Retirement Heist

“’As far as I can determine there is only one solution” to the CEO’s demand to save more money.  ‘That would be the death of all existing retirees.’”
memo from-human resources manager at Varity Corp.

It’s no secret that hundreds of companies have been slashing pensions and health coverage earned by millions of retirees.  Employers blame an aging workforce, stock market losses, and spiraling costs— what they call “a perfect storm” of external forces that has forced them to take drastic measures.

But this so-called retirement crisis is no demographic accident. Ellen E. Schultz, award winning investigative reporter for the Wall Street Journal, reveals how large companies and the retirement industry—benefits consultants, insurance companies, and banks— all  played a huge and hidden role in the death spiral of American pensions and benefits.

A little over a decade ago, most companies had more than enough set aside to pay the benefits earned by two generations of workers, no matter how long they lived. But by exploiting loopholes, ambiguous regulations, and new accounting rules, companies essentially turned their pension plans into piggy banks, tax shelters, and profit centers.

Drawing on original analysis of company data, government filings, internal corporate documents, and confidential memos, Schultz uncovers decades of widespread deception during which employers have exaggerated their retiree burdens while lobbying for government handouts, secretly cutting pensions, tricking employees, and misleading shareholders. She reveals how companies:

  • Siphoned billions of dollars from their pension plans to finance downsizings, and sold the assets in merger deals
  • Used loopholes in discrimination rules to tap pension plans to pay executive parachutes, pensions, and deferred compensation.
  • Exploited new accounting rules, which actually gave employers an incentive to cut benefits even when pension plans had more than enough money, because the moves generated gains that boosted profits by billions.
  • Used the accounting rules to inflate retiree health obligations to justify cutting benefits, and enjoy a bigger boost to income when they subsequently cut them. The accounting rules are so flexible that employers have been able to use their retiree plans to manage earnings, using well-timed benefits cuts, changes in assumptions, and contributions to the plans.

These maneuvers coincided with a shift in executive pay practices: compensation was tied to performance, so the retiree cuts boosted executive pay—and thus deferred compensation, and executive pensions. Obligations for executives (deferred comp and SERPS) exceed a billion dollars at many large companies.

At a growing number of companies, executive legacy liabilities exceed liabilities for the qualified pension plans. The executive obligations are largely hidden– aggregated with the qualified plan obligations,  which has enabled employers to blame their “costly” pension plans, when, in fact, in many cases only the nonqualified executive plans are hurting earnings.

To finance their executive pensions, companies –especially banks in recent years, including those that received massive government bailouts—have purchased billions of life insurance on employees, and use the policies as informal executive pension funds.

At a time when 401(k) savings plans are supposed to become the replacement for pensions, employers continue to use the plans to profit the companies.  Companies used 401(k)s as tools to kill healthy pension plans, and capture the surplus assets for themselves, and they continue to use them as part of leverage loan deals, to make borrowing costs lower.

And though 401(k) s are supposed to be the savings plans for the masses, employers shut millions of low-paid workers out of the plans, and provide those in the plans with less generous contributions.

To facilitate these maneuvers, employers have steadily and stealthily whittled away legal protections for employees and retirees, and have little to fear if sued: They simply drag out the cases until the retirees give up or die.

The “reforms” they and employers are proposing, supposedly to improve retirement security, would expand their ability to continue exploiting retirement plans, at the expense of employees and retirees.

Though Retirement Heist focuses on large companies—which drive the legislative agenda—the same games are being played at smaller companies, non-profits, public pension plans and retirement systems overseas. Nor is this a partisan issue: employees of all political persuasions and income levels—from managers to miners, pro-football players to pilots—have been slammed.