Here is a story that should appall American taxpayers. In June, the 115-year-old Huffy bicycle company reached an agreement to emerge from bankruptcy. The iconic American manufacturer had gotten itself into financial trouble by making a poor acquisition and had sought the protection of the courts.

As happens so frequently these days, the court turned Huffy’s pension obligations over to the Pension Benefit Guaranty Corporation, thus relieving a major cost pressure and helping the company to resume profitable operations. What is unusual in this tale is that Huffy is in the process of being taken over by a consortium of Chinese companies.

Over the past few years, corporations increasingly have taken advantage of bankruptcy proceedings to offload their underfunded pension plans. The steel companies and the airlines have passed off high-cost obligations to the PBGC. Delphi, which recently filed for bankruptcy, will likely follow the same path. Often, the newly slimmed-down companies are snapped up by financial operators such as Wilbur Ross, who parlayed an investment in the bankrupt steel industry into a personal fortune.

Wall Street celebrates this turnaround and the renewed health of an American corporation. But do we perhaps feel differently when a Chinese company is the beneficiary?

Not everyone approves of the PBGC’s unintended bailout of American corporations. The agency’s executive director, Bradley Belt, for instance, said in a telephone interview, “It is unreasonable that U.S. taxpayers should be subsidizing the labor costs of any company.” He thinks it is unfair that through bankruptcy proceedings companies in effect can offload pension obligations to others that have been more responsible over time, and thereby gain a competitive advantage.

He’s not alone. Competitors in America and overseas have been quick to criticize the policies that have kept some industries overpopulated (like the airlines) and simultaneously dangerously inflated PBGC’s obligations. The retiring head of British Airways, Rod Eddington, gave a blistering speech last month in which he blasted America for “state subsidies which preserve bad habits” and lamented the demise of truly free competition in this country. He’s right; there are too many airlines, and the PBGC is one of the entities keeping them in business.

The costs of this backdoor support have mushroomed as the bankruptcy virus has spread. At the end of last year, the PBGC had a deficit of more than $23 billion; two years earlier, the agency had net liabilities of a more modest $3.5 billion.The trend is not encouraging, especially now, as American corporations have unfunded pension liabilities of an unprecedented $450 billion. More relevant, perhaps, and even more worrisome is that the unfunded liabilities of companies with below investment-grade debt (which may actually someday have to rely on the PBGC) total more than $100 billion.

Mr. Belt points out that today the PBGC is able to meet its obligations, with more than $50 billion in assets and current outlays of a little more than $3 billion a year. However, many expect that the filings are not over and that General Motors could be next. He concedes that the agency is headed for insolvency unless the formulas change.

How did we get here? What to do?

The PBGC is a government corporation that is not funded by the government. Instead, it receives insurance premiums from companies participating in more than 31,000 defined-benefit plans involving 44 million workers and retirees. Established in 1974 as part of the Employment Retirement Income Security Act, the PBGC was meant to be a safeguard against the loss of benefits that might occur with a company’s failure.

Erisa came about on the heels of a bear market and during an economic downturn. American manufacturers in a number of areas were beginning to face significant challenges in the early 1970s from Japanese and other Asian competitors, and their future was not clear. Pension plan investment results were poor enough that companies’ programs were suddenly in arrears.

If this sounds familiar, it’s because today, once again, overseas competition and poor investment results have caused unfunded pension obligations to soar. American companies, especially, have attempted to keep labor costs competitive by trading huge future retirement and health benefits for restrained current wage hikes. They compound their foolishness by making unreasonably optimistic assumptions about returns on their pension investments.

When reality sets in, the PBGC is left to pick up the pieces. Mr.Belt points out that the Bush administration has proposed a comprehensive program aimed at strengthening the funding rules for companies, rationalizing the premiums paid by participants in the PBGC, and improving the transparency and information flow to plan participants.

Mr. Belt acknowledges that the program currently is bogged down in Congress but remains optimistic that some changes will be made. First, the premiums paid by corporations contributing to the program will have to increase. These are modest, totaling $1.5 billion last year. However, proposals before Congress would lead to a hefty rise of roughly 50% to 100%.

Also, companies with below investment-grade credit ratings may be asked to pay more. Mr. Belt argues that any insurer determines fees according to the “potential size of the claim and the likelihood of the claim.The standard metric is the evaluations given by the ratings agencies.” This may prove an added burden to already stressed companies, but the funding hikes are expected to be phased in over several years.

There are also suggestions circulating that would change the way corporations report their pension costs. For instance, some argue that companies should carry pension obligations on their balance sheets, just like any other debt.

At the end of the day,it is not just corporate managers who have participated in the scamming of the American worker and investor. Labor management also has been content to take back promises to their constituents that they must know are unsound. While we can understand the self-interest of all the participants in this mess, it is not reasonable that the American taxpayer should subsidize the foolishness.

Mr. Belt finds himself in a position to make a difference and begin to unravel this web. As he says, in the long term, the PBGC is not viable. Neither is an economy built on failed promises.