The car maker's bankruptcy woes leaves its pension scheme with a multibillion dollar shortfall, which echoes problems across the US system, writes Denis Staunton in Washington

When Delphi, America's biggest car parts manufacturer, filed for bankruptcy last week, financial markets went into shock, fearing that the company's main customer and former parent, General Motors, could be next.

With its shrinking market share, bloated cost base and junk bond credit, GM is indeed vulnerable, but Delphi's troubles could herald an even more far-reaching crisis for America's pension system that could rob millions of American workers of a comfortable retirement.

Delphi filed for bankruptcy after its management failed to persuade unions to accept massive pay cuts, but chief executive Steve Miller has made it clear that he hopes to use the court protection offered by bankruptcy to close down unproductive factories, lay off staff and make enough money to cover a multi-billion dollar shortfall in its pension scheme.

Delphi split off from General Motors in 1999, but GM is still liable if Delphi's workers lose their retirement benefits.

The Pension Benefit Guarantee Corporation (PBGC), a federal agency that insures private sector pension schemes, said this week that Delphi's scheme is underfunded to the tune of $10.8 billion (€9 billion).

GM and Delphi workers are among about 40 million Americans who have defined-benefit pensions - schemes that guarantee a specific monthly payment from the start of retirement until death.

In 1950, GM was the first American company to offer its workers such a retirement plan and its former employees now enjoy generous pensions and free health care for life. As Miller pointed out in a statement to the editors of Business Week this week, it seemed like a good idea at the time.

"Back in the days when you worked for one employer till age 65 and then died at age 70, and when health care was unsophisticated and inexpensive, the social contract inherent in defined-benefit programmes perhaps made some economic sense," he said.

As people live longer and health care becomes more expensive, companies now find themselves paying pensions and health benefits to former employees for more than 30 years after retirement.

GM is now struggling under more than $150 billion in pension and healthcare commitments.Somebody has to pay and consumers have made clear that they are not willing to foot the bill by paying higher prices for cars.

GM estimates that its pension commitments add $675 to the cost of each car it produces, but Japanese car makers are now manufacturing in America's southern states, where labour is plentiful and nobody demands a defined-benefit pension.

Airlines faced a similar crisis when increased competition allowed new companies with no pension obligations to slash prices, forcing a number of America's biggest, traditional carriers into bankruptcy.

Miller believes that young Americans are becoming increasingly reluctant to pay the price of allowing an older generation to enjoy generous benefits that they themselves will never have.

"I fear something like intergenerational warfare, as young people increasingly resent having their wages reduced and taxed away to support social programmes for their grandparents' income and healthcare concerns," he said.

The pension crisis is not simply the result of bad luck, however, for companies like GM, many of whom have not been putting away enough money to pay retired workers what they are owed. The PBGC estimates that defined-benefit pensions in America are underfunded to the tune of $450 billion.

Most pension funds are invested in the stock market and after the boom of the 1990s, many fund managers decided that pension reserves could grow at extraordinary rates indefinitely.

During the first three years of this decade, the hundred biggest firms in the US predicted that their pension reserves would produce a return of more than 9 per cent each year. In fact, these top companies saw their pension funds return an average of just 1.3 per cent each year between 1999 and 2003.

Such miscalculations may not have been entirely accidental because predicting huge returns allowed companies to set aside less money to pay their retired workers.

This allowed them to report higher earnings, pushing up the share price and increasing shareholder value. Indeed, the period of greatest underfunding of pensions coincided with an explosion in executive pay and bonuses at top companies.

If companies default on their pension obligations, the PBGC pays. This is what happened at Miller's last company, Bethlehem Steel, which he led into bankruptcy and defaulted on the pension scheme.

The agency is itself underfunded, however, because the premiums it charges firms to insure their pensions are too low to cover a succession of massive claims. If the PBGC goes bankrupt, the US government will have to pay, passing the bill to taxpayers. Many companies are abandoning defined-benefit pension schemes in favour of defined-contribution plans, which only guarantee that a certain amount will be deducted from each worker's salary. The benefit depends on how well the stock market performs, neatly passing the risk onto the employee while freeing up more revenue for employers.

"Today, defined-benefit programmes are an anachronism, and we are witnessing the slow agonising death of defined benefits as industrial compensation policy," Miller said