Business's Killer I.O.U.

With car sales surprisingly strong, J. T. Battenberg III, CEO of auto-parts maker Delphi Automotive, would like to expand his factories and hire some workers. But he can't. And it's not because his products aren't in demand--Delphi makes the DVD players and satellite radios that are becoming the next big things in cars. He first has to deal with an ugly blemish on his balance sheet--a $4.1 billion shortfall in Delphi's pension fund. Three years ago the pension plan was fully funded, but it cratered along with the stock market. To fill that hole, Battenberg is shoveling some $600 million a year--about half of Delphi's available cash--into the fund. "It's a huge millstone," he grumbles. "We are delaying our expansion plans because our board suddenly has half the amount of cash you would normally have."

Delphi is not alone. Huge pension liabilities are strangling corporate America, and execs say this new debt is choking off an economic recovery. Companies that offer workers traditional pensions are suddenly facing a yawning $350 billion deficit in those plans. To make up that shortfall, big business is expected to pour a record $83 billion into pension funds this year--nearly double last year's contribution and six times what companies paid in 2001. Back then, the bull market transformed dreary pen-sion funds into new profit centers, contributing millions to the bottom line. But a combination of collapsing stocks and record-low interest rates--something CFOs call the "perfect pension storm"--drove funds deep into the red. That's the same double whammy that swung the federal budget from surplus to a $401 billion deficit in the most recent fiscal year. Now CFOs view pensions as a drain that seems bottomless. "A lot of economists wonder why corporate America is so cautious," says Battenberg. "We're cautious because of the uncertainties surrounding this pension obligation."

Adding to the uncertainty is a year-end deadline facing Congress to devise a new formula for pension contributions. Changes to the formula could drastically alter how much companies must plow into their funds. In a rare dust-up, business and the Bush administration are at odds over the arcane accounting issue. Companies want a formula that could cut their contributions by nearly 75 percent. But the White House is pushing a more expensive alternative, fearing that chronic pension underfunding could bankrupt the government agency that bails out failed pension funds. Already, the federal Pension Benefit Guaranty Corporation (PBGC) is $5.7 billion in the hole, thanks to a string of costly pension failures in steel and airlines. And its administrator is warning Congress that the PBGC could be headed for a taxpayer bailout akin to the $150 billion S&L debacle. Corporate lobbyists, however, warn that an economic recovery will remain MIA as long as pensions siphon off money that could be used for new business investment. "Why is this administration, which is clearly interested in economic recovery, proposing something that would have such a negative effect?" says Jim Klein, president of the American Benefits Council, an industry group. Now accountants are proposing changes that will force companies to pour more cash into a new type of retirement plan that blends a traditional pension with a 401(k).

Retirees may love their monthly checks, but business is beginning to wonder if it's time to put pensions out to pasture. When traditional pensions first came into fashion in the postwar '50s, the American work force was young and offering a paid retirement plan was a good recruiting tool. But a half century later, retirees nearly outnumber workers, and pensions have become a costly burden borne mostly by old-line industries, like autos, airlines and steel. General Motors, for example, has piled more than $50 billion into its retirement fund over the past decade, and it still has the nation's largest unfunded pension liability of $19.3 billion. With 2.5 retirees for every worker, analysts say that GM's "legacy costs" add $1,700 to each car it builds. No wonder younger companies want nothing to do with traditional pensions and instead ask employees to share the retirement risk in 401(k) plans (which have their own problems, as Enron proved). Today 44 million Americans are covered by 32,000 traditional pension plans, down from 114,000 plans in 1985. And they don't always get what was promised. Retired US Airways pilot Michael Fairley just went to work selling lighting because his pension was cut 67 percent to $23,000 a year after the airline went bankrupt. "At 60," says Fairley, "who thought I'd be living paycheck to paycheck again?"

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Given hard-luck stories like that, it's hard for some to feel sympathetic for the corporate brass's poor-mouthing. After all, say critics, those execs are complicit in their own pension woes because they developed a bad case of irrational exuberance, investing an average of nearly two thirds of their plans in stocks. "A company that puts its pension assets in equities is basically playing roulette," says Boston University finance professor Zvi Bodie, who urges pensions be funded with long-term bonds.

Bethlehem Steel's pension plan landed on double-zero this year. When Bethlehem first began offering pensions just after World War II, more than 300,000 workers filled its teeming Pennsylvania steel mills. By the time the company liquidated this spring, there were just 12,000 workers supporting 100,000 retirees and its pension debt topped $7 billion. "The retiree liabilities were crushing the business," says CEO Steve Miller, who sold off the mills for $1.5 billion and terminated the retirees' health and pension plans. Shortly after, an e-mail showed up in Miller's in box that read: "May you motherf---ers rot in hell." His response: "What part of broke don't you understand?" There's no polite way to say it: in this fragile economy, pensions are a drag.

Business's Killer I.O.U. | News