Stealing the Nest Egg

When millions lost their jobs and homes when the credit bubble burst in 2008, one slower-motion rip-off gained speed as well. In 2009, 50 million workers lost over $1 trillion invested in their 401(k) retirement accounts.

The dream of a dignified retirement didn’t just evaporate, however. It has been systematically stolen over decades. That’s the thesis of Ellen Schultz, an investigative reporter for the Wall Street Journal, in her book Retirement Heist.

Schultz describes in meticulous detail how corporate executives twisted pension laws meant to protect workers’ retirement into instruments of legalized theft.

Retirement Heist, by Ellen Schultz, 256 pages, Penguin Portfolio.

Pension protection laws spawned consultancy firms created for the purpose of siphoning away employees’ retirement benefits, in the same way that labor laws intended to protect collective bargaining produced a vibrant union-busting industry.

Corporate CEOs, with the help of lawyers, actuaries, and accountants, transformed employees’ pension and health care plans into piggy banks to boost corporate profits and finance executive pay and retirement bonuses.

A broad spectrum of private sector industries, including retail, communication, professional sports, heavy manufacturing, and computer technology, all used these dodges. Tales of excruciating individual suffering caused by corporate decisions to deny pensions and health care riddle Schultz’s book.

Pension Funds Flush with Money

The betrayal traces back to the 1974 Employee Retirement Income Security Act (ERISA), which set minimum funding standards for pensions. When pension funds became flush with money by the end of the 1990s because of the decade-long bull market, the pension heist began. Many pension funds were so fat that further contributions were unnecessary for years. But rather than taking comfort that pensions were not a burden, CEOs complained that the pension assets were locked up. They said they needed to put those assets to work.

To get at the pension assets, employers needed to get around the pension laws. They claimed pension obligations were a competitive liability holding down stock value. Employers and pension consultancy firms won new accounting rules that permitted pension managers to invest more in stocks and channel the income into the company—thus lifting profits in bull markets.

Consultants advised corporations how to use pension rules to siphon money from employee pensions into bonuses, supplemental pension plans, and deferred compensation schemes—for executives. The actuarial industry had a hand in crafting the regulations. The president of Actuarial Sciences Associates, AT&T’s benefits consultancy subsidiary, personally led the ERISA Advisory Council Task force as it explored ways for corporations to use pension assets.

In 1987, the Financial Accounting Standards Board (FASB) required employers to disclose the size of their pension obligations in their quarterly financial reports. “FASB 87” inflated employers’ projected liabilities. Schultz describes a variety of corporate cost-cutting techniques to reduce these liabilities: cutting retirement benefits, freezing pensions, converting them to cash balance or 401(k) plans, or terminating the plan altogether. The difference between these cuts to retirement benefits and projected liabilities would show up on the books as income.

These techniques were used to channel employee pension assets into executives’ pockets. The company could count the income all at once to boost bonuses, or it could temper future losses. In 1999 IBM, for example, reduced its pension obligations by $450 million. That was $450 million the company could count as income. Hundreds of millions of dollars in profits were “added” and millions of dollars in executive compensation were doled out without the production of a single product or service.

From Bottom to Top

Schultz says employee pension benefits were not considered a liability until the 1990s because they were usually fully funded. Pension plans became a problem because companies were mixing deferred executive compensation with ordinary workers’ plans. Executive pension liabilities in some companies exceed the obligations for rank-and-file pensions, and since they are “hidden, understated, growing, and underfunded,” they can be far more burdensome.

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The most creative scheme was the “dead peasants insurance” plan. This corporate-owned life insurance was originally nicknamed “janitors insurance” because employers could benefit from the purchase of death-benefit plans on everyone in the firm—including the janitors. Such plans emerged in the 1980s, when companies purchased life insurance on both active workers and retirees without telling them.

Corporations including Walmart, Procter & Gamble, and Bank of America bought this insurance to finance their executives’ deferred compensation. In 2009, Bank of America held $17.3 billion worth of insurance on its employees. At least $15 billion of it was intended to back up deferred executive compensation.

Health care plans were plundered the same way as pension plans. A similar accounting rule required disclosure of health care liabilities. Companies had to estimate their obligations for current and future retirees, but their estimates were not based on the actual cost of medical care. The companies could simply make it up. Again, by cutting health care benefits and subtracting that amount from their projected liability, employers generated “income.” Gradual cuts would generate a steady stream of income, or terminating the plan altogether would produce a windfall.

Unions Too Often Complicit

Unions and collective bargaining agreements were crucial to establishing retirement and health benefits for ordinary workers. They have been just as instrumental in dismantling them.

Employers typically cannot unilaterally reduce benefits for union retirees because the benefits are protected by law under negotiated contracts. So employers go after the retirees by arguing that unless the company is allowed to cut benefits, it could end up bankrupt and everyone will lose.

If that fails, they approach the union. Schultz illustrates a bid to deceive the United Auto Workers at agricultural implements manufacturer Kelsey Hayes into giving up retiree health care. The troubled company was bought and sold several times. A new chief executive changed the company’s name to Varity and imposed creeping takeaways in the hope of instigating a lawsuit. The idea was to litigate the retirees into submission, a strategy Schultz suggests rested on management’s “hoping it could fool the United Auto Workers.”

It is inconceivable that the UAW would be fooled by such a strategy: The union had over 50 years’ experience in the co-administration of employee retirement and health care plans, with hundreds of employers. Silence about benefits cuts on the part of the union amounts to collaboration with management.

But, sadly, the UAW has a long history of cooperating with employers in reducing pensions and health care benefits. Schultz’s book is a fascinating and informative study of corporate abuse of the American pension system, but she barely mentions General Motors’ pension obligations, which now exceed $100 billion and played a pivotal role in the industry’s bailout debate.

The UAW negotiated an agreement in 2011 with GM to “de-risk” its hourly pension plan—in other words, to remove the risk to GM’s business strategy. The car company has claimed its pension liabilities, not its inability to sell cars, are the reason for flagging stock value. The agreement eliminated the traditional annual lump-sum payments to retirees—saving GM $1.4 billion. That's $1.4 billion GM can count as income without building a single car.

The 2011 agreement also amended the plan to add an “additional voluntary option” for retirement. To identify what that option might be, one need only look at what the UAW has already agreed to for GM new hires, existing GM retirees, and workers at the parts-maker Delphi. Those “options” are designed to remove the pension plan from the company's books through buyouts, replacement with annuities, and finally, as with Delphi retirees, transferring the plan to the taxpayers through the government’s Pension Benefit Guarantee Corporation, the government agency that insures workers' pensions. Free of its pensioners, Delphi made $1.1 billion last year. Imagination is the limit as to which option will be deployed.

Schultz’s book documents a disturbing dimension of corporate governance where depravity eclipses humanity. The examples of pension theft cited in the book are not isolated examples of individual greed. These practices represent yet another hidden chapter in profit-seeking that knows no bound, and a trend that has spread into all sectors of employment.

Left unsaid is the obvious solution for unionists struggling to save what remains of their pensions: a much stronger Social Security program that could take retirement out of the hands of the executives and the consultants—and separate it from the employer by guaranteeing dignified benefits for all.

Thomas F. Adams retired from General Motors in 2006 after 30 years’ service as an hourly worker and member of UAW Local 599. He received a PhD in history from Michigan State University in 2010 and is writing a book titled UAW Incorporated: The Triumph of Capital.