The Betrayal of the American Dream (19 page)

Two years and eight months later, Kathy and some of her coworkers lost their jobs at Legatus. It was a blow that caught them by surprise. One distraught employee later committed suicide. Kathy brushed up her résumé and began looking for work, assuming that with her years of experience in a wide range of jobs, it would be only a matter of time before she found one. But there was nothing. To make her mortgage payment and meet other expenses, she withdrew savings and started tapping into her 401(k). At a time when she would have liked to have been putting money away for retirement—she was in her sixties—she had to dip into her nest egg just to keep a roof over her head. At one point she worked at three part-time jobs and took an online course to become a real estate broker. She also organized a career counseling class at a local church to provide practical tips and moral support for others like herself.

With her financial situation growing increasingly dire, she ultimately took a job behind the deli counter of a grocery store. The woman who had helped arrange visits to the pope was now slicing ham and cheese. She learned how to close the store for the night—how to take apart and clean the slicers, tidy up cabinets and coolers, and disassemble the metal over floor drains so they could be mopped. “I hadn’t worked in anything like this since I was in my teens,” she said. Eventually she qualified for the company’s health plan, and in her first year she got a raise—a fifteen-cent-an-hour increase that put her up to $10.40 an hour.

If things had worked out differently, Kathy, sixty-three, might be thinking of retirement. Instead, simply holding on to her house is her most important priority. She renegotiated the mortgage and lowered the monthly payment with a forty-year mortgage. Unlike earlier generations of Americans who often left their debt-free homes to their children as an asset, Kathy will never be able to do that. Instead of saving in her later years and retiring the mortgage, she will be making payments to her bank as long as she lives if she stays in her house. Even after renegotiating her mortgage, money is still tight because her earnings are only one-third of what they once were. Having pulled money out of her 401 (k), and being in no position to replenish it from her modest earnings, Kathy is just trying to get by while she continues to look for a job in which she can use her talents and experience. In the meantime, she’s focused on the present: “I’m not living in the future anymore.”

A few miles west of Kathy, in the wealthy seaside town of Naples, retirement looks very different to Bruce Sherman.

Sherman was a money manager who headed Private Capital Management, a Naples-based investment firm that caters to wealthy individuals. He made a lot of money over the years for his clients and himself, but his last big deal had lasting repercussions.

He was the money manager who in 2006 brought down Knight-Ridder, the nation’s second-largest newspaper chain, which included the
Philadelphia Inquirer,
the
Miami Herald,
and the
San Jose Mercury News.
After gaining control of 19 percent of Knight-Ridder’s stock, Sherman in 2005 demanded changes in the company’s management, and when the response of company leaders didn’t satisfy him, he decided to sell off all the shares he controlled.

But Sherman controlled such a large bloc of stock that if he dumped it into the market, its value would plummet. To preserve Private Capital Management’s investment, Knight-Ridder had to be sold outright, through auction or otherwise. So Sherman decided “to bully the company into putting itself up for sale,” according to the
American Journalism Review.

To the surprise of its employees and the journalism world, Knight-Ridder caved and sold the company for $6.5 billion. The buyer was a smaller chain, McClatchy Newspapers, which in turn sold off a number of former Knight-Ridder papers to help offset the purchase price. The sale set off a chain reaction as investors fled the field, dumping their holdings in other newspaper stocks.

Every newspaper in the former Knight-Ridder chain has suffered greatly since Sherman’s brief foray into the newspaper business. The troubles affecting former Knight-Ridder properties are part of an industry-wide trend that has hit all newspapers in the Internet era. But Sherman’s acquisition of a large bloc of the company’s stock on behalf of his clients served to drive up the company’s stock price in excess of its value and was a contributing factor to the papers’ later weaknesses in dealing with debt. Every former Knight-Ridder paper has gone through layoff after layoff, killed pensions, frozen benefits, mandated unpaid furloughs, or taken other harsh measures to try to remain viable. To be sure, newspapers had financial problems before Sherman, and they still do, but the run-up in the debt of Knight-Ridder papers that he provoked has saddled them with huge liabilities that have compounded their problems.

None of that concerns Sherman. He retired from Private Capital in 2009. This gave him more time to play golf and spend time with his grandchildren, he told a local reporter. It has also given him time for charitable events. One of his interests is the annual Naples Winter Wine Festival, which raises money for a local foundation to support programs for underprivileged and at-risk children. One of the highlights of the Naples social season, the festival often imports famous wine experts and notable chefs to entertain the wealthy attendees. Sherman and his third wife, Cynthia, were cochairs of the 2011 festival.

When not on the golf course or at a charitable event, Sherman can be found in his 12,050-square-foot penthouse at the Regent, a luxury high-rise condominium overlooking the blue waters of the Gulf of Mexico. He and Cynthia purchased the place for $9.5 million in 2003. Though it had been built only the year before, they called in a decorator who had worked with Steven Spielberg to spruce it up, according to local press accounts. The Regent has about everything one could want in a gated community: guest suites, an auto-spray car wash, a beachfront pool, and massage and exercise rooms. In his spacious penthouse, Sherman told a local reporter that he’d set aside one room for a special purpose: an office to manage his investments.

TURNING BACK THE CLOCK

For many Americans, the changes that would affect their retirement years arrived by stealth. The number of Americans covered by guaranteed pensions had risen steadily from 1950 to 1980: 10.3 million in 1950; 23 million in 1960; 35 million in 1970. By 1980, a total of 28 percent of the private workforce was covered by a defined benefit pension plan. This was the gold standard for retirement because a pension plan guaranteed retirees a fixed income for life.

But then Wall Street and corporate America decided that enough was enough: deeming pensions too costly for corporations and their stockholders, they began to kill pensions and shift employees into cheaper plans that paid employees less money.

From a peak of 112,000 defined-benefit plans that provided retirees with a guaranteed monthly income in 1985, the number plunged to 27,650 in 2011. By then, only 3 percent of private workers were covered solely by such plans.

More significantly, virtually no companies are creating these plans anymore, and only a few provide them to new employees. Fortune 500 companies are among those killing or freezing their defined-benefit plans by the score. In 1998 a total of 67 percent of the top one hundred Fortune 500 companies offered defined-benefit plans. By 2010 the figure had plunged to 17 percent, according to Towers Watson, the global consulting firm. Typical of the attitude toward pensions was Hewlett-Packard, long one of the most admired U.S. companies, which pulled the plug on guaranteed pensions for new workers. A spokesman said the company had concluded that “pension plans are kind of a thing of the past.” In that, Hewlett-Packard was merely part of a corporate trend.

Major companies that have restricted their defined-benefit plans in some manner include Anheuser-Busch, Caterpillar Inc., CIGNA, DuPont, Kimberly-Clark, Kraft Foods, Motorola, R. R. Donnelley & Sons, Sunoco, and 3M. The nation’s largest employer, Walmart, does not offer such pensions. At the current pace, human resource offices will turn out the lights in their defined-benefit section in the next few years. At that point, individuals will assume all the risks for their own retirement.

The shift away from guaranteed pensions was encouraged by Congress, which structured pension and retirement plan legislation in a way that invited corporations to abandon their defined-benefit plans in favor of defined-contribution plans—increasingly 401 (k)s—in which employees set aside a fixed sum of money toward retirement. Many companies also contribute to these plans, but some don’t. In either case, the contributions will never be enough to match the certain and long-term income from a defined-benefit plan. What’s more, once the money runs out, that’s it. If people live longer than expected, get stuck with unanticipated expenses, or suffer losses of other once-promised benefits, they will have little besides their Social Security to sustain them.

The move out of pensions and into 401(k)s was an intentional strategy to substantially reduce corporate costs. It was sold as a plus for employees, as part of what former President George W. Bush referred to often as the “ownership society” in which people would take charge of their own finances and all other phases of their economic lives and not depend on other parties to possibly dictate their financial future. Bush’s Treasury secretary, John Snow, was an especially avid proponent: “I think we need to be concerned about pensions and the security that employees have in their pensions,” Snow told a congressional committee in 2004. “And I think we need to encourage people to save and become part of an ownership society, which is very much a part of the president’s vision for America.”

Of course, it’s much easier to own a piece of America when you have a pension like Snow’s. When he stepped down as head of CSX Corporation—operator of the largest rail network in the eastern United States—to take over Treasury, Snow was given a lump-sum pension of $33.2 million. It was based on forty-four years of employment at CSX. Unlike most people, who must work for forty-four years to receive a pension based on forty-four years of service, Snow was employed at CSX for just twenty-six years. The additional eighteen years of his CSX employment history were fictional, a parting gift from the company’s board of directors.

At the same time as corporate executives are paid retirement dollars for years they never worked, hapless employees lose supplemental retirement benefits for a lifetime of actual work. Betty Moss was one of thousands of workers at Polaroid Corporation—the maker of instant cameras and film then based in Waltham, Massachusetts—who gave up 8 percent of their salary to underwrite an employee stock ownership plan, or ESOP. It was created to thwart a corporate takeover and “to provide a retirement benefit” to Polaroid employees to supplement their pension, the company pledged. It didn’t happen. Slow to react to the digital revolution, Polaroid began to lose money in the 1990s. From 1995 to 1998, the company suffered $359 million in losses. As its balance sheet deteriorated, so did its stock price, including shares in the ESOP.

In October 2001, Polaroid sought bankruptcy protection. By then, Polaroid’s shares were nearly worthless, having plummeted from $60 in 1997 to less than the price of a Coke in October 2001. During that period, employees were forbidden to unload their stock, based on laws approved by Congress. But what employees weren’t allowed to do at a higher price, the company-appointed trustee could do at the lowest possible price—without even seeking the workers’ permission. Rather than wait for a possible return to profitability through restructuring, the trustee decided that it was “in the best interests” of the employees to sell the ESOP shares. They went for nine cents. Just like that, the $300 million retirement nest egg of six thousand Polaroid employees was vaporized. Many lost between $100,000 and $200,000.

Betty Moss spent thirty-five years at Polaroid, beginning as a file clerk out of high school, then working her way through college at night and eventually rising to be senior regional operations manager in Atlanta. “It was the kind of place people dream of working at,” she said. “I can honestly say I never dreaded going to work. It was just the sort of place where good things were always happening.” One of those good things was supposed to be the ESOP, touted by the company as a plan that “forced employees to save for their retirement,” as Betty recalled. “Everybody went for it. We had been so conditioned to believe what we were told was true.” Once Polaroid entered bankruptcy, Betty and her retired coworkers learned a bitter lesson—that they had no claim on benefits they had worked all their lives to accumulate. Although the federal PBGC agreed to cover most of their basic pensions, the rest of their benefits were canceled—not only the ESOP accounts but also their retiree health care and severance packages.

The retirees, who were generally well educated and financially savvy, organized to try to win back some of what they had lost by petitioning the bankruptcy court, which would decide how to divide the company’s assets among creditors. But Polaroid’s management undercut the employees’ effort. Rather than file for bankruptcy in Boston, near the corporate offices, the company took its petition to a bankruptcy court in Wilmington, Delaware, that had developed a reputation for favoring corporate managers. There Polaroid’s management contended that the company was in such terrible financial shape that the only option was to sell rather than reorganize. The retirees protested, arguing that Polaroid executives were undervaluing the business so that the company could ignore its obligations to retirees and sell out to private investors.

The bankruptcy judge ruled in favor of the company. In 2002 Polaroid was sold to One Equity Partners, an investment firm with a special interest in financially distressed businesses. (One Equity was a unit of Bank One Corporation, now part of JPMorgan Chase.) Many retirees believed that the purchase price of $255 million was only a fraction of Polaroid’s value, and there is evidence to support that view: the new owners financed their purchase, in part, with $138 million of Polaroid’s own cash.