It
evolved out of a tax break that Congress awarded to corporate
executives in 1978, allowing them to defer part of their salaries and
cut their tax bills.
The little shed behind Joy Whitehouse's modest home is filled with
aluminum cans--soda cans, soup cans and vegetable cans--that she
collects from neighbors or finds during her periodic expeditions along
the roadside. Two times a month, she takes them to a recycler, who pays
her as much as $30 for her harvest of castoffs. When your fixed income
is $942 a month, an extra $30 here and there makes a big difference.
After paying rent, utilities and insurance, Whitehouse is left with
less than $40 a week to cover everything else. So the money from cans
helps pay medical bills for the cancer and chronic lung disease she has
been battling for years, as well as food expenses. "I eat a lot of
soup," says the tiny, spirited 69-year-old, who lives in Majestic
Meadows, a mobile-home park for senior citizens near Salt Lake City,
Utah.
Whitehouse never envisioned spending her later years this way.
She and her husband Alva Don raised four children. In the 1980s they
lived in Montana, where he earned a good living as a long-haul truck
driver for Pacific Intermountain Express. But in 1986 he was killed on
the job in a highway accident attributed to faulty maintenance on his
truck, as his company struggled to survive the cutthroat pricing of
congressionally ordered deregulation. After her husband's death,
Whitehouse knew the future would be tough, but she was confident in her
economic survival. After all, the company had promised her a death
benefit of $598 every two weeks for the rest of her life--a commitment
she had in writing, one that was a matter of law.
She received the
benefit payments until October 1990, when the check bounced. A
corporate-takeover artist, later sent to prison for ripping off a
pension fund and other financial improprieties, had stripped down the
business and forced it into the U.S. bankruptcy court. There the
obligation was erased, thanks to congressional legislation that gives
employers the right to walk away from agreements with their employees.
To support herself, Whitehouse had already sold the couple's Montana
home and moved to the Salt Lake City area, where she had family and
friends. With her savings running out, she applied early (at a reduced
rate) for her husband's Social Security. She needed every penny. For
health reasons, she couldn't work. She had undergone a double
mastectomy. An earlier cancer of the uterus had eaten away at her
stomach muscle so that a metal plate and artificial bladder were
installed. Her children and other relatives offered to help, but
Whitehouse is fiercely self-sufficient. Friends and neighbors pitch in
to fill her shed with aluminum. "You put your pride in your pocket, and
you learn to help yourself," she says. "I save cans."
Through no
fault of her own, Whitehouse had found herself thrust into the ranks of
workers and their spouses--previously invisible but now fast
growing--who believed the corporate promises about retirement and
health care, often affirmed by the Federal Government: they would
receive a guaranteed pension; they would have company-paid health
insurance until they qualified for Medicare; they would receive
company-paid supplemental medical insurance after turning 65; they
would receive a fixed death benefit in the event of a fatal accident;
and they would have a modest life-insurance policy.
They didn't get those things. And they won't.Corporate promises are often not worth the paper they're printed on.
Businesses
in one industry after another are revoking long-standing commitments to
their workers. It's the equivalent of your bank telling you that it
needs the money you put into your savings account more than you do--and
then keeping it. Result: a wholesale downsizing of the American Dream.
It began in the 1980s with the elimination of middle-class, entry-level
jobs in lower-paying industries--apparel, textiles and shoes, among
others. More recently it spread to jobs that pay solid middle-class
wages, starting with the steel industry, then airlines and now
autos--with no end in sight.
That's why Whitehouse, as difficult as
her situation is, is worried more about how her children and
grandchildren will cope. And well she should. For while her story is
the tale of millions of older Americans, it is also a window into the
future for many millions more.
A
TIME investigation has concluded that long before today's working
Americans reach retirement age, policy decisions by Congress favoring
corporate and special interests over workers will drive millions of
older Americans--a majority of them women--into poverty, push millions
more to the brink and turn retirement years into a time of need for
everyone but the affluent.
The transition is well under
way, eroding efforts of the past three decades to eliminate poverty
among the aging. From taxes to health care to pensions, Congress has
enacted legislation that adds to the cost of retirement and eats away
at dollars once earmarked for food and shelter. That reversal of
fortunes is staggering, and even those already retired or near
retirement will be squeezed by changing economic rules.
Congress's
role has been pivotal. Lawmakers wrote bankruptcy regulations to allow
corporations to scrap the health insurance they promised employees who
retired early--sometimes voluntarily, quite often not. They wrote
pension rules that encouraged corporations to underfund their
retirement plans or switch to plans less favorable to employees. They
denied workers the right to sue to enforce retirement promises. They
have refused to overhaul America's health-care system, which has
created the world's most expensive medical care without any comparable
benefit. One by one, lawmakers have undermined or destroyed policies
that once afforded at least the possibility of a livable existence to
many seniors, while at the same time encouraging corporations to
repudiate lifetime-benefit agreements. All this under the guise of
ensuring workers that they are in charge of their own destiny--such as
it is.
The process has accelerated dramatically this year. Two major
U.S. airlines--Delta and Northwest--turned to bankruptcy court to cut
costs and delay pension-fund contributions. This followed earlier
bankruptcy filings by United Airlines and USAirways, both of which
jettisoned their guaranteed pension plans. Then on Oct. 8, the largest
U.S. auto-parts maker, Delphi Corp., filed for bankruptcy protection,
seeking to cut off medical and life-insurance benefits for its
retirees. Delphi's pension funds are short $11 billion. To Elizabeth
Warren, a Harvard law professor who specializes in bankruptcy, this is
just going to get worse, as ever more companies see the value to their
bottom line of "scraping off" employee obligations. "There's no
business in America that isn't going to figure out a way to get rid of
[these benefit promises]."
That may include the world's largest
automaker--General Motors. Although GM chairman Rick Wagoner has
insisted that "we don't consider bankruptcy to be a viable business
strategy," some on Wall Street are skeptical, given the company's array
of problems. Their view was reinforced when GM, the company that
dominated the American economy through the 20th century, announced on
Oct. 17 that it had reached a precedent-setting agreement with the
United Auto Workers leadership to rescind $1 billion worth of
health-care benefits for its retirees. If ratified by the union
membership, the retrenchment will hasten the end to company-subsidized
health care for all retirees. From 1988 to 2004, the share of employers
with 200 or more workers offering retiree health insurance plunged,
from 66% to 36%. The end result: a fresh and additional burden on
retirees. Concluded a report by the Kaiser Family Foundation and Hewitt
Associates: "For the majority of workers who retire before they turn
age 65 and are eligible for Medicare, the coverage provided under
employer plans is often difficult, if not impossible to find anywhere
else." For retirees over 65, "employer plans remain the primary source
of prescription drug coverage for seniors on Medicare ... This coverage
is more generous than the standard prescription drug benefit that will
be offered by Medicare plans beginning in 2006."
Perhaps the best
yardstick to assess the outlook for the later years is the
defined-benefit pension, long the gold standard for retirement because
it guarantees a fixed income for life. The number of such plans offered
by corporations has plunged from 112,200 in 1985 to 29,700 today. Since
1985, the number of active workers covered in the private sector
declined from 22 million to 17 million. They are the last members of
what once promised to be the U.S.'s golden retirement era, and they are
fast disappearing. From 2001 to 2004, nearly 200 corporations in the
FORTUNE 1000 killed or froze their defined-benefit plans. Most
recently, Hewlett-Packard, long one of the most admired U.S. companies,
pulled the plug on guaranteed pensions for new workers. An HP spokesman
said the company had concluded that "pension plans are kind of a thing
of the past." In that, HP was merely following the lead of business
rival IBM and such other major companies as NCR Corp., Sears Holding
Corp. and Motorola. The nation's largest employer, Wal-Mart, does not
offer such pensions either. At the current pace, human-resources
offices will turn out the lights in their defined-benefit section
within a decade or so. At that point, individuals will assume all the
risks for their retirement, just as they did 100 years ago.
The
shift away from guaranteed pensions was encouraged by Congress, which
structured the rules in a way that invites 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; some don't. Whatever
the 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 dawning perception among Americans that when it
comes to retirement, you're on your own, baby, is surely a reason that
President George Bush ran into so much opposition to his proposal to
change Social Security from a risk-free plan into one with so-called
private accounts. Critics of the 70-year-old system were determined to
chip away at Social Security as part of a larger effort to promote what
the Bush Administration calls an "ownership society." As Treasury
Secretary John Snow told a congressional committee in February 2004: "I
think we need to be concerned about pensions and the security that
employees have in their pensions. 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 Corp.--operator of the
largest rail network in the eastern U.S.--to take over Treasury, Snow
was given a lump-sum pension of $33.2 million. It was based on 44 years
of employment at CSX. Unlike most ordinary people, who must work the
actual years on which their pension is calculated, Snow was employed
just 26 years. The additional 18 years of his CSX employment history
were fictional, a gift from the company's board of directors.
Snow
is not alone. The phantom employment record, as it might be called, is
a common executive-retirement practice in corporate America--and one
that is spelled out in corporate filings with the Securities and
Exchange Commission (SEC). Drew Lewis, the Pennsylvania Republican and
onetime head of the U.S. Department of Transportation, got a $1.5
million annual pension when he retired in 1996 as chairman and CEO of
Union Pacific Corp. His pension was based on 30 years of service to the
company, but he actually worked there only 11 years. The other 19 years
of his employment history came courtesy of Union Pacific's board of
directors, which included Vice President Dick Cheney. And then there's
Leo Mullin, the former chairman and CEO of Delta Air Lines. Under
Mullin's stewardship, Delta killed the defined-benefit pension of its
nonunion workers and replaced it with a less generous plan. Now, little
more than a year after he retired, the airline is in bankruptcy and can
dump its pension obligations. But you need not fret about Mullin. On
his way out the door, he picked up a $16 million retirement package.
It's based on 28.5 years of employment with Delta, at least 21 years
more than he worked at the airline.
HOW SAVINGS CAN BE HIJACKED
At
the same time corporate executives are paid retirement dollars for
years they never worked, hapless employees lose supplemental retirement
benefits for a lifetime of actual work. Just ask Betty Moss. She was
one of thousands of workers at Polaroid Corp.--the Waltham, Mass.,
maker of instant cameras and film--who, beginning in 1988, gave up 8%
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. Alas, it was not to be. Polaroid was slow to react
to the digital revolution and began to lose money in the 1990s. From
1995 to 1998, the company racked up $359 million in losses. As its
balance sheet deteriorated, so did the value of its stock, including
shares in the ESOP. In October 2001, Polaroid sought bankruptcy
protection from creditors.
By then, Polaroid's shares were virtually
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 9¢. In short order, a $300 million
retirement nest egg put away by 6,000 Polaroid employees was wiped out.
Many lost between $100,000 and $200,000.
Moss was one of the losers.
Now 60, she spent 35 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 Moss recalled.
"Everybody went for it. We had been so conditioned to believe what we
were told was true."
Once Polaroid entered bankruptcy, Moss and her
retired co-workers learned a bitter lesson--that they had no say in the
security of benefits they had worked all their lives to accumulate.
While the federal Pension Benefit Guaranty Corp. (PBGC) agreed to make
good on most of their basic pensions, the rest of their
benefits--notably the ESOP accounts, along with retirement health care
and severance packages--were canceled. The retirees, generally well
educated and financially savvy, organized to try to win back some of
what they had lost by petitioning bankruptcy court, which would decide
how to divide the company's assets among creditors. To no avail:
Polaroid's management had already undercut the employees' effort.
Rather than file for bankruptcy in Boston, near the corporate offices,
the company took its petition to Wilmington, Del., and a bankruptcy
court that had developed a reputation for favoring corporate managers.
There, Polaroid's management contended that the company was in terrible
financial shape and that the only option was to sell rather than
reorganize. The retirees claimed that Polaroid executives were
undervaluing the business so 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 Corp., now
part of JPMorgan Chase.) Many retirees believed the purchase price of
$255 million was only a fraction of the old Polaroid's value. Evidence
supporting that view: the new owners financed their purchase, in part,
with $138 million of Polaroid's own cash.
Employees did not leave
bankruptcy court empty-handed. They all got something in the mail. 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. Now she and the
rest of Polaroid's other 6,000 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?"
Under a new management team
headed by Jacques Nasser, former chairman of Ford Motor Co., Polaroid
returned to profitability almost overnight. Little more than two years
after the company emerged from 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 were rewarded for their efforts. Rick
Lazio, a four-term Republican from West Islip, N.Y., who effectively
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. That amounted to nearly twice the $282,000 paid to all 6,000
retirees. The $12.08 a share that the new managers received for little
more than two years of work was 134 times the 9¢ a share handed out
earlier to lifelong workers.
LET'S BREAK A DEAL
Washington has a
rich history of catering to special and corporate interests at the
expense of ordinary citizens. Nowhere is this more evident than in
legislation dealing with company pensions. It has been this way since
1964, when carmaker Studebaker Corp. collapsed after 60 years, junking
the promised pensions of 4,000 workers not yet eligible for retirement,
pensions the company had spelled out in brochures for years: "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."
Oops. There oughta be a law.
It
took Congress 10 years to respond to the Studebaker pension abandonment
by writing the Employee Retirement Income Security Act (ERISA) of 1974.
It established minimum standards for retirement plans in private
industry and created the PBGC to guarantee them. Then President Gerald
Ford summed up 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."
Perhaps for some, but far from all.
Another
group that had no pension worries would turn out to be the biggest
winners under the bill. Congress wrote the law so broadly that moneymen
could 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. Throughout the decade, they walked 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, a once flamboyant
Beverly Hills, Calif., takeover artist who skimmed millions from
several companies, including the McCrory Corp., the onetime 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 Corp.,
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, thanks to Congress.
By the time all the billions of dollars were gone and the public outcry
had grown too loud to ignore, Congress in 1990 belatedly 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,
which insures private pension plans, published an annual list of the 50
most underfunded of those plans. In shining a spotlight on those 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--and never down or sideways--the pension plans would be
adequately funded. Congress liked that reasoning and, in 1994, reacting
to corporate claims that the underfunded list caused needless anxiety
among employees, voted to keep the data secret. When the PBGC killed
its Top 50 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 ignoring obligations to their employees, they
predicted that underfunded pension plans would be 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."
Not even close; instead they
accelerated at warp speed. In 1994 the deficit in PBGC plans was $31
billion. Today it's $450 billion, or $600 billion if one includes
multiemployer plans of unionized employees who work for more than one
business in such industries as construction.
Since the PBGC no
longer publishes its Top 50 list, anyone looking for even remotely
comparable information must sift through the voluminous filings of
individual companies with the SEC or the Labor Department, where
pension-plan finances are recorded, or turn to the reports of
independent firms such as Standard & Poor's. The findings aren't
reassuring. According to S&P, Sara Lee Corp. of Chicago, a global
maker of food products, ended 2004 with a pension deficit of $1.5
billion. The company's pension plans held enough assets to cover 69.8%
of promised retirement pay. Ford Motor Co.'s deficit came in at $12.3
billion. It could write retirement checks for 83% of money owed.
ExxonMobil Corp. was down $11.5 billion, with enough money to issue
retirement checks covering 61% of promised benefits. Exxon had
extracted $1.6 billion from its pension plans in 1986 because they were
deemed overfunded. The company explained then that "our shareholders
would be better served" that way.
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 was much wider than the companies reported
to stockholders or employees. Thus LTV Corp., the giant Cleveland
steelmaker, reported that its plan for hourly workers was about 80%
funded, but when it was turned over to the PBGC, there were assets to
cover only 52% of benefits--a shortfall of $1.6 billion to be assumed
by the agency.
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 exception: it's perfectly legal. By adjusting
the arcane formulas used to calculate pension assets and obligations,
corporate accountants can turn a drastically underfunded system into a
financially healthy one, 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 old PBGC lists of deadbeat pension
funds served another purpose. They were an early-warning sign of
companies in trouble--a sign often ignored or denied by the companies
themselves. "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 favorite on the Top 50.
Time proved Millenbruch wrong. The
early warnings about Bethlehem's pension liabilities turned out to be
right on target. Bethlehem Steel eventually filed for bankruptcy, and
the PBGC took over its pension plans--which were short $3.7 billion.
The company, once America's second largest steelmaker, no longer
exists. In the Top 50 pension deadbeats of 1990, the PBGC reported that
the funds of Pan Am Corp., operator of what was once the premier global
airline, had only one-third of the assets needed to pay its promised
pensions. Pan Am does not exist today.
Contrary to the assertions of
company executives, PBGC officials and members of Congress, one company
after another on the 1990 Top 50 disappeared. To be sure, many are
still around. Like General Motors. That year, the PBGC reported a $1.9
billion deficit in GM's pension plans. Today, by GM's reckoning, the
deficit is $10 billion. The PBGC estimates it at $31 billion. As for
the pension-fund deficit, if GM or any other company can't come up with
the money, the PBGC will cover retirement checks up to a fixed
amount--$45,600 this year--or until the agency runs out of money.
That's projected to occur around 2013. At that point, Congress will be
forced to decide whether to bail out the agency at a cost of $100
billion or more. When judgment day comes, other economic forces will
influence the decision. Medicare, which is in far worse shape than
Social Security, already is in the red on a cash basis. In what
promises to play out as a mean-spirited competition, Congress has laid
the groundwork to pit individual citizens against one another, to fight
over the budget scraps available for those and all other programs.
WHO'S LEFT HOLDING THE BAG?
In
the meantime, pension plans that companies are dumping are so short of
assets that the PBGC's financial position is rapidly deteriorating. In
2000, the agency operated with a $10 billion surplus. By 2004, the
surplus had turned into a $23 billion deficit. By the end of this year,
the shortfall may top $30 billion. As the Government Accountability
Office put it earlier this year: "PBGC's accumulated deficit is too
big, and plans simply do not have enough money in the system to back up
the long-term promises many employers have made to their workers." To
add to its woes, the agency has a record 350 active bankruptcy cases,
according to Bradley D. Belt, executive director. Of those, Belt told
Congress, "37 have underfunding claims of $100 million or more,
including six in excess of $500 million."
Congress idly watched
United Airlines and USAirways unload their pension obligations on the
PBGC. Now Delta and Northwest are positioned to do the same. That
increases the likelihood that other old-line carriers like American and
Continental will be forced to do likewise. Northwest's CEO, Douglas
Steenland, bluntly told the Senate Finance Committee last June,
"Northwest has concluded that defined-benefit plans simply do not work
for an industry that is as competitive and vulnerable from forces
ranging from terrorism to international oil prices that are largely
beyond its control, as is the airline industry." In that, he merely
echoed Robert Crandall, former chief of American Airlines, who told
another Senate committee in October 2004: "All the [older] legacy
carriers must get rid of their defined-benefit pension plans." In all,
the pension funds of those airlines are short $22 billion.
The
sudden shift from annual pensions of a guaranteed amount for a lifetime
to a lesser and uncertain amount for a limited period is taking its
toll on workers. Robin Gilinger, 42, a United flight attendant for 14
years, sees a frightening financial picture. She has another 14 years
to go before she can take early retirement. Under the old pension plan
she would have received a monthly check of $2,184. Because of
givebacks, that's down to $776--a poverty-level annual income of $9,312
by today's standards, even before inflation takes its toll over the
coming years. And there is the distinct possibility it could be less
than that. Her husband lost his pension in a corporate takeover.
Gilinger,
who lives with her husband and 9-year-old daughter in Mount Laurel,
N.J., is not planning on early retirement and certainly couldn't afford
it in the current situation. But she has concerns reminiscent of Joy
Whitehouse's experience. "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 30 years, they're worried how they're going to survive."
Each time the PBGC takes on another failed pension plan, it makes the
pension-insurance program more expensive for the remaining businesses.
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 those
that just want to unload their employee benefits. A proposal by the
Bush Administration to overhaul the system, critics fear, would
actually increase the likelihood that more companies will kill existing
plans and that other companies considering establishment of a
defined-benefit plan will choose a less expensive option. An analysis
of 471 FORTUNE 1000 companies by Watson Wyatt Worldwide, a global
consulting firm, concluded "healthy companies would see their total
PBGC premiums increase 240% under the proposal, more than double the
113% increase for financially troubled employers."
Barring a
reversal in government policies, the PBGC 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 Corp., 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 an indifferent Congress could
turn its back on the retirement crash. By the agency's estimate, that
would translate into a 90% reduction in pensions it currently pays.
WHERE THE 401(K) FALLS SHORT
The
universal replacement to the pension, by the consensus of the Bush
Administration, Congress, Wall Street and corporate America, is the
ubiquitous 401(k). As Bush explained at a gathering at Auburn
University in Montgomery, Ala., earlier this year, "When I was young, I
didn't know anything about 401(k)s because I don't think they existed.
Defined-benefit plans were the main source of retirement. Now they've
got what they call defined-contribution plans. Workers are taking aside
some of their own money and watching it grow through safe and secure
investments."
Tell that "safe and secure" part to the folks at
Enron, who lost $1 billion in their 401(k)s. Or WorldCom employees, who
also lost $1 billion. Or Kmart employees, who lost at least $100
million. Welcome to the 21st century version of Studebaker.
Truth to tell, the 401(k) was never intended as a retirement plan.
It
evolved out of a tax break that Congress awarded to corporate
executives in 1978, allowing them to defer part of their salaries and
cut their tax bills. At the time, federal income-tax rates were much
higher for upper-income individuals--the top rate was 70%. (Today it's
half that.) It wasn't until several years later that companies began to
make 401(k)s available to most employees. Even then, the idea was to
encourage saving and provide a tax shelter, not to substitute the plans
for pensions. By 1985, assets in 401(k)s had risen to $91 billion, as
more companies adopted plans. Still, the amount was only about
one-tenth that in guaranteed pensions.
All that changed as
corporations discovered they could improve their bottom lines by
shifting workers out of costly defined-benefit plans and into much
cheaper (for companies) and more risky (for workers) uninsured 401(k)s.
In effect, employees took a hefty pay cut and barely seemed to notice.
Lawmakers and supporters advocated the move by pointing to a changing
economy in which employees switch jobs frequently. They maintained that
because defined-benefit plans are based on length of service and an
average of salaries over the last few years of work, they don't meet
today's needs. But Congress could have revised the rules and made the
plans portable over a working life, just like a 401(k), and retained
the guarantee of a fixed retirement amount, just like corporations do
for their executives.
As it is, 401(k) portability often impedes
efforts to save for retirement. As today's job hoppers move from one
employer to another, most succumb to the temptation to cash out their
401(k)s and spend the money, a practice hardly reflective of a serious
retirement system. Today $2 trillion is invested in those accounts. But
to understand why the 401(k) is no substitute for a defined-benefit
pension, look beneath that big number. Earlier this year the airwaves
crackled with announcements that the value of the average 401(k) had
climbed to $61,000 in 2004. Noticeably absent from many accounts was
any reference to the median value, a more accurate indicator of the
health of America's retirement system. That number was $17,909, meaning
half held less, half more. Nearly 1 in 4 accounts had a balance of less
than $5,000.
So it is that in the end, all but the most affluent
citizens will have two options. They can join Joy Whitehouse in the
can-collection business, or they can follow in the footsteps of Betty
Dizik of Fort Lauderdale, Fla., who is into her sixth decade as a
working American. She has no choice. Dizik did not lose her pension.
Like most Americans, she never had one, or a 401(k). After her husband
died in 1968, she held a series of jobs managing apartments and
self-storage facilities, tasks that brought her into contact with the
public. "I like working with people," she said. But none of the jobs
had a pension.
Hence the importance of her monthly Social Security
check, which comes to less than $1,000. The benefit barely covers her
medications for heart problems and diabetes, which she says can cost
her as much as $800 a month. The new Medicare prescription-drug
benefit, she estimates, will still leave her with substantial
out-of-pocket expenses. To pay rent, utilities, gas for her car and
other living expenses, Dizik has continued to work since she turned 65.
For 10 years, she was with Broward County Meals on Wheels, which
provides meals to seniors, some younger than she is. But three years
ago, when she turned 75, driving 100 miles a day began exacting a toll.
Now
she works at a nearby office of H&R Block, the tax- return service.
"I do everything there," she says. "I am the receptionist. The cashier.
I open the office, close the office. I'm the one who takes the money to
the bank. I do taxes." A widow, she lives alone in an apartment
building for seniors. Her four children help with the rent, but she is
reluctant to accept anything more. "All my children are great, but I do
not like to ask them for anything," she said. "I'm waiting for myself
to get old, when I will need their help." For the time being, she says,
"I'm going strong. I have to."
She doesn't have much hope that
Washington will be able to help seniors like her. "They don't
understand what it's like to worry: Are you going to be able to make it
every month, to pay the telephone bill, the electric bill? How much are
you going to have left over for food and other expenses?" Her key to
getting by each month is forcing herself to live within a strict
budget. "You learn to live very carefully," she said. Although Dizik
really would like to retire, she can't. "I will be working the rest of
my life." Soon, she will have lots of company.
With reporting by Laura Karmatz, Lisa McLaughlin, Dody Tsiantar, Joan Levinstein
Find this article at:
http://www.time.com/time/magazine/article/0,9171,1122017,00.html 
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