“Retirement Heist” book asks: Who stole America’s pensions?

September 14, 2011

Can we afford retirement in this country? Not if you believe politicians who claim entitlement spending is out of control and that the economy is being dragged down by our aging population.

I don’t buy it. Soaring healthcare spending is a critical problem, but not only because our population is aging. And Social Security is affordable as a percent of GDP — it’s equal to 4.7 percent of GDP this year, and will slowly rise to 5.3 percent by 2021, according to the Congressional Budget Office.

Now comes an important new book that debunks another retirement myth: Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers (Portfolio/Penguin). Written by Ellen E. Schultz, an award-winning investigative reporter for The Wall Street Journal, the book takes on the often-heard claim that private employers no longer can afford to provide traditional defined benefit pensions.

Schultz’s thesis is that the near disappearance of defined benefit pension plans in the private sector didn’t have to happen at all.

“It wasn’t an accident,” Schultz says in an interview. “It is the result of actions companies took starting in the 1990s to profit from their plans. Employers took perfectly healthy plans with a quarter trillion dollars in aggregate surpluses, and they siphoned out the money through a variety of means.”

The result has been a severe decline in private sector defined benefit (DB) coverage.

The percentage of Fortune 1000 companies with at least one frozen DB plan (where the sponsor company retains the plan but stops future accruals for all or some workers) more than quadrupled between 2004 and 2010.

The fate of DB plans is a critical retirement policy issue. Like Social Security, DB pensions are key to retirement security because they do something private accounts cannot: provide lifetime income. DB pensions and Social Security are far more valuable than private accounts because they insure against longevity risk — the risk that you’ll run out of money before you run out of time.

Schultz details an array of accounting tricks, tax incentives and other ways that companies manipulate plan benefits to serve corporate purposes other than providing retirement security to their workers. These include everything from financing restructuring plans and mergers to goosing bonuses and performance-based management compensation and funding lavish pensions for top executives. Pension assets, Schultz argues, also have been cannibalized to fund retiree health benefits — which in turn also have been shrunk.

She trains her fire in the book not just on corporate managers, but on the “retirement industry”– mainly the consulting and law firms and others that help companies craft ways to cut benefits:

Employers can use pension assets to pay the actuaries, lawyers, financial managers and trustees who provide services related to the management of the pension plans, and uncounted millions have gone to pay the actuaries who craft ways to cut benefits and to lawyers who defend suits brought by pension plan participants.

“Companies were taking money out of plans throughout the 1990s, and people didn’t initially notice,” Schultz tells Reuters. “The plans looked healthy because the stock market was rising and there were surpluses. Companies started to secretly cut benefits and used a variety of means to reduce the rates of growth in benefits.”

Schultz decided to write the book when she noticed a disconnect between what the companies she covered for the WSJ were saying to shareholders and their communications with beneficiaries about plan changes. “I was dumbfounded that these massively overfunded plans were cutting benefits. The changes would be described as improvement or modernization to employees and retirees, but then the companies would tell shareholders that the changes would save money.

“They were referring to an accounting effect — if you reduce future benefits by $200 million, you get to record that as profit. You could look at these IOUs and say, ‘If we cancel or reduce those IOUs, that is a profit.’ That coincided with changes in executive compensation, which was moving toward more performance-based plans. Executives are compensated in stock options and awards that require them to hit profit targets. In some cases they can hit their numbers by cutting benefits.”

Mergers have also had a devastating impact on DB plans, Schultz charges. “When companies go through asset sales, they transfer populations of current workers and retirees. On paper, the retirees are a sort of portfolio of liabilities, but also the assets to pay benefits. But the buyers don’t really have a connection to these retirees, and they don’t care about them. So they hire consultants to audit the plans, and find ways to reduce the payout obligations and squeeze the plans for profit.”

Schultz sees parallels between the decline of private sector DB plans and the current controversy over government-sponsored pension plans. “In the private sector, we saw cuts in benefits that were hidden. In the public sector, benefits were increasing — and those changes were hidden. The motivations are opposite – the private employers want to cut and not have people notice, but in the public sector, politicians prefer to promise benefits down the road that they can’t afford rather than pay out salary now. So they pass the buck to the future. But the moral hazard is similar.”

Schultz has leveled some very serious charges here that are backed up by impressive investigative reporting. It’s recommended reading for anyone who cares about the future of retirement policy, and for anyone struggling to understand what’s happened to their pensions.

“Retirement Heist” could lead to pressure on Washington to enact serious reforms that will restore DB pensions – but I’m not holding my breath.

7 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Large Corporations plundered pension plans, shipped millions of jobs overseas, overpaid CEO’s and top executives and they don’t pay their share of taxes. They need to participate in America. Greed is the fall of Democracy.

Posted by minipaws | Report as abusive

Millions of US citizens are well aware that their savings and retirements were stolen through stock market manipulation, fraud and embezzlement. The question is when is the SEC going to hold the thieves accountable and seize assets to be returned to the rightful owners?

Posted by aligatorhardt | Report as abusive

As a society we are regressing toward economic serfdom governed by a plutocracy. As long as Congress is “bought and paid for” it isn’t going to get any better…especially with a pro-Corporate Supreme Court.

Posted by Rumplestilskin | Report as abusive

A criminal of the description above should be taken into custody just as regularly as the common street criminal. One may steal for subsistance or due to pathology, the other due to greed and a sense or belief of entitlement that is not there. Thievry is thievry, and the first criminal, the educated one is the more dispicable and unethical pig, as to the sheer number of victims!!!!

Posted by Laurita | Report as abusive

the euphimism “white collar crime” should be eliminated forever from our discourse

Posted by danielgrattan | Report as abusive

What we are witnessing here is the emergence of a new parasitic corporate aristocracy that doesn’t give a crap about the rank and file workers who make their lives possible. I’m reminded of a movie I saw once where a noble on horseback is exiting his castle and he passes an old woman selling eggs from a wicker basket. This noble greedily reaches down from his mount and snatches some of the eggs without paying for them. What corporate America has been doing to this country since the 90’s in the name of their executives is no less blatant thievery than the scene I have described here. The boardrooms of these corporations have become little more than non-government taxing authorities. America has forgotten that corporations exist so people can have jobs and raise families not the other way around. If something doesn’t change soon we will be living in a new Age of Robber Barrons . These executives expect people to work for nothing and that’s exactly what we’ll end up doing unless the people of this country pick up their proverbial torches and pitchforks and let the nobles in the castle know that we won’t take anymore of their BS.

Posted by MichaelCockrell | Report as abusive

This woman couldn’t be more wrong and misinformed if she were trying. To sum of the ridiculousness of her ‘charges’ as insane, I’ll sum it up by stating this fact:

Governmental entities — thousands of them — thought DB pension plans would be affordable, even ‘enhanced’/increased benefit formulas in the 1990s because investment returns were very good in the ’80s and ’90s…..and they have become INCREDIBLY unaffordable. Invstmt returns have been about 3%/year since 1/1/00, meaning……financial armageddon for all the govt entities still fighting to keep their DB pensions. Conclusion: It’s a damn good thing so many companies terminated or froze their pension plans. They would have become INCREDIBLY high ‘risk-centers’, just as the governmental plans have become. This will get VERY ugly, and Schultz’s thesis is entirely wrong. Besides, people who save enough in DC plans CAN insure against longevity by buying a partial annuity when they’re 70 AND 80, with a portion of their money. DC plans ARE fantastic, but unfortunately, people aren’t saving enough.

Posted by sbourg | Report as abusive