It’s Unfair to Dump Pension Costs on Public

What is the emerging issue in the steel industry today, surpassing even the long-running strike at the U.S. Steel division of USX Corp.? It is pensions and retirement benefits for steel industry employees--and how much of them American taxpayers will have to pay as the steel industry shrinks to a size more suitable to contemporary needs.

Now most people will recoil at the mere suggestion that taxpayers could end up paying steel industry pension benefits. Most of us are accustomed to regarding steel as one of the worst examples of U.S. uncompetitiveness, a once powerful business in which management failed to keep up technologically and unionized workers received outsized wages and benefits.

Why should we even be asked to help it out now? Because the situation has become critical, even though the American steel industry, after closing plants and sending hundreds of thousands of steelworkers into early retirement, is producing steel at a price that is on a par with our major competitors. Japan, in fact, is the world’s highest-cost producer right now because its companies failed to cut back.

Small Consolation

Still, that achievement is small consolation, because the world is awash in steel, with South Korea and Brazil and other newly industrialized countries turning the stuff out for a declining market. The market decline, moreover, is permanent because it results not simply from an economic slump but because of new materials that have replaced steel, such as the hard plastics that now make up car bumpers. Because of expanded capacity and reduced demand, the U.S. industry has overcapacity of perhaps 30 million tons, while the world is producing 100 million tons more steel than is necessary.

So, nobody really doubts that the U.S. industry must shrink further. The United Steelworkers is trying to achieve an orderly transition, in which a company’s work force is reduced through retirements and the life and health insurance and early retirement benefits it has negotiated for its members will be preserved.

But with the economy growing so slowly, the steel industry is threatened with cascading bankruptcies instead of orderly change. In fact, if U.S. Steel’s output were not absent from the market because of the strike, steel prices might be so low and unprofitable as to lead a couple of other major companies to seek protection from creditors in a Chapter 11 bankruptcy, as LTV Corp. did in July.

Attractive Solution

Indeed, the problem is that the example of LTV, and of Wheeling Pittsburgh which went bankrupt in early 1985, is making bankruptcy an attractive solution for steel companies. Not only are both companies still operating, they are doing so competitively because bankruptcy has cut their costs two ways. One, as in any bankruptcy, the companies get to avoid making interest payments to their creditors.

But in the steel industry, Chapter 11 has also meant that companies shuck off pension liabilities to a federal government agency, the Pension Benefit Guaranty Corp. Wheeling-Pittsburgh Steel did that, and LTV is trying to do so with $2 billion of pension liabilities now. That is, LTV, which was in poor financial shape for years and didn’t fully fund its pension liabilities, now is asking the PBGC to pay its retirees the promised benefits.

That presents a problem for the union, which is fighting LTV because the PBGC generally doesn’t pay some of the benefits, such as early retirement pay and life and health benefits, that the union negotiated.

More important, it could present a problem for you, the taxpayers. The PBGC, which funds itself by premiums collected from all companies with pension funds, even now has more benefits to pay than its premium income can afford. The agency and Congress are contemplating various solutions to the problem, but it’s a good bet that if there is a further wave of bankruptcies in steel, the PBGC will go broke and Congress will vote special legislation to pay the pensions.

So what should be done? A plan for paying pensions should be devised that would help reduce the steel industry to a sound, competitive size while at the same time being fair to pensioners. But the sham of a company gaining a competitive advantage in an industry because it has unloaded pension costs on a government agency should be stopped, obviously. Let companies and union negotiate sensible payment schedules for the pension benefits, and not be so quick to dump the burden on the public.