Headline: UMWA warns retirees at risk of losing health care, pension in light of coal company bankruptcies

Pension Benefits a Sunk Cost Pension Benefits a Sunk Cost? under Chapter Eleven Bankruptcy Restructuring of Benefits Liabilities… The case of the United Mine Workers of America (UMWA) The State Journal Article 06/19/16

What is a pension fund? According to Google, a pension fund is “a fund from which pensions are paid, accumulated from contributions from employers, employees, or both” Investopedia says, “A pension plan is a retirement plan that requires an employer to make contributions into a pool of funds set aside for a worker's future benefit.”

Fixed Costs vs. Variable Costs in the Time Horizon In the short-run, a pension fund is a variable cost to employers, as long as labor hired is variable. (Labor is usually a variable cost in the short-run.) In the long-run, pension fund payments are a variable cost. (All costs are variable in the long- run).

UMWA 1974 Pension Fund Each year, the 1974 Pension Fund pays $600 million to 89,000 retirees and widows of the coal mining industry The average pension payment is $560 monthly 21,000 beneficiaries are at risk of losing their benefits

Downturn in Coal Production During 2012 to 2015, there has been a rising trend in bankruptcies among coal mining companies – which means that an increasing number of companies have stopped payments to pension plans.

Patriot Coal Corp. In order to sell to Blackhawk Mining LLC, Patriot is attempting to shed its commitments to AMWA 1974 Pension Plan by restructuring under Chapter 11 Bankruptcy. If Blackhawk does not buy (with benefits liabilities) Patriot will liquidate its assets and shut down completely.

Pension Payments = Sunk Costs For the coal companies, pension payments are sunk costs because they cannot affect current or future production (p. 266) If they cut benefits liabilities, they will make a profit by having Blackhawk purchase the restructured company. If they keep benefits liabilities, they will lose profit by liquidating assets.

Sunk Cost Fallacy Decision? In terms of costs, are coal companies doing the right thing by restructuring rather than liquidating assets? Yes. To continue pension payments would overwhelm the company with costs and cause it to shut down completely. This would be a sunk cost fallacy.