Author's note: I'd like to share with you an article of mine scheduled for publication soon in 'Z' magazine. It is about the three-sided current attack on Defined Benefits Pensions that has just occurred with the passage August 4 by Congress of the 'Pension Protectio Act of 2006', with the federal Appellate Court's decision of August 7 legalizing all cash balance plans, and the coming September 2006 FASB pension accounting rules bombshell that will further undermine all pensions. These three coordinated events by Bush administration and corporate friends will accelerate the collapse of Defined Benefit (mostly union) pension plans, and will require a massive bailout of the Pension Benefit Guarantee Corporation (PBGC) within the next few years at workers' and taxpayers expense amounting to a minimum of $700 billion.
Tolling the Retirement Bell in America
by Jack Rasmus
CORPORATE AMERICA AND THE Bush administration have embarked upon a policy aimed at dismantling the retirement system in America. The consequences for more than a hundred-fifty 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 houses of Congress 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-third 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 retirement the traditional pension plan system and all but ensure the rapid demise of traditional pensions in the U.S. Moreover, senior Bush administration policy makers, 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 at retirement for tens of millions of retirees.
How To Create A Pensions Crisis
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, which, unlike 401K plans, guarantee workers a given level of monthly retirement per year of service were thus dismantled or diminished between 1980-89. In response to the above practices, Congress instituted a 50% excise tax on reversions in 1990. In response in turn, however, unable to continue diverting pension funds at will, managers simply declared ‘contribution holidays’ and refused to put funding taken out in the 1980s back during the 1990s.
After 1990 management played fast and loose with the assumptions game in establishing the value of their pensions’ funds. Corporate manipulation of assumptions became common practice throughout the decade. 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 in fact were justified. That in turn made possible the declaration of ‘contribution holidays’ in which companies maintained it wasn’t necessary to make 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 worker followed. The water level in the river of the economy fell and the many rocks of false economic and actuarial assumptions, contribution holidays, and twenty years of pension surplus skimming and pension surplus stealing appeared. From 2000 on un-funded pension liabilities soared in total value. The government’s 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 St. Journal in June 2006 estimated there was at least $450 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 severely under-funded plans that were highly likely to go belly up.
But the numbers may in fact be even higher. Just recently the PBGC refused even requests by Congressmen 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 and 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% of corporations surveyed were threatening to do just that—i.e. 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 of 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. In the last 20 years alone, since 1985 about 85,000 DBP plans have disappeared, as the table below clearly shows. (And that’s in addition to the 40,000 that went bust under Reagan from 1980-85). And from 75% of all workers covered by DBPs in 1985, the number has fallen to 20% 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 system has not only been in the process of dismantlement for some time but that it has been replaced with a system of 401K plans. Expressed another way, a system that once guaranteed tens of millions of workers a level of benefit payments at retirement they could know and count on has been substituted with a system paying retirement benefits on average one-half to two-thirds the benefits 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.
RESTRUCTURING THE PENSION SYSTEM In AMERICA
Defined Benefit Plans 401K Plans
Number of Plans % Workers Covered Number Participants Total Asset Value
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
The ‘Coup-de Grace’—The Pension Protection Act of 2006
What remains of DBP plans will now be further undermined and eventually dismantled as a consequence of the 2006 Pension Act just passed by Congress.
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 Act is actually designed to accelerate the demise of what remains of such pensions and encourages their further replacement with 401Ks.
As others point out, the ‘end-game’ for corporations and their political supporters may well be to engineer the current pension system toward an eventual collapse and public bailout at taxpayer expense, much like that which occurred with the $ trillion dollar bailout of the Savings and Loan industry in the late 1980s.
According to New York Congressman, Major Owens, “a huge conspiracy has been set in motion with a profitable bailout at the end for corporations”…in which “even the luckiest workers will get no more than half of the pension benefits they worked hard to earn”. Similar warnings have been voiced from California Congressman, George Miller, who has charged the 2006 Act will increase the under-funding of plans and encourage companies to abandon more of their plans, thus “raising the specter of another savings and loan style taxpayer bailout.”
There are at least five major provisions of the 2006 Act that are designed to accelerate the decline of Defined Benefit Pensions. Without going into details of the 900-page Act’s various provisions, here is how the Pension Act will significantly hasten the demise of what’s left of DBP plans:
The first measure designed to further undermine DBPs is the Act’s 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. As others have pointed out, this shift will permit corporations to forego up to $50 billion in necessary contributions to shore up their funds. That translates into yet another hidden ‘contribution holiday’.
When Republican House Committee chairman, 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 Act’s 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 is 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 its running 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. That 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 the absolutely necessary provision preventing corporations from ‘dropping out’ despite the increases, and fining those that attempt to do so with major financial penalties. Short of that, the current Act will strongly encourage corporations to abandon the system and unilaterally dismantle their DBPs, and result in their paying workers whatever they unilaterally choose as a cash out.
A third area encouraging the demise of DBPs is the set of strong measures favoring corporate conversions to ‘Cash Balance’ plans. As noted previously, the essence of such conversions is to discontinue a DBP, provide a lump sum cash out (especially negatively impacting older workers), and transition to a contribution plan—most often a 401K. The Act clears the way legally for such conversions by legislating that cash outs are not ‘discriminatory’ for older workers even though they clearly take a bigger pension hit at cash out compared to younger workers. To date, already seven million workers have been impacted by conversions to Cash Balance plans, mostly under George W. Bush. With the new 2006 Pension Act this number will undoubtedly grow even more rapidly.
Federal Appeals Court Delivers ‘Second Bullet’
If the Pension Act is the ‘coup de grace’ for traditional pensions, then the recent federal appeals court decision on August 7 amounts to a ‘second bullet’ delivered at point blank range into the heart of DBPs. The Pension Act provisions concerning Cash Balance plans primarily clears the way for future corporate conversions. But it still leaves open the status of the conversions to such plans by about 1500 corporations 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 1500 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 savings to corporations—mostly large multinationals—that have already converted. IBM Corporation, the main defendant in the court case, will alone now be able to pocket a windfall of $1.4 billion as a result of the decision.
The Cash Balance measure dovetails 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 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 latter recent and complex 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 Corp. and Worldcom Corp. pale in comparison.
The FASB ‘Nail In the Coffin’
There is yet another major factor occurring in parallel today, but outside the 2006 Act’s provisions, that will seriously undermine DBPs and do so 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 of major corporations’ pension funds are now significantly under-funded due to the way corporations were allowed to report the value of their pension funds the past twenty years, especially using assumptions about how much their pension fund investments had been earning. Consequently the FASB will release in September 2006 (conveniently following the passage of the Pension Act) new rules for valuing pension fund assets.
The point is this rule change will virtually overnight increase the under-funding of pensions by literally hundreds of $ billions more than even reported today. The highly respected actuarial firm, Millman, has estimated properly funding these pension liabilities will require an equivalent of 8% 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 1000 corporations across the board in all industries during the past year, 2005-06, 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 soon lead to an even more rapid exodus from DBPs by corporate America. The American 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 thus represents the overturning of one of the major incentives back in the late 1940s mentioned previously that strongly encouraged 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. Of course, the ultimate cause behind the FASB proposed change is the decades-long chronic under-funding of DBPs by corporate America and their just as long term practice of manipulating assumptions underlying their pension funds in order to avoid contributions and/or to justify improper exploitation of those funds. But the FASB accounting changes may well precipitate the exodus from DBP plans, or will at a minimum certainly accelerate it.
In the final analysis, the Pension Protection Act of 2006 represents the latest stage, the most recent significant event, in Corporate America’s 20 year long plans to abandon any liability to provide retirement benefits. With 401Ks, workers are on their own—with full risk and liability to ensure adequate retirement at the mercy of stock and bond markets, hedge funds, and other speculative sources. Meanwhile, corporations retain all the prior advantages of traditional pensions in terms of balance sheet, accounting, and taxation and enjoy more ready access than ever before to a huge pool of funds for investment purposes.
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. Both represent a huge pool of assets that corporate America has wanted to get its hands on and transfer into a more useful, exploitable and therefore directly profitable form. The vehicle for getting at DBPs has clearly been the promotion and advantages given to 401K plans by politicians and corporations. The dismantling of DBPs and shifting of their funds to 401Ks is now approaching a final phase with the latest wave of abandonment of DBPs about to occur.
George W. Bush’s intent—like that of Ronald Reagan before him—is to ‘privatize’ Social Security and to transfer Social Security funds to the private sector where they are also 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. Private Investment Accounts (PIAs) are just another version of 401Ks!
Bush and friends temporarily placed the push for Social Security Privatization on the policy ‘back burner’ in 2005-06, while focusing primarily on ensuring that tax cuts for the wealthy and corporations he passed during his first term were made permanent in his second. As that primary tax legislative task approaches completion, the focus will turn once again to the unfinished business in Bush’s last two years of trying to privatize the Social Security system. The preliminary political trial balloons are already rising, testing the political crosswinds in preparation for a post-November Congressional election push on Social Security once again.
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 the Wall St. Investment banking company, Goldman & Sachs. In his first major speech on the job, on August 1, 2006 Paulson “put social security reform firmly back on the political agenda more than a year after Mr. Bush abandoned his plan to create ‘personal accounts’,” 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, with new legislation in Congress quickly thereafter. Undermining what remains Defined Benefit Pension plans in 2006; and privatizing Social Security again in 2007. The dual approach to dismantling the retirement system in America.
What’s happening is a fundamental change in the ‘rules of game’ determining retirement in America, originally established in the post World War II period, now being replaced with a new set of ‘rules’ abandoning retirement as Americans have known it for more than half a century. At stake are literally the potential transfer of $ trillions from the hundred fifty million or so working and middle class Americans and retirees to banks, insurance companies, mutual funds, and to corporate CEOs, senior management and their major shareholder beneficiaries.
Dr. Jack Rasmus
1st Vice-President, UAW Local 1981, National Writers Union
Jack is the author of the recently published book, THE WAR AT HOME: THE CORPORATE OFFENSIVE FROM RONALD REAGAN TO GEORGE W. BUSH, published by Kyklos Productions, 2006.
Mailing Address: Dr. Jack Rasmus, 211 Duxbury Ct., San Ramon, CA 94583
Tel. 925-209-3933 (mobile)
Bus. Tel. 925-828-0792