ROBERT SIEGEL, host:
More now on the Pension Benefit Guaranty Corporation; that's the federal body that insures pensions, and will presumably take over the United pension plans. Zvi Bodie is a professor of finance at the Boston University School of Management and is a former consultant to the Pension Benefit Guaranty Corporation.
Professor Bodie, what actually happens right now to someone who's either receiving a pension from United or is working and contributing to a pension at United?
Professor ZVI BODIE (Boston University School of Management): Well, their pension rights will be preserved and payments will continue, but they will be made by the Pension Benefit Guaranty Corporation, which is a US government corporation, provided that their benefits do not exceed $45,000 per year.
SIEGEL: That's the cap on the pension you can collect now.
Prof. BODIE: Exactly. So the main employees who are going to wind up getting much less than was promised to them are the pilots, probably.
SIEGEL: Now if United can't afford to pay its pensions, how can the Pension Benefit Guaranty Corporation afford to pay those pensions?
Prof. BODIE: It is a self-financing corporation. That is to say it's supposed to run like an insurance company, paying benefits out of the premiums that it collects from insured pension plans. And so far it has plenty of cash flow, but from a balance sheet point of view, if you look at its future outlays and you look at how much it has in assets, if it were a private corporation, it would be insolvent.
SIEGEL: In the annals of pension plan takeovers by the Pension Benefit Guaranty Corporation, how does United stack up?
Prof. BODIE: Oh, United is by far the biggest to date.
SIEGEL: But before this it would have been Bethlehem Steel.
Prof. BODIE: I believe so, yes.
SIEGEL: But $10 billion is a net liability to the system.
Prof. BODIE: Well, but to put that in perspective--I mean, the total balance sheet deficit of the PBGC before this was on the order of 23 billion. So this is almost a 50-percent increase in their cumulative deficit. Now, of course, it could get much bigger because, you see, each one of these plans can dump a very big liability on PBGC. All we need is, you know, a--well, I don't even want to mention what company might go under next.
SIEGEL: But say one...
Prof. BODIE: But there could be a big one.
SIEGEL: ...whose bonds might have just been marked down to junk, let's say...
Prof. BODIE: Exactly. Exactly.
SIEGEL: ...has its many employees and a strong union work force...
Prof. BODIE: Right. Right.
SIEGEL: ...that's negotiated good pension plans over the years.
Prof. BODIE: You got it.
SIEGEL: That would be the nightmare that one would be...
Prof. BODIE: That's a nightmare. Now we start getting up into territory where it rivals the savings and loan crisis.
SIEGEL: That sounds awfully ominous when you say that.
Prof. BODIE: Well, it is pretty ominous. I mean, it--let's put it like this. It creates an enormous problem for the private pension system, because if the shortfall has to be made up by increasing the premiums that other pension plans have to pay in the future, those other pension plans are just going to go out of business, they'll terminate, and you'll see the early demise of the traditional pension system. They'll be replaced...
SIEGEL: The fixed-benefit pension system.
Prof. BODIE: Yeah, what we call defined benefit plans. So there's a huge irony here. It's almost perverse, because the Pension Benefit Guaranty Corporation was established to strengthen the traditional defined benefit system. And ironically, under the current circumstances, unless something radical happens, it's going to accelerate the demise of that system.
SIEGEL: That's Zvi Bodie, professor of finance at the Boston University School of Management, talking about the Pension Benefit Guaranty Corporation.
Professor Bodie, thanks a lot for talking with us.
Prof. BODIE: Thank you, Robert. Transcript provided by NPR, Copyright NPR.
