Half of U.S. workers have no employer-funded retirement plan
When AMR — the holding company for American Airlines and American Eagle — declared bankruptcy in November, it claimed that the airline needed $1.25 billion in concessions from employees, including termination of 13,000 jobs and the end of four employee pension plans.
But pressure and suggestions of alternatives from its unions and the federal government’s pension insurance fund led AMR on Wednesday to promise the Transport Workers Union- — which represents ramp crews, mechanics and five smaller crafts — that it would “freeze” pensions for those workers, as well as pensions for flight attendants and nonunion employees. That means existing workers and retirees, who total 130,000 in all four plans, would keep their collectively bargained AMR pensions. AMR is still negotiating with the pilots’ union, making a freeze dependent on pilots giving up their right to take their pension as a lump sum when they retire. Future employees that American hires would only have a 401k plan, to which the company will make defined contributions but which will not guarantee benefits.
AMR had hoped to dump its pension obligations on the Pension Benefit Guarantee Corporation, a government agency funded by insurance premiums on traditional pension plans offering defined benefits to retirees. The PBGC would then have been responsible for providing pension benefits to American employees, but the agency does not cover retiree health insurance and by law has limits on how big a monthly pension it could pay. All employees, but especially pilots and others with negotiated benefits far higher than the PBGC limit, would have lost future income. And with the largest pension termination ever potentially adding $10 billion to its responsibilities, the PBGC, already facing obligations amounting to $26 billion more than projected income, would have been pushed closer to crisis.
“We would have preferred to keep the existing defined benefit plan in place,” TWU president Jim Little said, “but that was simply not possible.” TWU got AMR to abandon its demand for $600 to $800 billion in additional concessions as the price of freezing the plan, partly by proposing alternatives including low-cost borrowing, according to a source close to TWU.
But Little emphasized that implementing the pension plan freeze depended on resolving other issues and reaching “an overall agreement.” AMR still needs to settle pension and other issues with its pilots and flight attendants, with whom negotiations have reportedly been more testy.
The breakthrough is a tentative victory for both PBGC and the TWU, but it is also part of a trend that endangers the retirement security of not only airline employees but also all American workers. Most seriously, half of all workers have no employer-funded retirement plan. But the dramatic change from defined benefit plans to 401(k) plans shifts risk to workers, who are left with plans inferior in virtually every other way as well.
Corporations have often declared bankruptcies as a way to reduce labor costs, including pensions, as well as to shortchange suppliers and often to wipe out shareholders, not because they are about to fail. Wall Street refers to such moves as “strategic bankruptcies,” as a Wall Street Journal editorial described AMR’s declaration.
After all, despite four years of losses, AMR had over $4 billion in cash when it filed for bankruptcy, and the same after announcing a $234 million loss in January. Furthermore, around $2.1 billion of that cash can be attributed to congressional relief of rules governing AMR contributions to the pension plans. “In effect,” the PBGC wrote, “that’s money AMR borrowed from its workers’ pensions, money that helped keep the company afloat.”
PBGC director Josh Gotbaum forthrightly challenged AMR’s attempt to dump its pension responsibilities. “Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees,” he said on Feb. 1, “it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that.”
While some airlines, like United and US Air, used bankruptcy to end pension plans, Northwest, Delta and Continental either froze or preserved intact all or most of their plans. And despite complaints about their high costs, PBGC says many American competitors have higher pension costs. Delta pays into its funds 2/3 more per employee than American. Many of the other bankruptcies and pension terminations occurred when the whole industry was in trouble. Now American is the only major airline losing money.
Workers and their pensions are not the problem, Little says. Since 2003 TWU workers have surrendered 30 percent of their pay — about $600 million, adding to a grand total of “billions of dollars” in concessions from all union workers since 2001, Little says. Bad management is the problem: “They didn’t modernize their fleet, missed merger opportunities, got stuck with higher fuel costs, lost money year after year – and rewarded themselves with hundreds of millions in executive bonuses,” he wrote.
Gotbaum’s persistent, tough challenges to AMR’s claims played a major role in reaching the tentative agreement and represents a much-needed shift.
“Gotbaum did what the PBGC should have done in previous events,” says Teresa Ghilarducci, economics professor and pension expert at The New School for Social Research and author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them “He’s doing his job, making them prove there’s a business reason to [end the pension plans]….He’s acting appropriately and raising red flags as he should. He’s acting like any insurance executive would and like previous PBGC directors under Bush should have done. There were opportunities for plans to consolidate [and form multi-employer pension plans]. We lost eight years under Bush, and these plans lost a lot under Bush, who had an ideological interest in undermining defined benefit plans.”
University of Massachusetts-Amherst finance professor Ben Branch adds that Gotbaum may also be motivated to save PBGC from more financial strain, which is likely to grow if more corporations abandon defined benefit plans and thus stop paying PBGC premiums. Ghilarducci argues that the administration, the PBGC and unions should first try to preserve defined benefit plans, encouraging multi-employer plans wherever they might strengthen such pensions. But if defined benefit plans can’t work, she believes 401(k) plans are the worst alternative (other than no plan) and that unions should strive for hybrids.
Defined benefit plans are run by legal fiduciaries focused on long-term investment for the benefit of pension recipients, Ghilarducci says, but defined contribution plans, especially 401(k)s, typically are managed by investment “professionals” whose fiduciary responsibility is to their investment firm employers, whose costs are high, and who often promote investments that are not well-designed for retirement needs.
But she believes some hybrid vehicles — such as some cash balance plans — combine some of the 401(k) features employers like with traditional pension characteristics that are good for workers. Government policy on pension tax credits for employers could be designed to favor defined benefit plans, or hybrids, instead of treating them the same as 401(k)s.
Although TWU had already tentatively negotiated 401(k)s for new hires before bankruptcy, it may still be possible for the unions, Gotbaum and the administration to craft a better alternative with American. But at least they seem on the way to salvaging pensions for current American workers and retirees.
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David Moberg, a former senior editor of In These Times, was on staff with the magazine from when it began publishing in 1976 until his passing in July 2022. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.