R
ecently
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
T
here
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
Sav ings 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
G
eorge
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 Bush-corporate sights.
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 rust- belting 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
P
BGC
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 month.
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 under- funded
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.
Social
Security
F
or
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 retirement accounts.
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 U.S.
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.kyklospro ductions.com).