RETIREE AND PENSION NEWS: 'The death spiral of American pensions and benefits'... How corporate America is plundering the pensions of ordinary workers and throwing the aged into deeper poverty

[Editor's Note: Just to make sure that Substance readers don't think our problems with Illinois public worker pensions are unique, we are reprinting the following article here (and probably in our print edition) so that retired teachers can see how the rantings, ravings, and lying of the Chicago Tribune and its allies in the Civic Committee of the Commercial Club are part of a pattern of finance capitalist behavior developed over the last quarter century or so. Some of us would also urge our readers to get and read Ellen Schultz's "Retirement Heist", which some of us are already reading or have read].

How Companies Plunder and Profit from the Nest Eggs of American Workers By Ellen Schultz, Portfolio Books

The following is an excerpt from Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of Americans Workers, by Ellen E. Schultz by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright (c) Ellen E. Schultz, 2011.

In December 2010, General Electric held its Annual Outlook Investor Meeting at Rockefeller Center in New York City. At the meeting, chief executive Jeffrey Immelt stood on the Saturday Night Live stage and gave the gathered analysts and shareholders a rundown on the

global conglomerate's health. But in contrast to the iconic comedy show that is filmed at Rock Center each week, Immelt's tone was solemn. Like many other CEOs at large companies, Immelt pointed out that his firm's pension plan was an ongoing problem. The "pension has been a drag for a decade," he said, and it would cause the company to lose 13 cents per share the next year. Regretfully, to rein in costs, GE was going to close the pension plan to new employees.

The audience had every reason to believe him. An escalating chorus of bloggers, pundits, talk show hosts, and media stories bemoan the burgeoning pension-and-retirement crisis in America, and GE was just the latest of hundreds of companies, from IBM to Verizon, that have slashed pensions and medical benefits for millions of American retirees. To justify these cuts, companies complain they're victims of a "perfect storm" of uncontrollable economic forces--an aging workforce, entitled retirees, a stock market debacle, and an outmoded pension system that cripples their chances of competing against pensionless competitors and companies overseas.

What Immelt didn't mention was that, far from being a burden, GE's pension and retiree plans had contributed billions of dollars to the company's bottom line over the past decade and a half, and were responsible for a chunk of the earnings that the executives had taken credit for. Nor were these retirement programs — even with GE's 230,000 retirees — bleeding the company of cash. In fact, GE hadn't contributed a cent to the workers' pension plans since 1987 but still had enough

money to cover all the current and future retirees.

And yet, despite all this, Immelt's assessment wasn't entirely inaccurate. The company did indeed have another pension plan that really was a burden: the one for GE executives. And unlike the pension plans for a quarter of a million workers and retirees, the executive pensions, with a $4.4 billion obligation, have always been a drag on earnings and have always drained cash from company coffers: more than $573 million over the past three years alone.

So a question remains: With its fully funded pension plan, why was GE closing its pensions?

That is one of the questions this book seeks to answer. Retirement Heist explains what really happened to GE's pensions as well as to the retirement benefits of millions of Americans at thousands of companies. No one disputes that there's a retirement crisis, but the crisis was no demographic accident. It was manufactured by an alliance of two groups: top executives and their

facilitators in the retirement industry--benefits consultants, insurance companies, and banks--all of whom played a huge and hidden role in the death spiral of American pensions and benefits.

Yet, unlike the banking industry, which was rightly blamed for the subprime mortgage crisis, the

masterminds responsible for the retirement crisis have walked away blame-free. And, unlike the pension raiders of the 1980s, who killed pensions to extract the surplus assets, they face no censure. If anything they are viewed as beleaguered captains valiantly trying to keep their overloaded ships from being sunk in a perfect storm. In reality, they're the silent pirates who looted the ships and left them to sink, along with the retirees, as they sailed away safely in their


The roots of this crisis took hold two decades ago, when corporate pension plans, by and large, were well funded, thanks in large part to rules enacted in the 1970s that required employers to fund the plans adequately and laws adopted in the 1980s that made it tougher for companies to raid the plans or use the assets for their own benefit. Thanks to these rules, and to the long-running bull market that pumped up assets, by the end of the 1990s pension plans at many large companies had such massive surpluses that the companies could have fully paid their current and

future retirees' pensions, even if all of them lived to be 99 and the companies never contributed another dime.

But despite the rules protecting pension funds, U.S. companies siphoned billions of dollars in assets from their pension plans. Many, like Verizon, used the assets to finance downsizings, offering departing employees additional pension payouts in lieu of cash severance. Others, like GE, sold pension surpluses in restructuring deals, indirectly converting pension assets into cash.

To replenish the surplus assets in their pension piggy banks, companies cut benefits. Initially, employees didn't question why companies with multi-billion-dollar pension surpluses were cutting pensions that weren't costing them anything, because no one noticed their pensions were being cut. Employers used actuarial sleight of hand to disguise the cuts, typically by changing the traditional pensions to seemingly simple account-style plans.

Cutting benefits provided a secondary windfall: It boosted earnings, thanks to new accounting rules that required employers to put their pension obligations on their books. Cutting pensions reduced the obligations, which generated gains that are added to income. These accounting rules are the Rosetta Stone that explains why companies with massively overfunded pension plans went on a pension-cutting spree and began slashing retiree health benefits even when their costs were

falling. By giving companies an incentive to reduce the liability on their books, the accounting rules turned retiree benefits plans into cookie jars of potential earnings enhancements and provided employers with the means to convert the trillion dollars in pensions and retiree benefits into an immediate, dollar-for-dollar benefit for the company.

With perfectly legal loopholes that enabled companies to tap pension plans like piggy banks, and accounting rules that rewarded employers for cutting benefits, retiree benefits plans soon morphed into profit centers, and populations of retirees essentially became portfolios of assets and debts, which passed from company to company in swirls of mergers, spin-offs and acquisitions. And with each of these restructuring deals, the subsequent owner aimed to squeeze a profit from the portfolio, always at the expense of the retirees.

The flexibility in the accounting rules, which gave

employers enormous latitude to raise or lower their

obligations by billions of dollars, also turned retiree

plans into handy earnings-management tools.

Unfortunately for employees and retirees, these

newfound tricks coincided with the trend of tying

executive pay to performance. Thus, deliberately or

not, the executives who green-lighted massive retiree

cuts were indirectly boosting their own pay.

As their pay grew, managers and officers began

diverting growing amounts into deferred-compensation

plans, which are unfunded and therefore create a

liability. Meanwhile, their supplemental executive

pensions, which are based on pay, ballooned along with

their compensation. Today, it's common for a large

company to owe its executives several billion dollars

in pensions and deferred compensation.

These growing "executive legacy liabilities" are

included in the pension obligations employers report to

shareholders, and account for many of the "growing

pension costs" companies are complaining about.

Analysts, shareholders, and others don't understand

that executive obligations are no different from

pension obligations for rank-and-file workers and

retirees--they are governed by the same accounting

rules, and they represent IOUs that a company has on

its books. In some ways, executive liabilities are like

public pensions: large, growing, and underfunded (or,

as in the case of the executives, unfunded).

Unlike regular pensions, the growing executive

liabilities are largely hidden, buried within the

figures for regular pensions. So even as employers

bemoaned their pension burdens, the executive pensions

and deferred comp were becoming in some companies a

bigger drag on profits.

To offset the impact of their growing executive

liabilities on profits, many companies take out

billions of dollars of life insurance on their

employees, using the policies as informal executive

pension funds and collecting death benefits when

workers, former employees, and retirees die.

With the help of well-connected Washington lobbyists

and leading law firms, over the past two decades

employers have steadily used legislation and the courts

to undermine protections under federal law, making it

almost impossible for employees and retirees to

challenge their employers' maneuvers. With no punitive

damages under pension law, employers face little risk

when they unilaterally slash benefits, even when

promised in writing, since they can pay their lawyers

with pension assets and drag out the cases until the

retirees give up or die.

As employers curtail traditional pensions, employees

are increasingly relying on 401(k) plans, which have

already proven to be a failure. Employees save too

little, too late, spend the money before retiring, and

can see their savings erased when the market nosedives.

But 401(k)s have other features that ensure that the

plans, as they exist, will never benefit the majority

of employees. The plans are supposed to provide a level

playing field, the do-it-yourself retirement vehicle so

perfect for an "ownership" society. But the game has

been rigged from the beginning. Many companies use

these plans as part of a strategy to borrow money

cheaply, or in schemes to siphon assets from pension


And just as the new accounting rules led to such

mischief, so too did new anti-discrimination rules.

Implemented in the 1990s, the rules were intended to

ensure that employers didn't use taxpayer-subsidized

401(k) plans for the favored few, but would make them

available to a broad swath of workers. But thanks to

the creativity of benefits consultants, employers have

used the discrimination rules to shut millions of

low-paid employees out of their plans and to provide

them with less generous benefits, while enacting other

restrictions that make the plans more valuable to

managers and executives, at the expense of everyone


Today, pension plans are collectively underfunded,

hundreds are frozen, and retiree health benefits are an

endangered species. And as executive pay and executive

pensions spiral, these executive liabilities are slowly

replacing pension obligations on many corporate balance


Meanwhile, the same crowd that created this

mess--employers, consultants, and financial firms--are

now the primary architects of the "reforms" that will

supposedly clean it up. Under the guise of improving

retirement security, their "solutions" will enable

employers to continue to manipulate retirement plans to

generate profit and enrich executives at the expense of

employees and retirees. Shareholders pay a price, too.

Their tactics haven't served as case studies at Harvard

Business School, and aren't mentioned in the copious

surveys and studies consultants produce for a gullible

public. But the masterminds of this heist should take a

bow: They managed to take hundreds of billions of

dollars in retirement benefits that were intended for

millions of workers and divert them to corporate

coffers, shareholders, and their own pockets. And

they're still at it. It might not be possible to

resuscitate pension plans, but it isn't too late to

expose the machinations of the retirement industry,

which has its tentacles into every type of retirement

benefit: profit-sharing plans, 401(k)s, employee stock

ownership plans (ESOPs), and plans for public

employees, nonprofits, small businesses, and even


The retirement industry has exported its tactics, using

them to achieve similar outcomes in retirement plans in

Canada, Europe, Australia, and elsewhere, and has big

plans for Social Security and its overseas equivalents

as well. Unless it is reined in, the global retirement

industry will continue to capture retirement wealth

earned by many to enrich a relative few.

Ellen Schultz, an investigative reporter for the Wall

Street Journal, has covered the retirement crisis for

over a decade. (c) 2011 Portfolio Books All rights

reserved. View this story online at:


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