What Killed Pensions

There's a litany of stock answers to the question of why private-sector pensions are disappearing. For starters, most workers don't stick with an employer long enough to benefit from a traditional pension, which becomes most valuable only after decades on the job. Large employers claim they can't compete with foreign and domestic rivals that aren't burdened by similar retirement-benefit costs. Throw in a few years of volatile stock prices and low interest rates, which boost pension costs, and many employers say they had to abandon pensions in favor of 401(k) plans, shifting the risk and most of the expense to employees.

At least, that's what we've been told. But now a new book claims that other factors may have been behind the demise of some private pensions. "Companies have been largely responsible for the retirement crisis -- and it was not an accident," says Ellen Schultz, former investigative reporter for the Wall Street Journal and author of Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers (Portfolio, $26.95).

In her book, Schultz details how corporate pensions went from holding $250 billion in excess funds in the late 1990s to being collectively underfunded today. Hundreds of plans have been frozen (meaning employees may collect benefits based on past work but do not earn future benefits), and retiree health benefits are an endangered species.

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What happened. Surplus pension assets are supposed to remain in the plans to provide a cushion for the inevitable times when investment returns are weak and interest rates fall -- like today. But years ago, employers persuaded Congress to relax the rules to allow them to use their overfunded pension plans to help cover other benefits, such as retiree health plans and early-retirement buyouts (which preserved cash the companies would otherwise have used to pay for both). Although that might have sounded like a good idea at the time, it essentially allowed companies such as Verizon and General Motors to use pension assets to finance corporate downsizings.

Others, such as IBM, moved hundreds of millions of dollars of executive pension liabilities into their rank-and-file pension plans without earmarking additional funds to pay for them. As a result, pension funds were severely depleted. Dramatic stock market losses did the rest.

Separately, changes to accounting rules required companies to disclose future pension and retiree-health-plan obligations on their balance sheets. On the surface, the changes seemed a step toward greater transparency. But the new rules had a perverse effect: Cutting future retiree benefits improved a company's bottom line, which in turn increased executive pay tied to corporate earnings. "By giving companies an incentive to reduce liability on the books, the accounting rules turned retiree benefits into a cookie jar of potential earnings," Schultz writes.

Not all employers that offered a pension plan engaged in these practices, but those identified in Schultz's exposé read like a who's who of corporate America. Her original analysis is based on company data, government filings, internal corporate documents and confidential memos.

Most workers view traditional pensions as part of a bygone era. Yet more than 42 million Americans are still covered by a pension plan. Unfortunately, most don't understand the details of how their plan works.

If you're lucky enough to have a pension, ask the important questions. Find out how long it takes to become vested -- meaning you qualify for future benefits -- and at what age you can collect. If you are offered the choice between taking your payout as a lump sum or as a monthly payout for life, hire a financial planner or an independent actuary to verify that the lump-sum offer truly reflects the benefits you have earned. It's your money. Protect it.