

    See comments on these proposals here:

  12. Will Allen Says:

    Absolutely correct, Robin. For capitalism to work, insolvent firms must be ruthlessly liquidated, their assets sold to entities who can better utilize them. One of the reason the airline industry has always been such a loser is that poorly run firms have been allowed to run out on their bills, while still competing against firms that are paying their bills.

  13. Ron Hardin Says:

    The deal with Social Security is that it’s an annuity that adjusts for inflation, which guarantees you won’t outlive your income. So you only have to save, via that 12%, for an average length of life, and you’re covered if you live longer. People who die sooner pay for those that die later.

    You can’t duplicate that in the private market precisely because you can’t count on the annuity company being around 30 years later when you need it; and it won’t adjust for inflation, which is a killer over 30 years.

    All that has to be done to make SS solvent is raise the retirement age (if you want to retire sooner, bridge the interval with your own savings). In particular, don’t reduce benefits – they’re valuable precisely because they’re big enough – but raise the age at which you get them.

    Part of being an annuity, of course, is that your heirs don’t get the remainder when you die. That already goes to people who are lucky or cursed to live longer than you do.

  14. Asymmetrical Information Says:

    Regulating risk

    There’s a debate that we should be having in this country, about risk, but aren’t, because everyone’s trading scare stories about Social Security. In a follow-up post, Matthew Yglesias argues with Alex Tabarrok about whether the United Airlines bankrup…

  15. Begging To Differ Says:


    Thoughts from around: “[I]nvesting is really rather simple.” [Prof. Bainbridge.] “[T]here are three entities that can bear retirement risk: a company, a person, or a government.” [Jane Galt.] Shorter Will Collier: UAL’s pension plan administrators are …

  16. djsfnsjdnf Says:

    Interesting analogy. I don’t think it holds, though, because United does not the power to tax or to collect those taxes with armed Federal agents.

  17. Not Ron Hardin Says:

    Ron Hardin contradicts himself in an especially ludicrous fasion by saying the early death of some people will pay for the Social Security of those who live too long, when in fact current workers pay for everything–and then admits even that won’t be enough by saying we just need to keep raising the retirement age until the prgoram is solvent.

    Why not let people keep their whole paycheck (govt. mandated cost of employment to employers) and take what risks and rewards they see fit to?

  18. doctorg Says:

    Liquidation isn’t all it’s cracked up to be. In bankruptcy the entities who are owed money — mostly the bondholders — have the biggest say in whether the bankrupt company is to be liquidated, or recapitalized and keep operating. Generally they’ll pick the way they think they’ll get the most money. If the bondholders think they’re most likely to get paid back by keeping the airline flying, why is that the business of any other airline? Of course, sometimes they’re wrong.

  19. Tim Higgins Says:

    Gary B,

    I’m not sure if this is what Will meant, but even though the pension fund’s assets may have been (read: almost certainly were, as a matter of tax qualified defined benefit regulatory requirements) well diversified, the health of the employee’s defined beneft relied entirely on the health of their employer, the plan sponsor. So, the employees are still exposed to same sort of non-diversified risk that the Enron 401k folk were. That said, the risk is much smaller because it is not tied to the volatility of the sponsor’s stock, but to the likelihood of default-inducing bankruptcy.

    One more addition to your analysis, Will. I am pretty sure that “the taxpayer” is not picking up the tab for this. If this is a tax qualified defined benefit pension plan, it has been paying premiums to a government sponsored corporation called the Pension Benefit Guarantee Corporation, which acts as a sort of insurance company for these plans. This organization does not draw from tax revenues, but is funded entirely by the premiums that all qualified defined benefit plans pay. When a plan sponsor goes under, the PBGC picks up the tab for the outsanding benefit obligation.

    Bad joke: among pension actuaries, UAL is used as shortand for Unfunded Actuarial Liability, which is one measure of the value of a pension plan’s future benefit obligations against the assets set aside to pay them. Maybe they should have seen this coming.

    All that said, I also hate social security.

  20. Balloon Juice Says:

    More on United Airlines

    The Instapundit reacts to this Will Collier piece on the United Airlines scandal and states: Whatever you call this, it’s…

  21. Balloon Juice Says:

    More on United Airlines

    The Instapundit reacts to this Will Collier piece on the United Airlines scandal and states: Whatever you call this, it’s…

  22. Balloon Juice Says:

    More on United Airlines

    The Instapundit reacts to this Will Collier piece on the United Airlines scandal and states: Whatever you call this, it’s…

  23. Vagabondia Says:

    Pension Benefit Guaranty Corporation

    Yesterday, I found out about something called the Pension Benefit Guaranty Corporation (PBGC). Apparently, it is a government program to provide surety for the unsustainable pension programs pushed by labor unions and agreed to by for-profit business…

  24. Coyote Blog Says:

    Classic Moral Hazard

    According to the WSJ($), you and I are going to take on the pension obligations of UAL:A bankruptcy judge approved a proposal from United Airlines parent UAL Corp. to transfer four underfunded employee pension plans to the federal government, paving

  25. Coyote Says:

    To the point about taxpayer funding, with the UAL obligations, the PBGC takes in about a billion a year in “premiums”, but is now over $23 Billion in the hole, and that is before other airlines starting dumping to the government. I think it will be taxpayer funded soon.

  26. Gary B Says:

    Tim H

    We are walking down the same path. Simply stated, the UAL business model is unable to generate sufficient cash to sustain it’s compensation models which include pension plans. Your’re correct, that’s the risk inherent in defined benefit pension plans.

    But just wait for the howling to commense when state governments face coming shortfalls. These will be a far bigger problem than any we will have in the private sector. Industry is self-adjusting, government is not.

  27. digital retrograde Says:

    Cue the Robots

    Had an interesting conversation with a friend yesterday — it somehow led to me asking if he was comfortable with the idea of paying into Social Security until he retires and finding it nearly or completely non-existant. Now, this guy…

  28. Says:

    LAT Swipes Bush Social Security Reform

    In a diatribe against Social Security reform thinly disguised as a news article, LA Times writer Peter Gosselin makes much of the fact that some Nobel economics laureates make plenty of lousy investment decisions. I’m still far from convinced personal

  29. Ron Hardin Says:

    Not Ron Hardin writes: “Ron Hardin contradicts himself in an especially ludicrous fasion by saying the early death of some people will pay for the Social Security of those who live too long, when in fact current workers pay for everything–and then admits even that won’t be enough by saying we just need to keep raising the retirement age until the prgoram is solvent.”

    You balance how much you pay out with how much people pay in, so that it neither generates nor eats up revenue, unless you want to make it a welfare program for old people. But the value of SS is as a running-out-of-money-because-you-live-too-long insurance program, in effect providing a policy that the private market cannot provide. The way you change the income to outgo ratio is by changing the retirement age, upwards for less outgo, and downwards for more outgo. At some retirement age is the magic point where it’s neither welfare nor burden, as an insurance program.

    It’s certainly true that people paying premiums supply the money today and it goes to people who are retired; but they’re also buying the same insurance. They don’t have to “save” to live to 95, but only to live to an average lifetime, and they’re covered if they live longer.

    As to pay as you go, there’s no alternative. Tedious economics lesson :

    Money is not wealth. It is a ticket in line to say what the economy does next, presumably something for you.

    The Fed regulates the number of tickets outstanding so as so that there aren’t too many or too few people in line at once. If there are too many, the economy starts raising prices as they bid against each other for the same stuff, and you get inflation. If there are too few, parts of the economy go idle, and you’d get deflation if workers would accept a pay cut, but they don’t, so you get layoffs instead.

    If there are too many tickets in line, the Fed buys up tickets by selling debt for tickets, and burning the tickets.

    If there are too few tickets in line, the Fed prints tickets and buys back debt with them, putting them in circulation.

    Neither of these creates or destroys wealth. It’s just matching the demands on the economy with what the economy is capable of doing, to keep it busy but not too busy.

    Now, if you pay SS taxes and the government puts the money in a mattress instead of spending it on typical waste and pork, the number of tickets in circulaton falls. The Fed notices the economy needs more tickets, so it prints tickets and buys back debt. What has happened? The money is back in circulaton, and the government has a government bond, the same as today.

    The government must spend all the money it takes in right away. It cannot in any way save it or put it aside. The Fed will counteract any move it tries to make in its keeping the value of the dollar constant.

    The implication for SS is that future workers will support future retirees no matter how you finance it. It isn’t going to work unless the number of retirees is small enough so that the workers are willing to support them. This is achieved in only one way : limit the number of retirees to that number. You do that by setting the retirement age so that it’s true, whatever retirement age it takes. I’d guess about 70.

    If you privatize, the same thing happens. Too many people are buying stock now and selling later, which raises the price now and lowers it later, reducing the rate of return. How much does it reduce it? Enough so that you can’t retire on the average until you’re 70.

    The number of workers and the number of retirees determines everything.

  30. FogCity Says:

    For my money, Robin is right. DoctorG is only partly right.

    Liquidation is the “best” of the bad options. As long as UAL is allowed to operate in bankruptacy, they will price at below marginal cost because any revenue is better than no revenue when you are just betting on hitting the lotto. In the meantime, the bondholders and equityholders of the other airlines are paying for United sins (by having to price below cost because of UAL)

    It would be the bond holders and the owners of the aircraft, the leasing companies, who would decide the fate in liquidation, but the bankruptacy judge would put them there.

  31. Rafael Says:

    On a somewhat (… very somewhat) related topic, Southwest Airlines is trying to repeal an amendmant that currently gives American Airlines a competative advantage in Love Field, a small airport in Dallas, Texas. You can check those details out at

    I mention this only because I have been wanting to see these airlines and automobile sleeping giants go six feet under for a long, long time. Survival of the fittest is how business evolves. Evolution is good for America, even if it hurts a little.

    (Man, I wish I would’ve studied Economics instead of English.)

  32. Critical Section Says:

    Thursday, May 12, 2005 10:31 PM

    Will Collier rants: Yesterday United Air Lines was allowed to dump it’s pension plan on the Federal government. Great, so you and I get to bail them out. Not good. In fact, horrible. [ via Glenn Reynolds ]…

  33. Asymmetrical Information Says:

    Regulating risk

    There’s a debate that we should be having in this country, about risk, but aren’t, because everyone’s trading scare stories about Social Security. In a follow-up post, Matthew Yglesias argues with Alex Tabarrok about whether the United Airlines bankrup…

Comments are closed.

%d bloggers like this: