11/2/2011 2:02 PM ET|
Who killed private pensions?
Corporations often blame pension shortfalls on out-of-control factors such as the large number of retirees and anemic investment returns. But a new book suggests other possible causes.
Editor's note: This article is adapted from "Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers," by Ellen E. Schultz, published by Portfolio/Penguin for Penguin Group (USA). Used by permission.
Gary Skarka had a rewarding middle-management career at AT&T (T, news), along with some of the best retirement benefits in the country. But instead of enjoying a comfortable retirement, he is working as a security guard. "I know I will have to work at menial jobs until I die," he says.
Skarka's financial predicament isn't the result of investment losses or runaway spending. He is among millions of Americans who encountered an unexpected risk to their retirement: their employers.
Over the past two decades, companies have cut pensions, slashed retiree health coverage and killed other benefits. Many have reduced their contributions to 401k's as well.
Companies say they are the victims of a "perfect storm" of unforeseen forces: an aging work force, market turmoil and adverse interest rates. Certainly, these all contributed to the retirement crisis. But employers have played a big and hidden role in the death spiral of pensions and retiree benefits as well.
Workers with a significant portion of their net worth tied up in employer-sponsored retirement plans should be aware of the hidden risks they face. Here are some to watch out for:
Tapping pension plans
Just over a decade ago, pension plans had a quarter of a trillion dollars in surplus assets. Today, they are collectively underfunded by about 20%. Market losses and historically low interest rates erased a lot of this, but much of the damage was self-inflicted.
Verizon Communications (VZ, news) predecessor Bell Atlantic, in a typical move, used more than $3 billion of its pension assets to finance retirement incentives for thousands of managers. Similar moves enabled companies to shed hundreds of thousands of older employees without dipping into corporate cash. Employers also began using pension-plan assets to pay for the health benefits they promised retirees.
These types of moves helped drain Verizon's pension surplus, so when the market cratered in 2008, there was no surplus left to cushion the blow. The plan, whose surplus peaked in the late 1990s, is now $3.4 billion in the hole. A Verizon spokesman says the amount of pension assets used to make incentive payments is "immaterial."
Another issue: In the swirl of mergers and acquisitions in the 1990s and 2000s, many companies "monetized" -- that is, sold -- billions of dollars' worth of pension assets. A common technique was to sell a unit and transfer workers and retirees to the buyer, along with more pension money than necessary to cover the benefits owed them. The buyer might pay 70 cents on the dollar for the surplus, leaving the seller with a less-well-funded plan -- but also with a lot of cash that the seller wouldn't otherwise have received.
What to watch for: In annual reports, companies usually disclose their use of pension assets for severance-type pay and the amounts they transfer from pension plans to pay retiree medical benefits. But it can be virtually impossible to determine whether pension money changed hands in mergers and acquisitions.
Cutting benefits provided employers with an additional windfall: income. Because the benefits are recorded as debts on a company's books, reducing the debt generates paper gains, which are added to operating income right along with income from selling hardware or trucks.
Thanks to these accounting rules, which all companies adopted in the late 1980s, retiree plans have become cookie jars of potential earnings enhancements: Essentially every dollar owed to current and future retirees -- for pensions, health care, dental, death benefits or disability -- is a potential dollar of income to a company.
What to watch for: Employers can raise or lower their retiree obligations by billions simply by changing key assumptions, such as "discount rates" and "estimated returns." If your employer announces it is cutting pension or retiree health benefits because costs are "spiraling," ask whether the company merely changed the assumptions in the plan to justify the cuts.
With so many ways to tap pension surpluses, companies had an incentive to cut pension benefits even when their plans were overfunded.
Many companies, including AT&T, converted their pensions to so-called cash-balance plans, which slowed the growth of benefits for older workers and, in many cases, froze them altogether for a period of years.
Skarka, 64, who left the company in 2003, says his pension would have been $50,000 a year, but is only $18,000 because of the pension changes.
His $1,500 monthly pension was further reduced by $500 a month to pay for his share of retiree health benefits, leaving the South Thomaston, Maine, resident a monthly pension of just $1,000.
While unable to comment on an individual case, an AT&T spokesman said, "We continue to provide great benefits -- including market-competitive health, pension and savings plans -- to our 1.2 million employees, retirees and their dependents."
Lump-sum payouts are another way companies can cut pension costs. Such payments, which entice older workers to leave, may be worth less than the actual value of the pension benefit. They also shift all the investment, interest rate and longevity risk to the retirees.
What to watch for: If you are offered a lump sum, ask your employer to show you how the payout stacks up against a monthly pension in retirement. You might have to hire an actuary to do this.
Financing executive pay
Employers' ability to generate profits by cutting retiree benefits coincided with the trend of tying executive pay to performance. Intentionally or not, top officers who green-lighted massive retiree cuts were indirectly boosting their own compensation.
As their pay grew, executives deferred more of it. Supplemental executive pensions, which are based on pay, also ballooned. These executive liabilities account for much of the "spiraling" pension costs many companies complain about.
Many companies -- especially large banks in the past few year -- have taken out billions of dollars of life insurance on their employees. The policies function as tax-sheltered investment pools that can be used to offset the cost of executive benefits. The companies also collect tax-free death benefits when employees, former employees and retirees die.
What to watch for: Your employer -- and former employers -- doesn't have to tell you if it bought a policy on your life before 2006. If your employer has taken out insurance on you in recent years, it must get your consent, but it doesn't have to tell you how much the policy is for. It is up to you whether you want to be a human resource to finance executive pay.
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What was monies that went to fund pensions for employees is now given to CEOS in bonusues and stock options and grants. After all, they only make $10M to $200M each year regardless of how the company is performing. It is a shame what happened to workers in the corporate world. My last employer, SunTurst Bank paid a total compensation package in 2010 of over $10M t to the CEO. The bank lost money, still had TARP funds at the end of 2010 and paid stock holders $0.04 dividend for the year 2010.
If anyone thanks this is fair or rational, I would say you need more than counseling from a shrink!
Someone: "Boy oh Boy!!! Leave it up to talking about pensions to bring out the Marxists out there. "
......Let's see. You're a hard working, loyal American, and there's a good chance you even served in the US military. You did nothing wrong, but the well paid management team at the top of your company screwed the pooch, so you lost your job, or you saw your benefits drastically reduced, while they continued to make more and more money inspite of the horrors of the "global market place". So now you're unhappy and say so, and that makes you a Marxist? Yeah, right! Well, guess there are a lot of "Marxists" in this country today, and if things don't change, there will be even more.
........Someone, you sure sound like "someone" at the top, kind of like a Leona Helmsley, yes, you're a real gem! You win the soldering iron award today!
The key statement here is in the next sentence: Congress created the 401(k) account as a way to close a loophole on executive bonuses, not to create a replacement for traditional (employer-guaranteed) defined benefit pension plans. Although the law mandates that all employees are eligible to participate in 401(k) accounts, companies initially maintained their traditional pension systems, because lower-paid employees could not generally afford to defer a portion of their paycheck. However, as the growing cost of maintaining traditional pension plans became more apparent to shareholders, cutting pension benefits – and eliminating plans altogether – proved to be a fail-safe way to entice people to buy stock in the company.
So, in spite of the misinformation handed out by your company, the fact is that the 401(k) was never designed to replace your pension, only to supplement it. It offers no security, no benefits at a time in your life when you become less and less able to fend for yourself. But, don't worry, your CEO will still be living high on the hog--at your expense!
the down side of union negotiations was it was always about employees getting paid more and never about CEO's getting paid less. the "more at all costs" eventually costs quite a few jobs to be outsourced
In most other countries, the rate of pay from the highest executive to the lowest paid worker is about 10:1.
In the US, its 450:1.
As for outsourcing: Free trade has and always will be a conservative ideal. Remember Bush (the 1st) trying to ram NAFTA through Congress? [Great move by Clinton to "strengthen" it though; saved his re-election campaign the following year]. Or CAFTA getting rammed through in 2006? It doesn't make any sense to make a free trade deal with any country with lower labor costs then us.
This all goes back to the decline of organized labor as a force in America. Unions are not a perfect institution but they went a long way towards countering the absolute power of large corporations.
Want to make America a better place to live and work then lets give organized labor a chance again. Private pensions came from the negotiations that happened across the bargaining table and until we again empower the union movement we will continue to see corporate america steal from it's employees by allowing it's higher executives to feather their own nests.
Stromprophet: "Is this rhetorical?
"Intentionally or not" - please. Of course it's intentional. "
..........Amen, it ain't exactly rocket science to realize that. Someone in a post a while back asked why so many people hate the wealthy. Well, there a probably quite a few reasons, with this being just one example.
Look, I have no problem with people acquiring wealth per se (Gates, Jobs, Buffett), but when it's done in a way that harms others, then I have a very BIG problem with it (Enron, Worldcomm, Tyco, Lehman Bros, Goldman Sachs, financial derivatives, etc., etc., etc.).
I also worked for AT&T, then Lucent Technologies. Three times they reduced the pension benefit, saying it was an improvement, but when you worked the numbers, you realized it was all BS. Then the upper 3% running the management team gave themselves bigger salaries and bonuses, which was necessary of course to retain top management talent, the same management talent that ran Lucent into the ground in 2001 and forced thousands of its employees out of work, me included. If anyone thinks I should support and defend these CEOs and their top management teams, sure, I'll do it, right after you use a soldering iron as a suppository and plug it in.
The major problem with SS is that it "entitles" folks who are not entitled
yes, we collect SS and yes, we feel 'entitled'. After all we have paid into it for over forty years as have our employers and their contribution was considered part of our total compensation. We didn't have a choice. We were told it would be there when we needed it and that it was 'ours'. Are you telling me that we should just forget about those many thousands of dollars that we were forced to contribute and move on? No thank you. We also had the foresight to save for ourselves and only one of us has a (tiny) old fashioned pension. And it isn't quite enough to cover the cost of our health insurance.
Between SS and our foresight in saving in our 401ks, and saving a little bit extra out of every paycheck we are doing ok and expect to continue to do ok. I don't understand those folks who have to have the latest 'toy', go on vacations they can't afford, buy new cars every couple of years (because they 'deserve' it), live in a 'McMansion', (and expect the government -- i.e. the taxpayer -- to bail you out when the payments become an inconvenience) and then gripe that they can't afford to retire.
Take some responsibility for your actions people!!
The Government has over taxed, over spent, and over regulated this country. It is time for change.
Congressional Reform Act1. Term Limits.
12 years only, one of the possible options below.
A. Two Six-year Senate terms
B. Six Two-year House terms
C. One Six-year Senate term and three Two-Year House terms
2. No Tenure / No Pension.
A Congressman collects a salary while in office and receives no pay when they are out of office.
3. Congress (past, present & future) participates in Social Security.
All funds in the Congressional retirement fund move to the Social Security system immediately. All future funds flow into the Social Security system, and Congress participates with the American people.
4. Congress can purchase their own retirement plan, just as all Americans do.
5. Congress will no longer vote themselves a pay raise. Congressional pay will rise by the lower of CPI or 3%.
6. Congress loses their current health care system and participates in the same health care system as the American people.
7. Congress must equally abide by all laws they impose on the American people.
8. All contracts with past and present Congressmen are void effective 1/1/12.
The American people did not make this contract with Congressmen. Congressmen made all these contracts for themselves.
Serving in Congress is an honor, not a career. The Founding Fathers envisioned citizen legislators, so ours should serve their term(s), then go home and back to work.
Although there are many variables that go into the death of the private pension, there is ONE main reason the private sector has lost their pensions.
GREEDY **** EXECUTIVES THAT CARE NOTHING ABOUT THE WORKER. Period.
They have attempted to bust the Unions, outsourced gazillions of products to slave labor countries, yet while their cost has decreased, their profits have greatly increased, yet they still care nothing about the American worker.
I would hope one day we have a day of reconning, where greedy execs, bankers and all of the others who have raped this country and the American worker meet their fate. I hope it is a bloody painful one too.
And all this time, the rich continue to get richer. So you know where the money to fund the pension plans WENT and WHO took it.
The fat PIGS felt they were ENTITLED to take what the employees running their enterprises has EARNED.
And I thought the Repulicons were AGAINST entitlements... Oh, yeah. That is only when it is for the lower or middle class. I had a momentary lapse there.
Funny they talk about cutting pension contributions because costs are spiraling out of control. Yup, they are. HIGHLY COMPENSATED EXECUTIVE costs are spiraling out of control.
Intentionally or not, top officers who green-lighted massive retiree cuts were indirectly boosting their own compensation.
Is this rhetorical?
"Intentionally or not" - please. Of course it's intentional.
Boards and Execs know that reducing wages, benefits, laying people off, improves their take home, stock options, etc, etc.
Easy to answer this one, who killed the private pension?
Why, big business of course. it was costing them to much money - looked bad for the bottom line so it was time to take it away from the workers who made them what they are and add it back. Helps make those massive annual bonuses that the 99% NEVER see.
What can we do about it? Not much. At least not until we kick out every politician we have and elect those who have the interest of the people (remember that old saying? A government of the people and for the people?) and not that of big business who has determined they will run the world. (Into the ground, in my opinion).
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