The Betrayal of the American Dream (20 page)

Employees did not leave bankruptcy court empty-handed. They all got something in the mail. Betty Moss will never forget the day hers arrived. “I got a check for $47,” she recalled. She had lost tens of thousands of dollars in ESOP contributions, health benefits, and severance payments. She and the rest of Polaroid’s other six thousand retirees were being compensated with $47 checks. “You should have heard the jokes,” she said. “‘How about we all meet at McDonald’s and spend our $47?’”

Any doubt as to how badly employees had been cheated by the company and the bankruptcy court was quickly dispelled when Polaroid emerged from court protection. Under a new management team headed by Jacques Nasser, former chairman of Ford Motor Company, Polaroid returned to profitability almost overnight. Little more than two years after the company came out of bankruptcy, One Equity sold it to a Minnesota entrepreneur for $426 million in cash. The new managers, who had received stock in the postbankruptcy Polaroid, walked away with millions of dollars. Nasser got $12.8 million for his 1 million shares. Other executives and directors also were rewarded for their efforts. Rick Lazio, a four-term Republican from West Islip, New York, who gave up his House seat for an unsuccessful Senate run against Hillary Rodham Clinton in 2000, collected $512,675 for a brief stint as a director—an amount nearly twice the $282,000 paid to all six thousand retirees. The $12.08 a share that the new managers received for little more than two years of work was 134 times the nine cents a share handed out earlier to lifelong workers.

Bankruptcy court’s shunting aside Polaroid’s workers in favor of the company’s executives and new owners was all too typical of how other institutions also treat ordinary citizens on retirement matters. Washington has a long history of catering to special interests on pension legislation and regulations, dating back to 1964 when the Studebaker Corporation collapsed, junking the promised pensions of four thousand workers not yet eligible for retirement.

For years the carmaker had published brochures spelling out its promise to employees: “You may be a long way from retirement age now. Still, it’s good to know that Studebaker is building up a fund for you, so that when you reach retirement age you can settle down on a farm, visit around the country or just take it easy, and know that you’ll still be getting a regular monthly pension paid for entirely by the company.”

It took Congress ten years to react to Studebaker’s betrayal by writing the Employee Retirement Income Security Act (ERISA) of 1974. It established minimum standards for private retirement plans and created the Pension Benefit Guaranty Corporation to guarantee them. President Gerald Ford hailed the measure when he signed it into law that Labor Day: “This legislation will alleviate the fears and the anxiety of people who are on the production lines or in the mines or elsewhere, in that they now know that their investment in private pension funds will be better protected.”

The biggest winners under the bill weren’t working Americans, however, but money men. Congress wrote the law so broadly that it allowed corporate raiders to dip into pension funds and remove cash set aside for workers’ retirement. During the 1980s, that’s exactly what a cast of corporate raiders, speculators, Wall Street buyout firms, and company executives did with a vengeance, walking away with an estimated $21 billion earmarked for workers’ retirement pay. The raiders insisted that they took only excess assets that weren’t needed.

Among the pension buccaneers: Meshulam Riklis, the onetime partner of Carnival Cruise founder Ted Arison. A takeover artist, Riklis skimmed millions from several companies, including the McCrory Corporation, the former retail fixture of Middle America that is now gone; and the late Victor Posner, the Miami Beach corporate raider who siphoned millions of dollars from more than half a dozen different companies, including Fischbach Corporation, a New York electrical contractor that he drove to the edge of extinction. Those two raiders alone raked off about $100 million in workers’ retirement dollars—all perfectly legal, courtesy of Congress. By the time billions of dollars were gone and the public outcry so loud that even Congress could not ignore it, lawmakers in 1990 rewrote the rules and imposed an excise tax on money removed from pension funds. The raids slowed to a trickle.

During those same years, the PBGC published an annual list of the fifty most underfunded pension plans. In spotlighting corporations that had fallen behind in their contributions, the agency hoped to prod companies to keep current. Corporations hated the list. They maintained that the PBGC’s methodology did not reflect the true financial condition of their pension plans. After all, as long as the stock market went up, the pension plans would be adequately funded. Congress agreed with this specious reasoning and in 1994, to please corporate America, voted to keep the data on the underfunded pensions of individual corporations a secret.

When the PBGC killed its top fifty list, David M. Strauss, then the agency’s executive director, explained, “With full implementation of [the 1994 pension law], we now have better tools in place.” PBGC officials were so bullish about those “better tools,” including provisions to levy higher fees on companies that ignored their commitments to their employees, that they predicted that underfunded pension plans would become a thing of the past. As a story in the
Los Angeles Times
put it, “PBGC officials said the act nearly guarantees that large underfunded plans will strengthen and the chronic deficits suffered by the pension guaranty organization will be eliminated within 10 years.”

The prediction was wildly off. Instead, pension deficits soared and ten years later the deficit was $23.5 billion. Since the PBGC no longer publishes its top fifty list, anyone looking for remotely comparable information must sift through voluminous company reports to the SEC or the Labor Department, where pension-plan finances are recorded, or turn to independent reports, such as one compiled in 2011 by UBS that identifies twenty-five of the most underfunded pension plans. The names were familiar: Ford Motor Company ($11.4 billion); Whirlpool Corporation ($1.5 billion); Lockheed Martin Corporation ($10.4 billion); United States Steel Corporation ($1.9 billion); and Raytheon Company ($4 billion). All told, according to Credit Suisse, publicly traded companies in 2011 were confronting a combined pension shortfall of $458 billion.

In reality, the deficits in many cases are worse than the published data suggest, which becomes evident when bankrupt corporations dump their pension plans on the PBGC. Time after time, the agency has discovered, the gap between retirement holdings and pensions owed is much wider than the companies reported to stockholders or employees. For example, the giant Cleveland steelmaker LTV Steel Corporation reported that its plan for hourly workers was about 80 percent funded, but when it was turned over to the PBGC, there were assets to cover only 52 percent of benefits—a shortfall of $1.6 billion that the PBGC had to assume.

How can this be? Thanks to the way Congress writes the rules, pension accounting has a lot in common with Enron accounting, but with one difference: it’s legal. By adjusting the arcane formulas used to calculate pension assets and obligations, corporate accountants can transform a drastically underfunded system into what appears to be a financially healthy plan, even inflate a company’s profits and push up its stock price. Ethan Kra, chief actuary of Mercer Human Resources Consulting, once put it this way: “If you used the same accounting for the operations side [of a corporation] that is used on pension funds, you would be put in jail.”

The PBGC lists of deadbeat pension funds served another purpose. They were an early-warning signal of companies in trouble—a sign often ignored or denied by the companies. “Somehow, if companies are making progress toward an objective that’s consistent with [the PBGC’s], then I think it’s counterproductive to be exposed on this public listing,” complained Gary Millenbruch, executive vice president of Bethlehem Steel, a perennial name on the top fifty.

Time proved Millenbruch wrong. The early warnings about Bethlehem’s pension liabilities were right on target. When Bethlehem Steel later filed for bankruptcy, the PBGC found that its pension plans were short $3.7 billion. The company that was once America’s second-largest steelmaker no longer exists. Contrary to the assertions of company executives, PBGC officials, and members of Congress, one company after another on the 1990 top fifty disappeared, many offloading their unfunded pensions on the PBGC.

Having seen how easy it is to unload a pension plan, more and more corporations are trying to do just that. In what threatened to be the largest company abandonment of its workers, AMR, the parent of American Airlines, filed for bankruptcy protection in November 2011 and asked a federal judge for permission to kill four pension plans covering 130,000 American workers and retirees.

The company asked that the PBGC assume responsibility for paying benefits to American’s retirees. If approved, the plan would have cost American’s retirees $1 billion in lost benefits because of caps imposed by Congress on the amount that PBGC can pay individual retirees.

After years of the PBGC rolling over to accommodate pension-killing corporations, the agency’s new director, Joshua Gotbaum, decided to make a stand on American’s plans, warning the airline that before it took such a “drastic action as killing the pension plans of 130,000 employees and retirees, it needs to show there is no better alternative. Thus far, they have failed to provide even the most basic information to decide that.”

In what has to be chalked up as a modest victory for workers, American backed down from its plan to terminate all pensions and announced that it would instead freeze them. The details of what that may ultimately mean are not clear at this stage, other than that the plans will be preserved—at least in a reduced form. The issue is not likely to be fully resolved until American exits bankruptcy sometime in the future.

American was but the latest large airline attempting to jettison its employee pension plans. In the last decade, four big carriers—United, US Airways, Delta, and TWA—walked away from their employee plans and shifted the responsibility to pay retirement benefits from themselves to the PBGC.

When the PBGC takes over a retirement plan, it covers retirement checks up to a fixed amount—$55,000 in 2011. But it will only continue to do this until the agency runs out of money, a distinct possibility given its looming liabilities. The PBGC’s financial position has rapidly deteriorated. In 2000 the agency operated with a $10 billion surplus. By the end of 2011, that had flipped to a $26 billion deficit—the highest in PBGC’s thirty-seven-year history.

The Government Accountability Office (GAO) says that the PBGC’s insurance funds are at “high risk” and the agency faces increasing challenges to meet its obligations. “PBGC’s premium base has been shrinking as the number of defined benefit pension plans and active plan participants has declined rapidly,” GAO said in 2010. With so many plans being canceled, the number of companies that pay premiums to PBGC has dropped precipitously; by 2011, only half as many companies paid premiums as fifteen years ago.

PAYING THE PRICE

The ease with which companies can eliminate or reduce their pension obligations is taking a toll on workers. Forty-nine-year-old Robin Gilinger, a United flight attendant for twenty-five years, is very worried. Before United entered bankruptcy, she had been promised a monthly retirement check of $2,184. Because of givebacks arising from the bankruptcy, that’s down to $1,082, or $12,884 a year—a poverty-level income even before inflation takes its toll in coming years. Though she has a few years before she could take early retirement, she wonders if even the reduced benefit will be there. Her husband lost his pension in a corporate takeover. Like many Americans, Robin is not sure she’d be able to take early retirement even if it were an option, given how small the benefit would be. The dream of early retirement, once such a motive force in the middle class, is gone for almost everyone these days. Robin, who lives with her husband and teenage daughter in Mount Laurel, New Jersey, has concerns that mirror those of middle-class Americans everywhere. “It’s scary. What if something happened to my husband or if I got disabled?” she asks. “Then I’m looking at nothing. Above all, what’s frustrating is that we were told we were going to get our pension and we’re not. The senior flight attendants, the ones who’ve worked thirty years, they’re worried how they’re going to survive.”

Robin believes the government did a poor job of looking out for United employees. “Our pensions were unfairly taken,” she said. Since the United bankruptcy, the company has done well, she said, and even remitted payments to PBGC, but she and her fellow workers are still going to receive less. “This was security for us and now that security is gone,” she said. “I think the future just means working a lot harder for less.”

Each time the PBGC takes on another failed pension plan, it makes the pension insurance program more expensive for the businesses that remain. That in turn prompts other companies to unload their plans. The PBGC receives no tax money. Its revenue comes from investment income and premiums that corporations pay on their insured workers. As a result, soundly managed companies with solid retirement plans are compelled to pick up the costs for plans in mismanaged companies as well as in those that just want to eliminate their employee benefits.

If the PBGC were to run out of money, the agency could require a multibillion-dollar taxpayer bailout. The last time that happened was during the 1980s and ’90s, when another government insurer, the Federal Savings and Loan Insurance Corporation (FSLIC), was unable to keep up with a thrift industry spinning out of control. The federal government eventually spent $124 billion. Unlike the FSLIC, which was backed by the U.S. government, the PBGC is not. That means that Congress could turn its back on the retirement crash if it chose, a distinct possibility given the budget-cutting obsession of Capitol Hill deficit hawks whose own pensions are guaranteed by taxpayers. By the agency’s estimate, that would translate into a 90 percent reduction in the pensions it currently pays—so retirees covered by the agency would receive no more than ten cents for every dollar that has been promised them.