When AMR Corp. announced its plan Wednesday to terminate all four of its employee pension plans, it joined a long line of U.S. employers that have abandoned what was long seen as a birthright of American workers.
In 1980, 84 percent of Americans working for large or midsize private employers were eligible for a traditional pension, known as a defined benefit plan because it promises to pay a specific benefit based on earnings and years of service. By 2010, that was down to 30 percent, according to the Employee Benefit Research Institute, a not-for-profit research organization in Washington, D.C.AMR's plan, if approved by the bankruptcy court, would place its pensions with the federal Pension Benefit Guaranty Corp., an agency funded by premiums levied on employers that sponsor pensions. The PBGC, which says it will fight the move, estimates that AMR's pensions have obligations of $18.5 billion, compared with the $8.3 billion currently in the plans' assets.If it does take over the plans, the PBGC will assume the responsibility for paying retirees' benefits -- but not necessarily all of them. The agency caps the monthly benefit it pays at $4,500 a month for plans ended in 2010. It has said about $1 billion in promised benefits to the highest-paid AMR retirees would not be paid.AMR has said less than 10 percent of its workers would be affected."Before American takes such a drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have declined to provide even the most basic information to decide that," PBGC Director Josh Gotbaum said in a release issued Wednesday.The PBGC has noted that AMR entered bankruptcy on Nov. 29 with about $4 billion in cash, and wants the company to devote at least some of that to its pension obligations. Gotbaum has pointed out that AMR since 2008 has been granted about $1 billion in reductions to its required contributions.Gotbaum is expected to testify today at a previously scheduled hearing on pensions before the House Education and Workforce Committee's Subcommittee on Health, Employment, Labor and Pensions. The PBGC covers about 1.5 million workers in failed pension plans, but has a $23 billion funding shortfall itself.Employers generally turn pensions over to the PBGC in what it calls "distress terminations." That typically means the company is in bankruptcy, but PBGC can also agree to take over a plan if the sponsor proves to the agency that it cannot remain in business unless the plan is terminated.Speaking to reporters Wednesday, AMR CEO Tom Horton said he was "a little dismayed" by Gotbaum's stance, "because American has fought this battle longer and harder than anybody else has."AMR told employees Wednesday that competitors Delta, United and USAir have all previously terminated their defined benefit pensions in bankruptcy court, while Northwest and Continental, which merged with Delta and United, respectively, have frozen theirs. Dallas-based Southwest Airlines, which started flying in 1971, does not have a defined benefit pension, instead offering profit-sharing and a 401(k) retirement plan.AMR's daunting challenge of making up $10 billion in pension obligations is just one example of what has driven U.S. employers to shun traditional pensions, said Stephen Blakely, an editor with the Employee Benefit Research Institute. He dates the exodus to the enactment of the federal Employee Retirement Income Security Act of 1974, legislation sparked by failures such as the 1963 collapse of Studebaker, which left thousands of autoworkers with no benefits or severely reduced payments.ERISA required employers to adequately fund their pensions and report on their status."As corporations discovered how much it took to finance these pensions, and how dependent they were on interest rates sometimes decades in the future," they began to pull back, Blakely said. At the same time, "most workers did not understand what a defined benefit plan was and did not appreciate it," he said.New companies stopped offering the plans, and existing plans were trimmed, frozen or terminated.Here's one way to think about AMR's pension obligations: Its $8.3 billion in current plan assets comes to about $64,000 for every participant; to get to $18.5 billion, it would need more than $142,000 each, money it couldn't have used to buy new airplanes or pay in wages.That extra $10 billion also dwarfs AMR's meager earnings. Between 1996 and 2010, the company had a net loss of $6.3 billion.In the same years, it contributed just over $3 billion to pensions, according to past financial disclosures. In its 2010 annual report, it estimated its required 2011 contributions, just for the defined benefit plan, at $520 million. "We were losing money and we kept funding our pensions," Horton said Wednesday.The 401(k) has become employers' preferred option. The company's liability is limited to its contribution to the plan, typically a percentage of what the worker contributes. They are called defined contribution plans, and an employee's ultimate benefit is determined by his or her contributions into the plan and how that money grows, based on the employee's investment decisions.According to the Employee Benefit Research Institute, 54 percent of U.S. employees at large and medium-size employers participated in a defined contribution plan, although more were eligible.Staff writers Maria Recio and Andrea Ahles contributed to this report.Jim Fuquay, 817-390-7552Twitter: @jimfuquay