Pension Plans In Corporate Cross-Hairs
by Jack Rasmus
Z magazine, September 2004
Decently United Airlines announced it
will abandon the pension plans for its 120,000 employees and retirees,
quickly setting off similar announced intentions by other airline
companies and sharply increasing the likelihood of a chain reaction
of pension plan failures, both within the airline industry and
throughout other industries as well.
United Airline's action directly followed
a decision by Congress earlier this summer not to provide another
loan to the company at the public taxpayers' expense. It dramatically
raises the possibility that the Pension Benefit Guarantee Corporation
(PBGC), a non-governmental agency responsible for insuring workers'
pensions in such cases, will itself be forced into bankruptcy
should it have to assume the nearly $7.5 billion liability of
United's (plus additional $10-$20 billion of other airlines')
unfunded pension obligations.
As a consequence of the recent Bush administration's
decision this year to allow companies with unfunded pension plans
to forego $80 billion in payments currently due and required by
law to bring their plans into balance, the PBGC now faces total
unfunded pension liabilities or more than $278 billion.
Should the PBGC itself fail under the
imminent, large scale abandonment of group pension plans by United
and other U.S. corporations soon to follow its lead, it will certainly
require hundreds of billions of dollars in bailout by Congress
and mean yet another huge windfall for corporations at the expense
of the U.S. worker and taxpayer.
The 401K Plan Rip-Off
There are basically four kinds of pensions
in the U.S-the public Social Security system; Defined Benefit
and Defined Contribution pension plans; and Individualized Savings
accounts where employees pay into a 401K, an IRA, or a similar
personal pension plan. Social Security and Defined Benefit pensions
provide a guaranteed level of benefits on retirement, while Defined
Contribution and Individual Savings account plans do not.
Corporations and financial institutions
prefer 401Ks, IRAs, and similar individualized plans because they
can charge high fees and raise administrative costs, lower the
benefit amount at will, borrow from the accounts when they want,
pressure workers to buy the company's stock, manipulate the plan's
funds to make the company appear more profitable than it is, and
let workers assume all the risks if the company or stock and bond
markets fall. With union-defined benefit plans and Social Security
they can't do any of that.
Administrative fees for managing a 401K
alone can amount to a huge sum and significantly impact a worker's
retirement. For example, the typical fee to run a 401K averages
2 to 4 percent of the worker's contribution. If a worker had $100,000
in a 401K, earning 8 percent over 30 years, every 1 percent reduction
in the 2 to 4 percent fee charge would mean an extra $215,000
in the worker's account upon retirement.
Employees at Enron Corporation, who lost
more than $2 billion when that company went bankrupt in 2002,
were in a typical 401K account. Enron management pulled its money
out when they knew the company was going under, while they "froze"
the accounts for their employees who couldn't withdraw anything
until the plan was essentially bankrupt. But it's not just Enron
workers who have been victims of 401K plans. Between 2000 and
2002, during the recent Bush recession, workers who had their
money in 401K plans found their retirement savings contract on
average by 20 to 40 percent in 2 years.
Individual retirement plans based on 401Ks
and similar programs are largely the product of the last 20 years.
A series of laws were passed under Reagan in 1980, 1982, and 1987
that gave a big boost to 401Ks. At the same time, a corporate
offensive was launched to dismantle Defined Benefit pension plans.
The result of this decades-long attack
on group pensions, and the concurrent promotion of 401Ks, has
been a major shift from union and group pension plans to individual
retirement 401K accounts. Very few households had 401K retirement
plans in 1983. By 1995, this had risen to 23 percent. Today more
than 62 percent have such plans despite the various problems associated
with 401Ks noted above. In contrast, in 1981 more than 37 percent
of all U.S. workers were covered under some kind of group pension
plan. Today the number is less than 20 percent.
Group Pension Plans
George Bush, Alan Greenspan (head of the
U.S. Federal Reserve System), and other conservatives have recently
declared that privatizing and breaking up Social Security will
be high on the Bush agenda in a second term. Social Security alone
will generate $1.1 trillion in surplus between now and 2018. That
is a huge sum of money that Wall Street, the banks, and corporations
want transferred into 401K plans in order to invest offshore,
to stimulate stock market sales, and for other business ventures.
But the target is not just Social Security.
Group pension plans-especially union negotiated Defined Benefit
plans with total funds of $350 billion on hand-are also in the
From Reagan through Bush, corporations
have been terminating and undermining group pension plans by shutting
down plants and moving companies, underfunding the plans, diverting
funds to other corporate use when they can get away with it, and
then, when the plan is in jeopardy, with the assistance of government
and the courts, funneling whatever remains into private 401K-type
personal savings plans.
From the passage of the Employee Retirement
Income Security Act (ERISA) in 1974 until 2003, more than 160,000
Defined Benefit plans have gone under in the U.S.
Sixty-five thousand of these plans failed
between 1975 and 1985, most of which occurred under Reagan from
1981-85 as a consequence of runaway shops, corporate restructuring,
and the rustbelting of the U.S. From 1986 to 2002, another additional
95,000 plans failed, as traditional unionized and manufacturing
jobs continued to melt away due to corporate outsourcing and off-shoring,
government "free trade" policies, and as corporations
in newer services and technology industries increasingly opted
for 401Ks. Courts and legislatures throughout the 1990s made 401Ks
more attractive with tax breaks and other advantages-as they simultaneously
continued to tighten the screws on traditional group pension plans.
According to the government's Pension
Benefit Guarantee Corporation, there were 112,000 Defined Benefit
pension plans in 1983. Today there are less than 31,000 such plans.
Group Pension Plan Crisis
PBGC is a federal government agency set
up to handle the distribution of remaining pension funds and benefits
when a plan gets into financial difficulty. Today the PBGC provides
support to workers for only 3,200 pension plans out of the 160,000
such plans that went belly up since 1980. Most of the U.S. workers
once covered by these 160,000 plans were forced to cash out, receiving
only a small part of what they contributed to the plan, or were
required to migrate to 401K or other plans with far fewer benefits.
Yet the current crisis in group pension
plans is far from over. Both the 3,200 pension plans and the one
million workers in those plans currently receiving insured pension
benefits from the PBGC, as well as the 44 million additional workers
and retirees in the remaining 31,000 Defined Benefit plans, are
increasingly at risk. Today, pension benefits worth $1.5 trillion
are exposed because the PBGC is about to go broke.
The corporate-government strategy of the
last 20 years has succeeded in eliminating so many Defined Benefit
plans that too few may exist today to keep the PBGC afloat. The
PBGC is not backed by the "full faith and credit of the US
government" and receives no federal tax dollars. The 31,000
pension plans still participating in the PBGC have to pay a fee
to the fund that insures pension payments to workers in the plans
it supports and to other plans that may also soon go broke. As
the number of plans participating in the PBGC shrinks, the costs
get higher for those pension plans remaining. They can opt out
of the PBGC and increasingly have. In 1980 nearly 80 percent of
all Defined Benefit pension plans participated in the PBGC. By
2000, only 53 percent participated and many more have dropped
out since the recession.
As participation in the PBGC evaporates,
at some point a critical threshold will be reached and the PBGC
will be insolvent. By 2004, the PBGC fund's deficit was more than
$10 billion and rising at a rate of more than $1.5 billion each
But this is just a ripple. A pension storm
is taking shape at sea and currently heading toward the retirement
coastline. In an emergency report issued this past June 2004,
the PBGC estimated that companies with pensions plans underfunded
by $50 million or more-that's more than 1,050 pension plans-together
had an underfunded liability of $278.6 billion at the end of 2003.
This compares to only $18.4 billion as recently as 1999. It doesn't
even include companies with underfunded liabilities of less than
$50 million. The total underfunding for all pensions covered by
the PBGC today comes to about $400 billion as of the end of 2003.
The Bush response to this growing crisis
has been to give corporations with pensions in trouble a "contribution
holiday," by allowing them this past April to change the
way they calculate their fund obligations for the next two years.
This Bush "paper fix" will save these corporations $80
billion that they would otherwise have put into their pension
plans-in other words, an effective additional corporate tax cut
of $80 billion. But the $80 billion corporate contribution holiday
will not resolve the real problem of underfunding.
For Social Security, the Bush plan is
to talk up a phony crisis and make workers believe that the Social
Security fund doesn't have enough money to pay for future retirees'
benefits by the end of the next decade. That propaganda campaign
is already underway. Should Bush get elected for a second term,
the next step will be to pass legislation early in 2005 allowing
workers to invest their payroll tax deductions, now going into
the Social Security fund, into private personal savings accounts
like 401Ks, IRAs, and other similar devices-all of which will
be controlled by corporations and banks. The same legislation
will then provide a carrot and stick. The carrot will be to offer
workers tax credits for the payroll deductions they transfer to
privately run 401K plans. The stick will be to raise retirement
levels and lower Social Security benefits (because there now will
be less money in the Social Security fund). Making it longer to
wait to retire and reducing benefits will create a strong incentive
for workers to consider diverting their payroll tax deductions
from Social Security into the tax credit-enabled 401Ks.
In contrast to Social Security, a real
crisis does exist for group pension plans. Bush's plan will be
similar to that for Social Security. First, the current crisis
in Defined Benefit pension plans will be allowed to worsen. Indeed,
the Bush administration has been passing rules the past two years
that won't resolve the crisis, but are designed to make it worse.
For example, another recent Bush rule prohibits unions from negotiating
changes to their plans if they are in financial trouble. Finally,
there are the new arbitrary rules concerning Cash Balance plans.
Cash Balance plans were recently launched
by the largest corporations with Defined Benefit plans. Think
of Cash Balance plans as a unilateral attempt by corporations
to do an end-run on union negotiated Defined Benefit plans and
convert them into Defined Contribution plans. More than 40 of
the largest 100 corporations with Defined Benefit plans have gone
this route in recent years. Cash Balance plans essentially permit
workers (and managers) to cash out their benefits before retirement
(at a total amount almost always less than what they would have
earned in retirement). Once they cash out they can invest in 401Ks
offered by the companies. Cashing out weakens financially the
Defined Benefit plan and puts those who don't cash out at growing
risk. This provides an incentive for those initially reluctant
to cash out, to do so. The result is a snowball effect that hastens
the demise of the original Defined Benefit plan, which was intended
by management from the outset.
Recent rules passed by the Treasury Department
have been designed to encourage Cash Balance plans and thus the
shift to 401Ks and the weakening of remaining union negotiated
Defined Benefit plans. The battle over Cash Balance plans currently
rages in Congress. Cash Balance arrangements will therefore loom
large in Bush's eventual restructuring of the U.S. retirement
system in a second term.
The common denominator result of all the
above, if allowed to continue, will soon be an even larger record
number of Defined Benefit plans becoming financially unstable
and having to be taken over by the PBGC. As PBGC losses accumulate,
and the exodus from the PBGC of stable plans grows, it will become
clear that the PBGC cannot survive without a massive government
bail out. When this point is reached, the Bush administration
will recommend legislation similar to that planned for Social
Security-legislation that will allow, or even require, companies
and workers in Defined Benefit plans to transfer their contributions
and/or their remaining accrued funds into 401K and similar individual
Republicans and conservatives in Washington
are intent on using the crisis to provide more handouts and subsidies
for their corporate friends at the expense of the public purse
and the taxes we pay. They will attempt to use the crisis as an
excuse for a complete restructuring of the pension system in the
Jack Rasmus is a member of the National
Writers Union. This article is an excerpt from The War At Home:
The Corporate Offensive in America From Reagan to Bush (www. kykiosproductions.