The Betrayal of the American Dream

by Donald L. Barlett

  From a peak of 112,000 defined-benefit plans that provided retirees with a guaranteed monthly income in 1985, the number plunged to 27,650 in 2011. By then, only 3 percent of private workers were covered solely by such plans.

  More significantly, virtually no companies are creating these plans anymore, and only a few provide them to new employees. Fortune 500 companies are among those killing or freezing their defined-benefit plans by the score. In 1998 a total of 67 percent of the top one hundred Fortune 500 companies offered defined-benefit plans. By 2010 the figure had plunged to 17 percent, according to Towers Watson, the global consulting firm. Typical of the attitude toward pensions was Hewlett-Packard, long one of the most admired U.S. companies, which pulled the plug on guaranteed pensions for new workers. A spokesman said the company had concluded that “pension plans are kind of a thing of the past.” In that, Hewlett-Packard was merely part of a corporate trend.

  Major companies that have restricted their defined-benefit plans in some manner include Anheuser-Busch, Caterpillar Inc., CIGNA, DuPont, Kimberly-Clark, Kraft Foods, Motorola, R. R. Donnelley & Sons, Sunoco, and 3M. The nation’s largest employer, Walmart, does not offer such pensions. At the current pace, human resource offices will turn out the lights in their defined-benefit section in the next few years. At that point, individuals will assume all the risks for their own retirement.

  The shift away from guaranteed pensions was encouraged by Congress, which structured pension and retirement plan legislation in a way that invited corporations to abandon their defined-benefit plans in favor of defined-contribution plans—increasingly 401 (k)s—in which employees set aside a fixed sum of money toward retirement. Many companies also contribute to these plans, but some don’t. In either case, the contributions will never be enough to match the certain and long-term income from a defined-benefit plan. What’s more, once the money runs out, that’s it. If people live longer than expected, get stuck with unanticipated expenses, or suffer losses of other once-promised benefits, they will have little besides their Social Security to sustain them.

  The move out of pensions and into 401(k)s was an intentional strategy to substantially reduce corporate costs. It was sold as a plus for employees, as part of what former President George W. Bush referred to often as the “ownership society” in which people would take charge of their own finances and all other phases of their economic lives and not depend on other parties to possibly dictate their financial future. Bush’s Treasury secretary, John Snow, was an especially avid proponent: “I think we need to be concerned about pensions and the security that employees have in their pensions,” Snow told a congressional committee in 2004. “And I think we need to encourage people to save and become part of an ownership society, which is very much a part of the president’s vision for America.”

  Of course, it’s much easier to own a piece of America when you have a pension like Snow’s. When he stepped down as head of CSX Corporation—operator of the largest rail network in the eastern United States—to take over Treasury, Snow was given a lump-sum pension of $33.2 million. It was based on forty-four years of employment at CSX. Unlike most people, who must work for forty-four years to receive a pension based on forty-four years of service, Snow was employed at CSX for just twenty-six years. The additional eighteen years of his CSX employment history were fictional, a parting gift from the company’s board of directors.

  At the same time as corporate executives are paid retirement dollars for years they never worked, hapless employees lose supplemental retirement benefits for a lifetime of actual work. Betty Moss was one of thousands of workers at Polaroid Corporation—the maker of instant cameras and film then based in Waltham, Massachusetts—who gave up 8 percent of their salary to underwrite an employee stock ownership plan, or ESOP. It was created to thwart a corporate takeover and “to provide a retirement benefit” to Polaroid employees to supplement their pension, the company pledged. It didn’t happen. Slow to react to the digital revolution, Polaroid began to lose money in the 1990s. From 1995 to 1998, the company suffered $359 million in losses. As its balance sheet deteriorated, so did its stock price, including shares in the ESOP.

  In October 2001, Polaroid sought bankruptcy protection. By then, Polaroid’s shares were nearly worthless, having plummeted from $60 in 1997 to less than the price of a Coke in October 2001. During that period, employees were forbidden to unload their stock, based on laws approved by Congress. But what employees weren’t allowed to do at a higher price, the company-appointed trustee could do at the lowest possible price—without even seeking the workers’ permission. Rather than wait for a possible return to profitability through restructuring, the trustee decided that it was “in the best interests” of the employees to sell the ESOP shares. They went for nine cents. Just like that, the $300 million retirement nest egg of six thousand Polaroid employees was vaporized. Many lost between $100,000 and $200,000.

  Betty Moss spent thirty-five years at Polaroid, beginning as a file clerk out of high school, then working her way through college at night and eventually rising to be senior regional operations manager in Atlanta. “It was the kind of place people dream of working at,” she said. “I can honestly say I never dreaded going to work. It was just the sort of place where good things were always happening.” One of those good things was supposed to be the ESOP, touted by the company as a plan that “forced employees to save for their retirement,” as Betty recalled. “Everybody went for it. We had been so conditioned to believe what we were told was true.” Once Polaroid entered bankruptcy, Betty and her retired coworkers learned a bitter lesson—that they had no claim on benefits they had worked all their lives to accumulate. Although the federal PBGC agreed to cover most of their basic pensions, the rest of their benefits were canceled—not only the ESOP accounts but also their retiree health care and severance packages.

  The retirees, who were generally well educated and financially savvy, organized to try to win back some of what they had lost by petitioning the bankruptcy court, which would decide how to divide the company’s assets among creditors. But Polaroid’s management undercut the employees’ effort. Rather than file for bankruptcy in Boston, near the corporate offices, the company took its petition to a bankruptcy court in Wilmington, Delaware, that had developed a reputation for favoring corporate managers. There Polaroid’s management contended that the company was in such terrible financial shape that the only option was to sell rather than reorganize. The retirees protested, arguing that Polaroid executives were undervaluing the business so that the company could ignore its obligations to retirees and sell out to private investors.

  The bankruptcy judge ruled in favor of the company. In 2002 Polaroid was sold to One Equity Partners, an investment firm with a special interest in financially distressed businesses. (One Equity was a unit of Bank One Corporation, now part of JPMorgan Chase.) Many retirees believed that the purchase price of $255 million was only a fraction of Polaroid’s value, and there is evidence to support that view: the new owners financed their purchase, in part, with $138 million of Polaroid’s own cash.

  Employees did not leave bankruptcy court empty-handed. They all got something in the mail. Betty Moss will never forget the day hers arrived. “I got a check for $47,” she recalled. She had lost tens of thousands of dollars in ESOP contributions, health benefits, and severance payments. She and the rest of Polaroid’s other six thousand retirees were being compensated with $47 checks. “You should have heard the jokes,” she said. “‘How about we all meet at McDonald’s and spend our $47?’”

  Any doubt as to how badly employees had been cheated by the company and the bankruptcy court was quickly dispelled when Polaroid emerged from court protection. Under a new management team headed by Jacques Nasser, former chairman of Ford Motor Company, Polaroid returned to profitability almost overnight. Little more than two years after the company came out of bankruptcy, One Equity sold it to a Minnesota entrepreneur for $426 million in cash. The new managers, who had
received stock in the postbankruptcy Polaroid, walked away with millions of dollars. Nasser got $12.8 million for his 1 million shares. Other executives and directors also were rewarded for their efforts. Rick Lazio, a four-term Republican from West Islip, New York, who gave up his House seat for an unsuccessful Senate run against Hillary Rodham Clinton in 2000, collected $512,675 for a brief stint as a director—an amount nearly twice the $282,000 paid to all six thousand retirees. The $12.08 a share that the new managers received for little more than two years of work was 134 times the nine cents a share handed out earlier to lifelong workers.

  Bankruptcy court’s shunting aside Polaroid’s workers in favor of the company’s executives and new owners was all too typical of how other institutions also treat ordinary citizens on retirement matters. Washington has a long history of catering to special interests on pension legislation and regulations, dating back to 1964 when the Studebaker Corporation collapsed, junking the promised pensions of four thousand workers not yet eligible for retirement.

  For years the carmaker had published brochures spelling out its promise to employees: “You may be a long way from retirement age now. Still, it’s good to know that Studebaker is building up a fund for you, so that when you reach retirement age you can settle down on a farm, visit around the country or just take it easy, and know that you’ll still be getting a regular monthly pension paid for entirely by the company.”

  It took Congress ten years to react to Studebaker’s betrayal by writing the Employee Retirement Income Security Act (ERISA) of 1974. It established minimum standards for private retirement plans and created the Pension Benefit Guaranty Corporation to guarantee them. President Gerald Ford hailed the measure when he signed it into law that Labor Day: “This legislation will alleviate the fears and the anxiety of people who are on the production lines or in the mines or elsewhere, in that they now know that their investment in private pension funds will be better protected.”

  The biggest winners under the bill weren’t working Americans, however, but money men. Congress wrote the law so broadly that it allowed corporate raiders to dip into pension funds and remove cash set aside for workers’ retirement. During the 1980s, that’s exactly what a cast of corporate raiders, speculators, Wall Street buyout firms, and company executives did with a vengeance, walking away with an estimated $21 billion earmarked for workers’ retirement pay. The raiders insisted that they took only excess assets that weren’t needed.

  Among the pension buccaneers: Meshulam Riklis, the onetime partner of Carnival Cruise founder Ted Arison. A takeover artist, Riklis skimmed millions from several companies, including the McCrory Corporation, the former retail fixture of Middle America that is now gone; and the late Victor Posner, the Miami Beach corporate raider who siphoned millions of dollars from more than half a dozen different companies, including Fischbach Corporation, a New York electrical contractor that he drove to the edge of extinction. Those two raiders alone raked off about $100 million in workers’ retirement dollars—all perfectly legal, courtesy of Congress. By the time billions of dollars were gone and the public outcry so loud that even Congress could not ignore it, lawmakers in 1990 rewrote the rules and imposed an excise tax on money removed from pension funds. The raids slowed to a trickle.

  During those same years, the PBGC published an annual list of the fifty most underfunded pension plans. In spotlighting corporations that had fallen behind in their contributions, the agency hoped to prod companies to keep current. Corporations hated the list. They maintained that the PBGC’s methodology did not reflect the true financial condition of their pension plans. After all, as long as the stock market went up, the pension plans would be adequately funded. Congress agreed with this specious reasoning and in 1994, to please corporate America, voted to keep the data on the underfunded pensions of individual corporations a secret.

  When the PBGC killed its top fifty list, David M. Strauss, then the agency’s executive director, explained, “With full implementation of [the 1994 pension law], we now have better tools in place.” PBGC officials were so bullish about those “better tools,” including provisions to levy higher fees on companies that ignored their commitments to their employees, that they predicted that underfunded pension plans would become a thing of the past. As a story in the Los Angeles Times put it, “PBGC officials said the act nearly guarantees that large underfunded plans will strengthen and the chronic deficits suffered by the pension guaranty organization will be eliminated within 10 years.”

  The prediction was wildly off. Instead, pension deficits soared and ten years later the deficit was $23.5 billion. Since the PBGC no longer publishes its top fifty list, anyone looking for remotely comparable information must sift through voluminous company reports to the SEC or the Labor Department, where pension-plan finances are recorded, or turn to independent reports, such as one compiled in 2011 by UBS that identifies twenty-five of the most underfunded pension plans. The names were familiar: Ford Motor Company ($11.4 billion); Whirlpool Corporation ($1.5 billion); Lockheed Martin Corporation ($10.4 billion); United States Steel Corporation ($1.9 billion); and Raytheon Company ($4 billion). All told, according to Credit Suisse, publicly traded companies in 2011 were confronting a combined pension shortfall of $458 billion.

  In reality, the deficits in many cases are worse than the published data suggest, which becomes evident when bankrupt corporations dump their pension plans on the PBGC. Time after time, the agency has discovered, the gap between retirement holdings and pensions owed is much wider than the companies reported to stockholders or employees. For example, the giant Cleveland steelmaker LTV Steel Corporation reported that its plan for hourly workers was about 80 percent funded, but when it was turned over to the PBGC, there were assets to cover only 52 percent of benefits—a shortfall of $1.6 billion that the PBGC had to assume.

  How can this be? Thanks to the way Congress writes the rules, pension accounting has a lot in common with Enron accounting, but with one difference: it’s legal. By adjusting the arcane formulas used to calculate pension assets and obligations, corporate accountants can transform a drastically underfunded system into what appears to be a financially healthy plan, even inflate a company’s profits and push up its stock price. Ethan Kra, chief actuary of Mercer Human Resources Consulting, once put it this way: “If you used the same accounting for the operations side [of a corporation] that is used on pension funds, you would be put in jail.”

  The PBGC lists of deadbeat pension funds served another purpose. They were an early-warning signal of companies in trouble—a sign often ignored or denied by the companies. “Somehow, if companies are making progress toward an objective that’s consistent with [the PBGC’s], then I think it’s counterproductive to be exposed on this public listing,” complained Gary Millenbruch, executive vice president of Bethlehem Steel, a perennial name on the top fifty.

  Time proved Millenbruch wrong. The early warnings about Bethlehem’s pension liabilities were right on target. When Bethlehem Steel later filed for bankruptcy, the PBGC found that its pension plans were short $3.7 billion. The company that was once America’s second-largest steelmaker no longer exists. Contrary to the assertions of company executives, PBGC officials, and members of Congress, one company after another on the 1990 top fifty disappeared, many offloading their unfunded pensions on the PBGC.

  Having seen how easy it is to unload a pension plan, more and more corporations are trying to do just that. In what threatened to be the largest company abandonment of its workers, AMR, the parent of American Airlines, filed for bankruptcy protection in November 2011 and asked a federal judge for permission to kill four pension plans covering 130,000 American workers and retirees.

  The company asked that the PBGC assume responsibility for paying benefits to American’s retirees. If approved, the plan would have cost American’s retirees $1 billion in lost benefits because of caps imposed by Congress on the amount that PBGC can pay individual retirees.

  After years of the PBGC r
olling over to accommodate pension-killing corporations, the agency’s new director, Joshua Gotbaum, decided to make a stand on American’s plans, warning the airline that before it took such a “drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that.”

  In what has to be chalked up as a modest victory for workers, American backed down from its plan to terminate all pensions and announced that it would instead freeze them. The details of what that may ultimately mean are not clear at this stage, other than that the plans will be preserved—at least in a reduced form. The issue is not likely to be fully resolved until American exits bankruptcy sometime in the future.

  American was but the latest large airline attempting to jettison its employee pension plans. In the last decade, four big carriers—United, US Airways, Delta, and TWA—walked away from their employee plans and shifted the responsibility to pay retirement benefits from themselves to the PBGC.

  When the PBGC takes over a retirement plan, it covers retirement checks up to a fixed amount—$55,000 in 2011. But it will only continue to do this until the agency runs out of money, a distinct possibility given its looming liabilities. The PBGC’s financial position has rapidly deteriorated. In 2000 the agency operated with a $10 billion surplus. By the end of 2011, that had flipped to a $26 billion deficit—the highest in PBGC’s thirty-seven-year history.

  The Government Accountability Office (GAO) says that the PBGC’s insurance funds are at “high risk” and the agency faces increasing challenges to meet its obligations. “PBGC’s premium base has been shrinking as the number of defined benefit pension plans and active plan participants has declined rapidly,” GAO said in 2010. With so many plans being canceled, the number of companies that pay premiums to PBGC has dropped precipitously; by 2011, only half as many companies paid premiums as fifteen years ago.