HELPLESS
The architects of today’s retirement mess—consultants and financial firms—have also played a non-starring role in the public pension debacle. The difference was that, while they helped private employers hide pension cuts and exaggerate their pension woes, they also helped public employers quietly boost benefits and hide the growing liabilities.
They not only helped private companies drain assets from pension plans, but also helped public employers avoid contributing in the first place, enabling legislators and politicians to conjure up cash for popular projects, without raising taxes, and look like community heroes.
And while they were helping private employers to load their retirement plans with stock, some consultants and financial firms duped many public pension managers into investing in complex and risky derivatives whose value later exploded, just like the subprime loans with low teaser rates that predatory lenders conned millions of homeowners into.
In the private sector, current and future retirees are bearing the brunt of the retirement heist; in the public sector, the carnage is being borne by the employees and by the communities around them.
The scapegoat game continues. Corporate employers are still blaming aging workers, retiree “legacy costs,” and “spiraling” retiree health care costs for their financial woes—not their own actions that squandered billions of dollars in pension assets, their thinly masked desire to convert benefits earned by and promised to retirees into profits for executives and shareholders, and their willingness to sacrifice retiree plans, and the well-being of retirees, for short-term gains.
In the public plan sector, the scapegoats are the public employees and retirees, who are beginning to have the haunted look of victims of the Salem witch hunts. The real culprits are the self-serving politicians and officials who passed the funding buck to future generations, the consulting firms that helped them do this, and the investment banks that conned local governments into investing taxpayer-funded pensions in risky, abusive investments.
The reforms employers are pushing today are the same reforms the ERISA Advisory Council proposed when it met in 1999 to discuss the “problem” of companies having too much surplus in their pension plans: Allow employers greater latitude to use pension money to pay retiree health and layoff benefits, ease funding rules, lift funding ceilings, and lift the benefits limits in 401(k)s and pension plans. The latter recommendation would facilitate discrimination in retirement plans and enable employers to shift billions of dollars of executive liabilities into their regular pension plans. More quietly, employers and insurers are looking to ease restrictions on buying life insurance on workers, which they supposedly use to pay for retiree health benefits but actually use to finance deferred compensation.
Though characterized as reforms that would improve retirement security, employers propose them with a veiled threat. They remind lawmakers and regulators—as they have for the past thirty years—that it’s a voluntary system, and they don’t have to have pension or retirement plans at all. If they don’t get their way, they might just pull the plug on their plans altogether. This often causes lawmakers to fall in line. (And besides, who isn’t for retirement security?)
But this threat is the equivalent of a five-year-old threatening to hold his breath until he turns blue. The fact is, employers can’t fold their benefits tents at will: The pensions people have earned are legally earned delayed compensation, protected by law. (Though they can be cut or frozen going forward.) Retiree health benefits for unions are protected by negotiated contracts. Employers have put pretty much everything else—future pension accruals, retiree health for salaried retirees—on the chopping block already. Or can at any moment.
And, of course, the “pull-the-plug” threat is a bit less effective when companies have already frozen their pensions. The only move left is to terminate the plans. But they aren’t going to do this, either. Not yet. Unless the pension is woefully underfunded and a candidate for dumping in bankruptcy, a frozen pension plan is more valuable alive than dead.
Apart from all their other benefits for employers, frozen pension plans can function as shadow plans for executive liabilities. The investment returns offset the cost of the executive obligations, and the frozen plans often contain QSERPs, the mini–executive pensions that employers carve out within the regular pensions by taking advantage of loopholes in the discrimination rules.
The assets in pension plans have largely recovered from the market crisis losses, and, as interest rates finally begin to rise from their historic lows, liabilities will fall. The surpluses will build again and be available for a variety of corporate purposes. And unless employers withdraw the money, when the surplus is substantial enough, companies may pull the plug on their pensions and use the termination loophole to capture much of the surplus money. At that point, the only pensions left will be for the executives.
This is the hidden history of the retirement crisis—a story that hasn’t made it to Fox News, the Huffington Post, or even Comedy Central. This retirement heist has produced a transfer of benefits earned by three generations of post–World War II middle-class workers to a comparatively small cohort of company executives, shareholders, and the financial industry that orchestrated the plunder.
If employers continue to control the retirement system and manage it for their own benefit, then within our lifetimes, “retirement” will inevitably revert to what it was in the 1930s and before. Society—and taxpayers—will be paying for services to support the millions of elderly, formerly middle-class Americans.
Acknowledgments
IN THE LATE 1990s, I went to Washington to talk to pension experts about why companies were adopting new kinds of pension plans.
My first stop was a leading law firm where the hallways were paved with lush Oriental carpets. There, two $600-an-hour lawyers explained that companies were changing their pensions to make them better for a more mobile workforce and to improve retirement security. They’re still saying this.
My next stop was the Pension Rights Center, with its battered furniture and shabby wall-to-wall. I brought a tray of lattes as a joke, because Fidelity Investments was sponsoring a campaign saying that skipping the daily Starbucks beverage would put someone on the road to retirement riches.
Karen Ferguson, the director of the center since its inception in the 1970s, had rounded up her minuscule staff and a few retiree advocates. They all got the joke but wouldn’t touch the lattes because there weren’t enough to go around. Someone finally rounded up some mugs and the lattes were divvied up. It was a small thing, but it distilled the spirit of the place, which under the guidance of Ferguson has done so much to improve the retirement security of Americans.
Ferguson has always generously shared her knowledge of the legislative horse trading, history, policy, tax rules, and players with every reporter who knocks on her door. Though eternally outgunned by employer groups, insurers, and the investment industry, Ferguson retains unshakable diplomacy and grace and is always a fountain of sources and legislative updates.
Norm Stein, a law professor at Drexel University, provided valuable input over the years. David Certner, an AARP policy expert, has been a valued source on legislation affecting retiree benefits. The attorneys Susan Martin, Bill Payne, and Roger McClow, who have helped thousands of retirees regain the pensions and health benefits they had earned, were amazingly generous with their time.
Many employees and retirees, some now deceased, shared their stories. Ed Beltram, with the National Retiree Legislative Network, spent many hours prospecting for retirees to interview.
I have benefitted greatly from the expertise and guidance of Joelle Delbourgo, my agent, and from the patience and professionalism of Brooke Carey and the staff at Portfolio. Nancy Cardwell provided valuable structural advice, collegues Sara Silver and Vanessa O’Connell read sections of the manuscript and were mensches, and my pet sitter, Diane Woodle, made it possible for me to spend nights and weekends at the office without worrying about the mental health and well-being of my geriatric Jack Russell, Cody.
Many of the stories in this book first appeared in some form in
