The PBGC funding crisis, which is finally getting the ink it deserves, is often laid at the feet of the lengthy, painful restructuring of the large traditional airlines. Although they're not the only firms involved, they certainly represent a significant part of the current problem, which is primarily the heritage of the era of defined-benefit pensions.

As employers continue to abandon defined-benefit-style pension programs, the PBGC exposure will not grow substantially in future decades from new pension practices. Putting aside the issue of whether shifting all financial risk to employees is a sustainable system politically in the long run, the big problems for the PBGC are handling the legacy of labor practices in older industry structures.

Now comes a proposal in the Wall Street Journal -- devilish details to be worked out -- jointly offered by an unusual trio, representing the perspectives of the PBGC, airline management, and airline workers. That in itself makes it worth looking at. The three authors clearly share a common villain: Chapter 11 bankruptcy. One doubts that it is the cause of the dilemma, but the three agree that it is certainly making things worse all around -- a "lose, lose, lose," they claim.

We believe that the airlines, airline unions and the administration should work together to propose to the Congress a new alternative to the "lose-lose-lose" Chapter 11 approach. This would present an airline and unions with the following new choice: First, management and a union would need to agree collectively to freeze an existing defined-benefit pension plan. Importantly for the PBGC, its liability as guarantor of the plan would be capped as of the freeze date and would decrease over time. Second, the unfunded liability of the frozen plan then would be amortized over a specified time period that would be longer than what current law allows. Here's where compromise is needed -- the PBGC will want a shorter period for the unfunded pension liability to be paid; the airlines will want longer. One thing is clear: The existing pension funding law, particularly the so-called deficit-reduction contribution provisions, so accelerate the funding of significantly underfunded pension plans as to make the freeze option unrealistic absent a longer time period to satisfy the unfunded liabilities. Finally, management and labor would negotiate and agree upon a new, replacement defined-contribution pension plan.

The core dilemma, in its simplest terms, is that any attempt to address the PBGC funding shortfalls would unfortunately have the perverse effects of either accelerating the demise of financially weak firms (and further increasing the unfunded liabilities of the PBGC), if they are forced to pay higher premiums to cover unfunded liabilities, or accelerating the abandonment of defined-benefit programs by financially strong firms, if they have to pay higher premiums to save the PBGC.

The tinkering at the margins, and the extensions of time for firms to "grow their way" out of their troubles, that has characterized dealing with PBGC's problems to date has been likened to the run-up to the S&L crisis. In an earlier WSJ editorial this week, the editors complained:

The big problem is that the agency, by insuring private pension plans, has created its own moral hazard. Essentially, PBGC is writing a put option for which any private plan that is not fully funded is in-the-money; therefore, exercising the put by dumping liabilities onto the PBGC is attractive. Ultimately, of course, the put is written by taxpayers to the tune of tens of billions of dollars.

Several decades ago, the PBGC didn't represent the moral hazard problem it does today because the PBGC was insuring a type of pension system that was widespread across US industry. Firms simply didn't have the choice of abandoning their defined-benefit schemes and remain competitive in the labor market. So the risks of plan failures could be spread across a large and diversified pool of US employers. Not so anymore.

Granted, the PBGC hasn't attracted a new set of sharp and shady characters who pocketed millions making one-way bets on interest rates. But like the S&Ls, there is a basic illogic to the structure of the system that no "grow your way out of the problem" will solve.

Without a thorough appreciation of how Chapter 11 is playing out in the Bankruptcy Courts for the old airlines, it's not clear whether the proposal for the airline industry is simply an attempt to delay facing the inevitable. The proposal doesn't fully explain how granting longer periods, more negotiating flexibility and caps could actually convert "lose, lose, lose" into "win, win, win." My thoroughly uneducated guess is that it is unlikely to fundamentally transform the competitive basis of the old airlines, but it could allow both the airlines and their employees to come out somewhat better than under Chapter 11, while at the same time capping the costs to taxpayers. That sort of result would be better than the road we're headed down today.