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What Will They Do When the Money Runs Out?
Comment by Dean Baker
Ellen Schultz has given us a fascinating account of the ways in which corporate America has been able to game legal and accounting rules to emasculate the private pension system. It was only a few decades ago that a secure pension was a staple of middle class life. Workers in middle class jobs, whether in offices, construction, or manufacturing expected to have a pension in retirement to supplement their Social Security income. In many cases, the pension would provide the larger portion of their income, with the Social Security benefit being the supplement.
We should be careful not to glorify the pre-1980 period as a golden age of pensions. Many pensions were not especially generous. Women and minorities were far less likely to have a pension than white men. And, many workers walked away from jobs with nothing after just missing a vesting period by a year or even a month.
Nonetheless, in 1980, roughly half of the work force had a defined benefit (DB) pension on their job. Today, the figure in the private sector is less than 20 percent and it is dropping rapidly. This shift reflects a great loss in the level of retirement security that workers can expect. The 401(k) system of defined contribution has not come close to replacing the losses from the old DB system. The percentage of workers who have access to any retirement plan at their jobs, including a 401(k), is roughly the same as the percentage who had a DB plan in 1980.
We know that the vast majority of workers end up accumulating little in their 401(k) accounts. The median holdings at age 60 for those with accounts is less than $150,000. This is enough to provide a retirement income of about $750 a month. And three quarters of retirees will get less. This is not a story of a middle class that will enjoy a middle class life-style in their retirement.
Ellen Schultz’s book is the story of how we got from there to here. From a world where at least a substantial segment of the population could count on a defined benefit pension to give them a substantial degree of retirement security to world in which the majority of the middle class are looking at a retirement where they are not too far above the poverty line.
The book is essentially a menu of ways in which companies have found to scam the pensions of their workers and the code in order to increase corporate profits and fatten executive compensation. I will just note two of the issues raised.
First, under the law, pension funds are supposed to be kept strictly segregated from the rest of the corporate operation. The money in the fund is to be used only to provide retirement benefits for workers. This fact led to great pain for corporate managers in the 90s, as a surging stock market led many pension funds to be seriously overfunded. (Since this was a stock bubble, the overfunding was to a large extent an illusion.)
However, as the book points out, smart managers found ways around this restriction. There were a number of corporate takeovers in which pension funds were used to pay early retirement benefits to workers who were being laid off. In effect, the takeover artists were using the pension funds to provide severance payments, which is clearly in violation of the law. But, no one was looking.
My other favorite in this book is the story of “dead peasant” insurance policies. People may have heard of these in Michael Moore’s movie, Capitalism: A Love Story. The basic idea is that large companies buy insurance policies on their lower level employees, and make themselves the beneficiaries. In general the employees do not even know about the policy.
Moore left this as just a morose tale of corporate greed, with companies making money off the death of their employees. However, this misses the real story.
The real story is why dead peasant policies are profitable; after all, insurance companies are not giving presents to anyone, even other large corporations. Schultz gives us the secret. Dead peasant insurance policies are a way in which companies can put aside money to accumulate tax free to cover the retirement benefits of their top level executives. Since people will die at a relatively predictable rate, companies know how many dead peasant policies they have to take out in 2000 to pay benefits in 2020.
There are many other great tales of creative accounting in this book. People should go through them to see what happened to their parents’ pension or their own.
I’ll just conclude by throwing out two obvious questions for Ellen:
How do you think pension policy should change in the decade ahead?
How do you think pension policy actually will change?