Life In Retirement: The Not-So-Golden Years
1:45 am
Thu September 29, 2011

'Retirement Heist': How Firms Trimmed Pensions

Originally published on Thu September 29, 2011 9:03 am

As companies have been moving away from traditional pension plans, they have been shifting employees to new retirement plans, such as 401(k)s, that transfer the cost — and the risk — to workers.

Companies have claimed for years that old-style pensions were unsustainable. Author Ellen Schultz tells Morning Edition host Steve Inskeep that there's another explanation.

"The main narrative is that [companies] are struggling to pay both their pensions and these unexpectedly high health care costs for the retirees," Schultz says. "What isn't known is that companies were well-prepared for this phenomenon. The plans were in fact significantly overfunded. They had more than enough to pay every dime for every person currently employed and already retired."

Schultz investigated the changes in pension plans as a reporter for The Wall Street Journal and has written a book called Retirement Heist.

In the early 1990s, Schultz says, companies were looking for new ways to push out workers, especially older, more expensive ones. She says the expensive way would have been to pay severance, "but the cost-effective way was to instead promise them a bit more pension money in lieu of severance." In the end, "you've just laid off somebody who's expensive and it has cost you nothing."

Schultz cites this example of one well-known company whose pension fund has dropped significantly since the early 1990s. General Electric announced it was closing its pension plan to be more competitive. She says the company's financial filings show that GE has not put a cent into its pension plans since the mid-1980s. Over the years, GE, like most large companies, used assets in the plans to pay for other things.

Morning Edition reached out to several companies for this story, but none would talk in detail about changes to their pension plans.

Don Fuerst, a senior fellow at the American Academy of Actuaries, says companies can offer retirees the opportunity to take a lump sum distribution rather than a lifetime of pension income, which can be beneficial to the company but detrimental to the individual.

"But it's always a choice," he says.

David Certner, a policy director at the AARP, says that "corporations weren't always so transparent and clear about what they were doing."

Schultz says there was a massive transfer of wealth over the past two decades, from a multitude of retirees to a small number of executives. But while she calls her book Retirement Heist, she concedes that nothing that happened was illegal.

"When you have a properly funded plan, it doesn't matter how many retirees you have or how long they live," Schultz says. "It's not the fact that you have a lot of retirees; it's the fact that you have abused the pension plan."

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Transcript

DAVID GREENE, Host:

This week, we're looking more closely at retirement, which many Americans would rather not think about at all. Their prospects are just that bad.

KRISTEN SPIVEY: Oh, boy. You know, I haven't really thought about this in a long time because I lost my job. And this is why I avoid thinking about the future.

STEVE INSKEEP, Host:

We heard from Kristin Spivey six years ago. The flight attendant for United Airlines was shocked when she found out she was entitled to a pension worth $43 a month.

GREENE: Many firms didn't seem to have enough money to pay out pension benefits. President Bush signed a bill in 2006 to address that problem.

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SPIVEY: If you offer a private pension plan to your employees, you have a duty to set aside enough money now so your workers will get what they've been promised when they retire.

GREENE: But the law has not changed a broader pattern, stretching back decades. Countless corporations have done away with traditional pension plans in which the worker can expect a specific, defined benefit. Workers, at best, have been left with 401(k) plans, which carry much greater risk.

INSKEEP: Companies that still have traditional pension plans often say they're drastically underfunded.

GREENE: In this part of the program, we'll hear a radically different interpretation of where all the pension money went. The story comes from journalist Ellen Schultz. For the past decade, she covered corporate pensions for the Wall Street Journal.

ELLEN SCHULTZ: The standard narrative about what's wrong with corporate pensions is that the companies were surprised by this tidal wave of aging workers, and they have been struggling to put money into their pension plans. And because of this, it is hurting earnings.

INSKEEP: That's the narrative. But in a new book, called "Retirement Heist," Schultz uncovers a different story. She says many corporate executives looted pension plans while blaming other factors.

SCHULTZ: So companies are - the main narrative is that they're struggling to pay both their pensions and these unexpectedly high health-care costs for the retirees.

INSKEEP: Well, isn't that true? I mean, certainly, this is an aging country - maybe not to the degree of Japan or someplace, but America is getting older.

SCHULTZ: That is certainly true, but what isn't known is that companies were well-prepared for this phenomenon. They had been putting plenty of money into their pension plans. The plans were, in fact, significantly overfunded in the 1990s. There was a quarter-of-a-trillion dollars in surplus assets, collectively, in the large plans in the late '90s.

INSKEEP: Two-hundred-fifty billion dollars that corporations had in the bank for future pension obligations - is that what you're saying?

SCHULTZ: Yes. They had more than enough to pay every dime for every person currently employed and already retired.

INSKEEP: Even if they lived to be 100. Ellen Shultz says you don't have to look back many years to find stories of corporations with so much extra pension money, they described it as a problem. It seemed like money going to waste. So corporations found creative ways to spend the money to boost profits. Consider a big firm like Verizon, which decided to offer buyouts to many of its older workers, getting them off the payroll.

SCHULTZ: And the expensive way to do that would be to pay severance, but the inexpensive way - in fact, the very cost-effective way - was to instead promise them maybe a bit more pension money in lieu of severance.

INSKEEP: I want to make sure I understand that, and why an executive would do that. If I offer to buy somebody out, they're going to walk away from their job, and I'm going to offer to pay them a thousand dollars, cash. That's a thousand-dollar expense which will count, at some point, against my profits and maybe affect my stock price. But if I offered them an extra thousand-dollar pension benefit, thereby running down the pension fund, what happens to my profits and my stock price?

SCHULTZ: Well, then you've just laid off somebody who's expensive, and it has cost you nothing.

INSKEEP: You give a couple of dramatic examples of how the pension funds of large, well-known corporations have changed from 1999, say, to 2011, one of them being General Electric. What's the before and after on GE's pension funds?

SCHULTZ: Well, what we've heard most recently last year was GE saying they had to close the pension plan because they just needed to be more competitive with other companies, that it was hurting their earnings. But if people look at the financial filings, they'll see that GE has not put a cent into their pension plans since the mid-1980s. Over the years, GE, like most large companies, has used assets in the plans to pay for other things.

INSKEEP: What was the GE surplus in pensions in the late-'90s?

SCHULTZ: It was more than $20 billion.

INSKEEP: And...

SCHULTZ: Now, they're underfunded by about $5 billion.

INSKEEP: So it's been a $25 billion difference in fortunes there.

SCHULTZ: Yes.

INSKEEP: Having run down their pension funds, companies cut pension benefits. A promise to pay money to retired workers counts as a debt on a corporation's books. Cut those benefits, and the books promptly look better.

SCHULTZ: So let's say you have IBM, and it says, well, let's cut the pension plan. We will be paying out $200 million less in the future. So that helps income. It boosts earnings, and helps the stock price.

INSKEEP: Now, we called several companies, and none would talk with us in any detail about the changes in their plans. So we spoke with Don Fuerst, a senior fellow at the American Academy of Actuaries - those are financial statisticians who, among other things, design pension plans. He says companies have often found creative ways to restructure pension payments. For example...

DON FUERST: Companies can offer to retirees the opportunity to take a lump-sum distribution rather than a lifetime of pension income. And that can sometimes add to the financial statements of the company and work to the detriment of the individual. But it's always a choice that the individual has. They're not forced to take the lump sum. They have the choice of doing it either way.

INSKEEP: They have a choice, though some experts say people do not understand that choice.

DAVID CERTNER: Corporations weren't always so transparent and clear about what they were doing.

INSKEEP: That's David Certner, a policy director at the AARP, the organization that lobbies on behalf of older people.

CERTNER: And what they weren't quite telling their employees was that, we're going to be dramatically cutting back some of the benefits you thought were getting going forward.

INSKEEP: And as it happens, while companies were shrinking retiree benefits, they were boosting executive compensation. Don Fuerst, of the American Academy of Actuaries, cautions against oversimplifying this process. In spite of abuses, he says, not all executives are crooks.

FUERST: The vast majority of them were extraordinarily ethical and did a very good job, and had the best interests of their organization and their employees at heart.

INSKEEP: Given that they had the best interests at heart, how is it that so many pension plans have run into trouble?

FUERST: Pension plans have run into trouble for many reasons; the economic scenario that we're in is a major part of it. The extraordinarily complex rules about pension funding are a part of the issue.

INSKEEP: And, of course, many pension funds were invested in assets that have declined. Ellen Schultz, the former Wall Street Journal reporter who wrote "Retirement Heist," acknowledges that most creative pension accounting has been perfectly legal. Still, she says, there's been a transfer of wealth from many employees to a few executives.

SCHULTZ: There's a misconception that many companies killed their pension plans because the plans were unhealthy and dragging the companies down. What was happening was that the companies were being dragged by their own financial problems, and they saw the pension plan as an asset to cannibalize.

INSKEEP: Schultz describes that historic process in her new book, "Retirement Heist." And you can read an excerpt at npr.org.

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INSKEEP: This is NPR News. Transcript provided by NPR, Copyright NPR.