Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers
By Ellen E. Schultz Portfolio/Penguin 2011 216 pages, in hardcover and paperback
August 20, 2012. UE News – Summer 2012 issue
We already knew that employers are stealing workers’ pensions, and that they’ve doing it for more than 20 years. But in this well-researched and well-argued book Ellen Schultz, an award-winning investigative reporter for The Wall Street Journal, documents the complex ways in which they’ve been doing it, how they profit from these crimes, and how gaping loopholes in laws and regulations let them get away with it.
Interestingly for UE members, the first corporate leader Schultz mentions is Jeffrey Immelt, CEO of General Electric, recounting a speech he gave to investors in December 2010. Immelt told them that the GE pension “has been a drag for a decade,” and that to relieve itself of this financial burden, GE was going to keep future employees out of the pension. But Immelt’s presentation was fundamentally untrue, says Schultz – the company’s pension and retiree plans, huge and well-funded, “had contributed billions of dollars to the company’s bottom line over the past decade and a half”, and the company had not contributed a cent to the workers’ pension plan since 1987.
One of the ways GE made money from the pension fund was by selling chunks of it when it spun off a division of the company. For example, Schultz writes that when GE sold an aerospace unit to Martin Marietta in 1993, it transferred 30,000 employees and $1.2 billion in pension assets – $531 million more than was needed to cover the pension liabilities. But all that was included in the sale price, so “GE effectively got to put half a billion dollars from its pension plan into its pocket.”
With case studies involving some of the biggest names in corporate America, Schultz describes the elaborate schemes by which employers have gutted workers’ pension plans and retiree health care to finance downsizings, boost corporate profits and, in many cases, pay for the obscenely generous benefits of top managers and executives.
She describes how some companies have transformed their pensions into “cash-balance plans,” presented as a change that will benefit employees, when in fact cash-balance plans are a way to disguise retroactive pension cuts. A similar scheme called the “pension equity plan” also enables employers to cut workers’ pension benefits; the calculations are so complex that most employees don’t realize they’ve been fleeced until they’re about to retire. These and other innovative ways of robbing workers have been developed by what she calls “a new breed of benefits consultants” that emerged over the past two decades, who specialize in cutting retirement benefits for ordinary employees while boosting executive compensation.
The many complicated and sinister schemes to loot retirement benefits that Schultz describes can be depressing and mind- boggling to follow. She humanizes these stories by introducing us to individual retirees who were the victims of these plots, who struggled for months or years to even grasp what was happening to them. Some of these people fought back, in some cases achieving limited success, but often failing in a system of “benefits law” which the corporations have largely rigged in their own favor.
The book deals with the looting of pensions in the private, corporate sector. But in the final pages she says a few words about the developing crisis of public employee pension plans. The same consultants and financial firms who engineered the pillage of private pensions, she writes, are now playing “a non-starring role in the public pension debacle.” She adds:
“The scapegoat game continues. Corporate employers are still blaming aging workers, rising ‘legacy costs’ and ‘spiraling’ retiree health care costs for their financial woes – not their own actions that squandered billions of dollars in pension assets, their thinly-masked desire to convert benefits earned by and promised to retirees into profits for executives and shareholders, and their willingness to sacrifice retiree plans, and the well being of retirees, for short-term gains.
“In the public plan sector, the scapegoats are the public employees and retirees, who are beginning to have the haunted look of victims of the Salem witch hunts. The real culprits are the self-serving politicians and officials who passed the funding buck to future generations, the consulting firms that helped them do this, and the investment banks that conned local governments into investing taxpayer-funded pensions into risky, abusive investments. ”
What’s the answer? Schultz calls for tightening laws to stop many of the abuses she’s uncovered. “Pension law requires that the plan be managed for the ‘exclusive benefit’ of the participants, ” she writes, but the law “is like a toothless dog.” She wants “laws that make it tougher for companies to terminate their pensions to capture the surplus money,” and tightening of loopholes that enable corporate executives to divert the money in pension and retiree health plans.
While the reforms she proposes would help protect those workers and retirees who still have defined benefit pensions and retiree healthcare, they could not help the millions who have already lost these benefits. Because Schultz’s scope is limited to the past two or three decades, she does not look back to the origins of employer-based pensions, and therefore misses the underlying problem.
Social Security, as originally conceived by members of President Franklin Roosevelt’s Committee on Economic Security in 1934 and ’35, was intended to provide full retirement security as well as “all forms of social insurance” – health insurance, accident insurance, unemployment benefits, maternity benefits, etc. To get the original Social Security Act through Congress in 1935, Roosevelt scaled back these goals (National healthcare was left out of the bill, for example, and agricultural and domestic workers were excluded, which left out half of the African American workforce.) New Dealers planned to broaden the concept and coverage of Social Security in later amendments. But by the late ’30s life insurance companies, which devised and marketed pension plans to employers (then generally covering only high-paid managerial employees) had gained political traction for the idea of “supplementation. ” This was the notion that Social Security should provide only a minimal, subsistence retirement benefit, to be “supplemented” by employer pensions, savings and other income.
After World War II, with the failure of efforts to expand Social Security’s coverage of retirement and healthcare, unions turned, often reluctantly, to bargaining pensions and health insurance with employers. (An excellent history of these developments is Jennifer Klein’s 2003 book, For All These Rights: Business, Labor and the Shaping of America’s Public-Private Welfare State.
The system of employer-based pensions and health insurance “supplementing” Social Security was never complete – even in the boom years of the 1950s and ’60s, huge sections of the working class had no pensions or health coverage. In our time, we’re witnessing the collapse of that system, with healthcare becoming unaffordable even with insurance, and defined-benefit pensions rapidly disappearing. Retirement Heist is a very important indictment of corporate America’s looting of its workers’ retirement funds. It is further evidence that we need to return to the vision of 1935:
Retirement and healthcare are much too important to be entrusted to employers, and must instead be guaranteed by the federal government as human rights.
Excerpts
Siphon
In November 1999, a group of the nation’s leading pension experts met at the Labor Department in Washington to discuss a $250 billion problem. After eight years of double-digit returns, the pension plans at American corporations had more than a quarter of a trillion dollars in excess assets. Not a shortage of assets. Excess assets. At some companies, the surpluses had reached almost laughable levels: $25 billion at GE; $24 billion at Verizon; $20 billion at AT&T; $7 billion at IBM.
One might expect that such lush asset balances would be something to celebrate. Many employers hadn’t contributed a dime to the plans since the 1980s, yet they still had enough money to cover the pensions of all current and future retirees even if they lived to be 100. With so much money, the plans would cost the companies nothing for years to come. But employers weren’t celebrating. The money was burning a hole in their pockets.
————
Today the giant surpluses are gone: sold, traded, siphoned, diverted to creditors, used to finance executive pay, parachutes, and pensions. But you’d think the employers had nothing to do with it. Companies blame investment losses for their plight, as well as their aging workforces, union contracts, regulation, and global competition. But their funding problems were largely self-inflicted. Had they not siphoned off the assets, they would have had a cushion that could have withstood even the market crash that troughed in March 2009. Nonetheless, employers continue to lobby for more liberal rules that would enable them to withdraw more of the assets to pay other things. Meanwhile, their solution when funds run low remains the same: Cut pensions.
The Heist
In 1997, Cigna executives held a number of meetings to discuss their pension plan. At the time, the plan was overfunded, but executives weren’t satisfied and suggested cutting the pensions of 27,000 employees in an effort to boost the earnings they could report on their bottom line. The only problem? How to cut people’s pensions—especially those for long-tenure employees over forty—by 30 percent or more, without anyone noticing?
Cigna was just the latest of hundreds of large companies, including Boeing, Xerox, Georgia-Pacific, and Polaroid, that had already gone through this charade in the 1990s.
These companies had something in common: They all had large aging workforces—with tens of thousands of employees who had been on the job for twenty to thirty years. These workers were entering their peak earning years, and with traditional pensions that are calculated by multiplying years of service by one’s annual salary, their pensions were about to spike. With the leverage of traditional pension formulas, as much as half an employee’s pension could be earned in his final five years. In short, millions of workers were about to step onto the pension escalator. Financially, that wasn’t a problem. Companies, including Cigna, had set aside plenty of money to pay their pensions, so having a large cohort of aging workers didn’t put the companies in peril. ..
The problem, from the employers’ perspective, was that it would be a shame to pay out all that money in pensions when there were so many other useful ways it could be put to use for the benefit of the companies themselves.
Laying people off was one way to keep pension money in the plan. When people leave, their pensions stop growing, and if this happens just when employees’ pensions are poised to spike, all the better. In the 1990s, companies purged hundreds of thousands of middle-aged workers from the payrolls at telephone companies, aerospace and defense contractors, manufacturers, pharmaceutical companies, and other industries, reducing future pension outflows by billions of dollars.
Employers couldn’t lay off every middle-aged worker, of course, but there were other ways to slow the pension growth of those who remained. They could cut pensions, but there were certain constraints. Pension law prohibits employers from taking away pensions being paid out to retirees, and employers can’t rescind benefits its employees have locked in up to that point. But they can stop the growth, by freezing the plans, or slow it, by switching to a less generous formula.
That was the route Cigna took. The company estimated that the move would cut benefits of older workers by 40 percent or more, which meant that as much as $80 million that had been earmarked for their pensions would remain in the plan. The challenge was how to cut pensions without provoking an employee uprising. Pushing people off the pension escalator just when they’re about to lock in the fruits of their long tenure would be like telling a traveler that his nearly one million frequent flier miles were being rescinded—they weren’t going to like it.
Cigna’s solution to this communications challenge? Don’t tell employees. In September 1997, consulting firm Mercer signed a $200,000 consulting contract to prepare the written communication to Cigna employees, describing the changes without disclosing the negative effects. One of these was a benefits newsletter Cigna sent employees in November 1997, entitled “Introducing Your New Retirement Program.” On the front, “Message from CEO Bill Taylor” declared: “I am pleased to announce that on January 1, 1998, CIGNA will significantly enhance its retirement program.” “These enhancements will make our retirement program highly competitive.”
The newsletter told employees that “the new plan is designed to work well for both longer- and shorter-service employees,” provides “steadier benefit growth throughout [the employee’s] career,” and “build[s] benefits faster” than the old plan. “One advantage the company will not get from the retirement program changes is cost savings.” In formal pension documents it later distributed, Cigna reiterated that employees “will see growth in [their] total retirement benefits every year.”
The communications campaign was successful: Employees didn’t notice that their pensions were being frozen, and didn’t complain. “We’ve been able to avoid bad press,” noted Gerald Meyn, the vice president of employee benefits, in a memo three months after the pension change. “We have avoided any significant negative reaction from employees.” In the margins next to these statements, the head of Cigna’s human resources department, Donald M. Levinson, scribbled: “Neat!” and “Agree!” and “Better than expected outcome.”
When employees made individual inquiries, Cigna had an express policy of not providing information. “We continue to focus on NOT providing employees before and after samples of the pension plan changes,” an internal memo stresses. When employees called, the HR
staff, working with scripts, deflected them with statements like “Exact 02 comparisons are difficult.”
Cigna wasn’t the only company deceiving employees about their 04 pension cuts, and actuaries who helped implement these changes were concerned, because federal pension law requires employers to notify employees when their benefits are being cut. At an annual actuarial industry conference in New York later that year, the attendees discussed how to handle this dilemma. The recommendation: Pick your words carefully. The law “doesn’t require you to say, ‘We’re significantly lowering your benefit,’” noted Paul Strella, a lawyer with Mercer, which had advised Cigna when it implemented a cash-balance plan earlier that year. “All it says is, ‘Describe the amendment.’ So you describe the amendment.”
Kyle Brown, an actuary at Watson Wyatt, reiterated that point: “Since the [required notice] doesn’t have to include the words that ‘your rate of future-benefit accrual is being reduced,’ you don’t have to say those magic words. You just have to describe what is happening under the plan. . . . I wouldn’t put in those magic words.”
Just to make sure the message had sunk in, in December 1998, Cigna sent employees a fact sheet stating that the objectives for introducing the new pension plan were to:
- Deliver adequate retirement income to Cigna employees
- Improve the competitiveness of our benefits program and thus
improve our ability to attract and retain top talent - Meet the changing needs of a more mobile employee workforce, and
provide retirement benefits in a form that people can understand.
The letter went on to say that “Cigna has not reduced the overall amount it contributes for retirement benefits by introducing the new Plan, and the new Plan is not designed to save money.”
This was true, literally. Cigna had indeed not reduced the overall amounts it contributed for retirement benefits. It had lowered the benefits for older workers and increased benefits for younger workers (slightly) and for top executives (significantly). Looked at this way, the plan wasn’t designed to save money, just redistribute it.
The communications campaign was successful. Janice Amara, a longtime Cigna employee, didn’t learn that she had not actually been receiving any additional benefits until September 2000, when she ran into Cigna’s chief actuary, Mark Lynch, at a farewell party for two other Cigna employees. “Jan, you would be sick if you knew” how Cigna was calculating her pension, she recalled him telling her. “Frankly, I was sick when I heard this,” Amara said. Under Cigna’s new pension formula, Amara’s pension would effectively be frozen for ten years.