The U.S. airline industry has never recovered from 9/11. Since the terrorist attacks, the industry has been in a free fall. Record fuel costs, the lowest fares since the early 1990s, and stiff competition have caused the air carriers to lose billions of dollars. The industry as a whole has lost $30 billion. To keep the carriers from economic collapse, labor unions have agreed to millions of dollars in concessions and wage cutbacks.
Hardest hit is United Airlines, which has lost $10 billion by itself. But even the labor concessions were not enough to keep United out of bankruptcy court. Looming large in the equation are the pension obligations to retiring flight attendants, mechanics, and pilots. When it faced the bankruptcy judge in 2002, United had pension obligations of $9.8 billion. This staggering sum was owed to present and future retirees under the terms of their contracts.
United argued that it was financially unable to pay these benefits, and the bankruptcy court agreed. The airline walked away from the pension obligation, the equivalent of taking $267,000 from each pilot, flight attendant, and mechanic.
The Pension Benefit Guaranty Corporation (PBGC), the government agency created in 1975 to bail out domestic companies that default on pension obligations, will pick up the tab for United’s pension plans. The PBGC is funded through an employer premium that is essentially a tax on employers to fund pension plans. PBGC believes that U.S. pension plans are underfunded by more than $450 billion, with companies in financial trouble liable for nearly $100 billion of this amount. The PBGC collects roughly $560 million a year from the private sector, far short of the amount needed to pay the pensions of companies that have fallen on hard times. The agency’s resources will be exhausted within a few years.
Because of the United pension fiasco, some members of Congress warned that taxpayers may someday have to bail out the deficit-riddled government pension agency. “Taxpayers had better buckle up, because we will be in for a bumpy ride of bailout after bailout, as more and more corporations dump their pension plan obligations on the PBGC,” said U.S. Representative Jan Schakowsky. The PBGC is already operating at a deficit of more than $23 billion.
While preserving some of United’s pension benefits, the bankruptcy settlement hit workers and retirees hard. Federal regulations limit the amount of pension payments the PBGC can make to a maximum of about $45,000 a year. The highest-paid United workers, such as pilots, face pension cuts of up to 50%. The pilots also face a catch-22: Under one federal law, they are not allowed to work after age 60; under another, the proportion of their pension guaranteed by the PBGC is sharply reduced if they retire before age 65.
The former United pension plan covers 120,000 current and retired United workers. Bankruptcy Judge Eugene Wedoff approved the pension plan over the objections of several unions. He called it “the least bad” of the available choices, since it gives unprofitable United the best chance to keep functioning. United’s CFO, Jake Brace, said the verdict was important but that it “was not a joyous day” for the airline.
Employees and retirees are bitter about what they perceive as an inequity of sacrifice. While workers take huge cuts in pension benefits, United CEO Glen Tilton has a $4.5 million annual pension guaranteed by his employment contract with the company.

1. What ethical and economic issues are raised by this case?
2. Since Social Security will not be fully funded in the future and company pensions may be in doubt, what should a student do to prepare for retirement? Is this a union–management issue that is easily resolved?
3. Does the government backing of pension programs create a “moral hazard”? What is a moral hazard anyhow?

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1 The ethical and economic issue primarily projected in this case is that because of financial const... View the full answer