posted October 27, 2006
Tolling the Retirement Bell in America

Corporate America and the Bush administration have embarked on a policy aimed at dismantling the U.S. retirement system. The consequences for more than 150 million workers and retirees are ominous.

The latest act in this dismantling is the recent pension legislation, the Pension Protection Act of 2006, targeting Defined Benefit Pension plans (DBPs). Passed by both the House and the Senate on August 4, 2006, the new legislation was followed quickly on August 7 by a federal appeals court decision clearing the way further to convert traditional pensions into 401K-type plans. Unlike traditional DBP pensions, 401Ks provide no guarantee of benefit payments at retirement and historically provide only one-half to two-thirds the benefits at retirement compared to traditional DBP pensions.

Both actions will soon be followed by a new ruling in September from the Financial Accounting Standards Board (FASB) that will provide a further third strike against the traditional pension plan system and all but ensure the rapid demise of traditional pensions in the U.S. Moreover, senior Bush administration policymakers, together with corporate lobbyists, appear poised once again to launch another major effort to privatize Social Security following the November 2006 Congressional elections and convert that program’s guaranteed benefits as well into a lower and more uncertain income stream for tens of mil lions of retirees.

Defined Benefit Pension plans (DBP) provide a guaranteed level of payment per year of an employee’s service with a company. They may be single employer plans or multi-employer plans. The latter are virtually all union negotiated plans in the construction, trucking, and other trades where a given union negotiates with multiple companies that contribute payments into a single pension trust fund covering all non-management workers in the participating companies. Many single employer DBP plans have also historically been union negotiated pensions, particularly in basic industries like auto, steel, communications, utilities, and other manufacturing industries. The assault on DBP plans is thus concurrently an effort to undermine, at least in part, negotiated union contracts providing for Defined Benefit Pensions.
In contrast to DBPs, which guarantee a stream of retirement payments by the company based on a worker’s years of service and annual pay, are Defined Contribution Pension plans (DCPs). DCPs come in various forms. Some are collective in nature and some are individualized. DCPs may be pensions in which a company provides a certain level of contributions per year for employees into a company administered pension plan. The contributions—not the benefit levels—are guaranteed (if there is a union contract); alternatively (usually without a union contract) contribution levels may change year to year at management’s whim. But the important feature of DCPs, and key difference compared to DBPs, is that there is no guaranteed level of payment for the employee. The contribution is guaranteed, but the benefit level in terms of monthly retirement income is not. Company DCP contributions typically go into a company fund, are invested by the company (or an employee is allowed to pick from several choices of investments), and the level of retirement payment is determined by the outcome of returns on those investments in various financial markets.

DBPs mean management and the company have a major liability (guaranteed benefits to employees) that must be paid regardless of investment outcomes. If the DBP trust fund does not produce a sufficient return on investment, then the company must make up the difference out of revenues and profits in order to meet the guaranteed level of benefits negotiated by the union or provided otherwise by the plan.

In the past two decades a more individualized variant on the DCP model has emerged. Instead of a company making contributions and administering a pension plan, companies have moved to a personal, private pension model where the company makes only a contribution to the employee without bothering to manage a pension plan per se. This eliminates additional administrative costs for companies. This type of plan is represented best by what is called the 401K private pension. Like all DCPs, 401Ks are contribution plans so there is no guaranteed level of benefits for the employee upon retirement. The employee must invest the contribution in stocks, bonds, or other securities. If that investment goes bust and there is no or little retirement income, then the worker is out of luck. The dominant feature of 401Ks, like all DCP plans, is there is no liability for the company. Also, unlike DBPs, 401K plans are virtually unregulated by the government. Employees at Enron, Worldcom, and scores of other major corporations in recent years found that out in no uncertain terms.

A third, and even more recently emerged variant of DCPs, is the Cash Balance Pension plan, created and designed to allow a company to transition a traditional Defined Benefit Plan to a 401K-like DCP plan.

In the 1980s it was a common practice of corporations to manipulate IRS rule 83-52 and other accounting devices to terminate even healthy pension plans at will and then use the pension fund for non-retirement business purposes. Also popular throughout that decade was the practice called reversions by which pension plan surpluses could be diverted for purposes other than funding retirement. More than 50,000 Defined Benefit Pension funds were thus dismantled or diminished between 1980 and 1989. In response to the above practices, Congress instituted a 50 percent excise tax on reversions in 1990. However, unable to continue diverting pension funds at will, managers during the 1990s simply declared contribution holidays and refused to put back funding taken out in the 1980s.

After 1990, management played fast and loose with the assumptions game in establishing the value of their pension funds. Corporate manipulation of assumptions became common practice. In particular, bloated assumptions about rates of return, and plans on paper to hire more young workers in the future, led to pension fund valuations much higher than were justified. That in turn made possible the declaration of contribution holidays in which companies maintained it wasn’t necessary to add to their pension funds since rates of return were so high and so many new young workers were going to be hired. But it was all smoke and mirrors accounting, as recent Congressional hearings on such practices have shown.

When George W. Bush entered office and the recession of 2001 began, interest rates and other returns on investment collapsed and mass layoffs, especially of younger workers, followed. From 2000 on un funded pension liabilities soared in total value. The government agency tasked with managing bankrupt and abandoned pensions, the Pension Benefit Guarantee Corporation (PBGC), experienced a major increase in its operations deficit as it took on DBPs jettisoned by steel and metal manufacturing companies, airlines and auto supply companies, and a rising number of other busted pension funds throughout industry.

The PBGC’s surplus of $9.7 billion in 2000 to cover bankrupt DBPs abandoned by companies flipped to a deficit of $11.2 billion in 2003 and $25.7 billion in 2005. Meanwhile, the Wall Street Journal in June 2006 estimated there was at least $450 billion in un-funded pension liability outstanding for remaining DBP plans, and that was not counting public sector plans. The PBGC estimated in turn at least $108 billion of that $450 billion represented under-funded plans that were likely to go belly up.

But the numbers may be even higher. Recently the PBGC refused requests by Congress for copies of its full analysis of the crisis. For example, California Representative George Miller, after repeated denials by the PBGC this past July to provide him the PBGC’s full analysis, had to file a Freedom of Information Act request for the information. In official reply, the PBGC responded that, “The disclosure of this material would not further the public interest at this time and would impede the operations of the PBGC.?

As the under-funding of pensions grew obviously worse after 2001, instead of insisting on corporations making the necessary contributions to shore up their pensions, the Bush administration in 2003 actually proposed corporations take another contribution holiday for two years. This even included companies with severely under-funded pensions.
In early 2004 corporate lobbying groups like the American Benefits Council and the ERISA Industry Committee, a group composed of corporations with the largest 100 pension funds, plus many more Fortune 500 companies with troubled pension funds, demanded further reprieve from contributions. They called for new rules favoring Cash Balance plans and demanded the total elimination of the 1990 excise tax on pension reversions. They insisted all these measures be implemented before April 15, 2004, the next deadline of required contributions by law to under-funded pensions. If Bush and Congress did not comply by that date, they threatened to dump their DBP plans on the PBGC. According to a survey at the time by the leading Fortune 500 corporate consulting firm, Hewitt Associates, 39 percent of corporations surveyed were threatening to freeze or abandon their DBP plans if Congress failed to legislate another contribution holiday.

Congress quickly did. In April 2004, just days before the due date for pension fund contributions by law, Congress passed an $80 billion break for companies with DBP plans. At the heart of this $80 billion windfall was another two-year general reprieve on contributions to DBPs for corporations, this time including those whose pension plans were not even financially under-funded.

The encouragement of contribution holidays, the long-term accounting chicanery by corporations, and the long history of siphoning off pension fund surpluses and terminating plans for company use—all conscious corporate practices endorsed by government and politicians—has taken a severe toll on Defined Benefit Pension plans that were once (along with Social Security) the centerfold of the retirement system in the U.S. Since 1985 about 85,000 DBP plans have disappeared, as the table in this article clearly shows. (That’s in addition to the 40,000 that went bust under Reagan from 1980-85). From 75 percent of all workers covered by DBPs in 1985, the number fell to 20 percent by 2005, according to the PBGC’s figures.
In contrast 401K pensions have grown over the same period, 1985-2005, from 17,000 plans with 10 million participants to 400,000 plans with 50 million participants. What this means is that the DBP pension that once guaranteed tens of millions of workers a level of benefit payments at retirement has been substituted with 401K plans, which pay retirement benefits on average one-half to two-thirds those provided by DBPs—and a system with no guarantee of benefits, with no liability for the corporation, and with all risk shifted to the worker.

The Pension Protection Act of 2006

Under the guise of allegedly providing appropriate funding and saving what remains of 30,000 Defined Benefit Pensions still providing retirement benefits for 44.1 million Americans, the 2006 Pension Protection Act is actually designed to accelerate the demise of what remains of such pensions and encourages their further replacement with 401Ks.
There are at least 5 major provisions in the 900-page Act that are designed to accelerate the decline of Defined Benefit Pensions. The first measure is the provision that allows corporations, in valuing their pension funds, to shift from using the 30-year treasury bill to estimate their funds’ value to a so-called segmented interest rate based on a complex and easily manipulated mix of rates and assumptions. This shift will permit corporations to forego up to $50 billion in contributions necessary to shore up their funds. That translates into yet another hidden contribution holiday.

When Republican House committee chair John Boehner, responsible for the Pension Act’s passage in the House, was confronted with this $50 billion fact, his reply was simply that it was “irrelevant.?

A second measure is the raising of company contributions to the PBGC for each employee covered under its plan without imposing any penalties for companies unilaterally dropping out of the program. The PBGC and its bailouts are financed by company contributions into the PBGC’s fund for bailouts. But corporations aren’t required by federal law to participate in the PBGC. With PBGC bailouts rising sharply since 2000 and an ever larger deficit as a result, the Act provides for an increase in corporate contributions to the PBGC from $19 now to $30-$35 per employee. Those increases will not take effect until 2008, however, which makes a convenient window for companies to decide to leave the PBGC system and avoid paying the increase—in effect to drop out.

Conspicuously missing from the Act is a provision to prevent corporations from dropping out, despite the increases, and fine those that attempt to do so. Short of that, the current Act will strongly encourage corporations to abandon the system and unilaterally dismantle their DBPs. This will result in their paying workers the 40-65 percent of the value of their scheduled retirement benefits that typically occurs when pensions are dismantled and turned over to the PBGC.

A third area encouraging the demise of DBPs is the set of strong measures favoring corporate conversions to Cash Balance plans that, like a 401K, do not provide a guaranteed level of benefits at retirement. What happens in the case of such conversions is the DBP is discontinued, employees are provided a lump sum cash out well below their scheduled retirement benefits under a DBP (and significantly less for older workers closer to retirement), and a contribution-only plan—most often a 401K—is set up in its place. For the past ten years court cases have challenged conversions to Cash Balance plans as age-discriminatory. But the new Pension Act has cleared the way for such conversions by legislating that cash outs are not discriminatory for older workers, even though they clearly take a bigger pension hit compared to younger workers. To date, already 7 million workers in about 1,500 plans have been impacted by conversions to Cash Balance plans, mostly under George W. Bush.
If the Pension Act is the coup de grace for traditional pensions, then the federal appeals court decision on August 7 amounts to a second bullet delivered at the heart of DBPs. The Pension Act clears the way for future corporate conversions. But it still leaves open the status of the conversions to such plans by the 1,500 corporations that already converted to Cash Balance plans to date. The appellate court decision of August 7, following by a mere three days the passage of the Pension Act, now eliminates all potential liability for the 1,500 corporations that already introduced Cash Balance plans that were found by a federal court in 2003 to have seriously discriminated against older workers in violation of the Age Discrimination laws. The appeals court decision will result in tens of billions of dollars of savings to corporations—mostly large multinational corporations—that have already converted. IBM, the main defendant in the court case, will be able to pocket $1.4 billion as a result of the decision.

Transitional Cash Balance plans dovetail conveniently with the numerous provisions in the Act that strongly encourage the growth of 401K plans, including measures that require new employees’ automatic enrollment in 401Ks when hired and measures in the Pension Act that allow banks and other financial institutions to provide direct advice to workers, with their lump sum in hand, on where to invest their 401K.

Finally, of potential long-term significance is the encouragement of DBP investment by the 2006 Act in Hedge Funds. These new financial innovations, however, are highly volatile, speculative, and lay totally outside all government regulatory control. Even the Securities and Exchange Commission has no access to information or regulation of these funds. Hedge Funds will eventually prove to be the cause of a major global economic downturn within the next decade, or sooner. Their volatility, and the potential collapse of many, will ensure the general collapse of pensions that will make the bankrupting of pensions at Enron and Worldcom pale in comparison.

Financial Accounting Standards Board

There is yet another major factor outside the 2006 Act’s provisions that will seriously undermine DBPs in the very near future. This is the current change about to occur in accounting practices for pensions being proposed by the FASB (Financial Accounting Standards Board). The FASB has independently determined that virtually all major corporation pension funds are significantly under-funded due to the way corporations were allowed to report the value of their pension funds over the past 20 years, especially using assumptions about how much their pension fund investments had been earning. Consequently, the FASB released in September 2006 (conveniently following the passage of the Pension Act) new rules for valuing pension fund assets.

This rule change will increase the under-funding of pensions by literally hundreds of billions of dollars more than even reported today. The highly respected actuarial firm, Millman, has estimated that properly funding these pension liabilities will require an equivalent of 8 percent of corporate America’s net worth. A typical company would find its balance sheet weakened by $1.7 billion on a pretax basis as a result of the accounting changes.
In anticipation of this, Fortune 1,000 corporations across the board in all industries during 2005-2006 have been quietly announcing the freezing of all benefits in their existing DBPs, prohibiting newly-hired employees from participation in their DBPs, and moving to convert from DBPs to Cash Balance plans. The combination of the Pension Act of 2006 and the FASB accounting changes will lead to an even more rapid exodus from DBPs by corporate America. The U.S. worker will pay the price—both as employee and as taxpayer—should the demise turn into a collapse overwhelming the PBGC and requiring a savings and loan-like bailout at public expense.

The FASB change represents the overturning of one of the major incentives instituted back in the late 1940s to strongly encourage the formation of DBPs—namely, the advantage of DBPs to the corporate balance sheet. With the FASB changes, that advantage will become a gross disadvantage.

RESTRUCTURING THE PENSION SYSTEM In AMERICA

Defined Benefit Plans 401K Plans

Number of Plans % Workers Covered # Participants Total Asset Value

1985 114,000 75% 10 million $105 billion
1994 58,800 33% 18 million $475 billion
2002 34,500 24% 42 million $1.8 trillion
2005 30,300 20% 50 million $2.9 trillion

Pensions Now, Social Security Next

Defined Benefit Pension plans are like Social Security retirement benefits in that both are designed to provide a guaranteed level of retirement payments based on wages and years of work service. George W. Bush’s intent—like that of Ronald Reagan before him—is to privatize Social Security and transfer Social Security funds to the private sector where they are more easily exploitable, just as DBPs have in effect been transferred to 401Ks. That was the meaning of George W. Bush’s Private Investment Account proposals of 2004.
Bush and friends temporarily placed the push for Social Security privatization on the policy back burner in 2005-2006 while focusing primarily on ensuring that the tax cuts for the wealthy and corporations passed during his first term were made permanent in his second. As that tax legislative task approaches completion, the focus will turn once again to the Social Security system.

Opening the new offensive against Social Security was the recent public statement by Bush’s newly appointed billionaire treasury secretary, Henry Paulson, ex-CEO of Goldman & Sachs. In his first major speech on August 1, 2006, Paulson “put Social Security reform back on the political agenda,? according to the global business source, the Financial Times. A further propaganda buildup to once again try to privatize Social Security can be expected soon after the November 2006 elections, with new legislation presented to Congress quickly thereafter.
What’s happening is a fundamental change in the rules of the game determining retirement in America. Rules originally established in the post World War II period are now being replaced with a new set of rules. At stake is the potential transfer of trillions of dollars from the 150 million or so working and middle class Americans and retirees to banks, insurance companies, mutual funds, corporate CEOs, and major shareholder beneficiaries.

Jack Rasmus is a vice-president of UAW Local 1981 of the National Writers Union and author of The War At Home: The Corporate Offensive From Ronald Reagan To George W. Bush (Kyklos Productions, 2006). The book may be ordered online at Amazon, Borders or Barnes & Noble, from local independent bookstores, or at discount from Kyklos Productions at the publisher’s website at http://www.kyklosproductions.com.

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