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Bye-Bye, Pension! The trend in the US to reduce middle class worker wages

Marc

Fully vaccinated are you?
Staff member
Admin
#1
From Slate
Bye-Bye, Pension!
It's just a matter of time till your company drops its defined-benefit retirement plan.
By Daniel Gross
Posted Friday, Jan. 27, 2006, at 4:17 PM ET

Until recently, the cram-down—the process in which a company walks away from pension and benefit promises—had generally been confined to failed companies like Delphi. Struggling companies frequently terminate their pension plans and push the liabilities onto the Pension Benefit Guaranty Corp.

But now perfectly healthy companies—solvent, profitable, thriving, industry-leading, blue chip companies—are unilaterally moving to slash the expected compensation of nonunionized employees by "freezing" pension plans. They're doing so not because they have to, but because they want to—and because they can.

For several years, companies have been effectively freezing pension plans for new employees. New hires are offered 401(k)s instead of the defined-benefit pension plan available to more senior workers. The PBGC in December said that as of 2003, 9.4 percent of plans had been frozen in some way (here's the whole study) but that most of the freezing companies were small.

Now it's not just new employees but everyone who is starting to lose pension benefits. Last summer, Hewlett-Packard, as part of its latest turnaround effort, announced that as of this month the company would freeze both the pensions and retiree health-care benefits of many current employees and offer them larger matching contributions to 401(k)s instead. In December, Verizon made a similar move, freezing the pension for existing managers and boosting 401(k) contributions. A few weeks ago, IBM—a company that is thriving by any measure—followed suit. Alcoa this month said it was eliminating the pension for new hires. And last week, apparel company Russell Corp. said it would freeze its pension plan for all employees.

There is no legal problem with companies unilaterally freezing pension plans for nonunionized employees. When such pensions are frozen, workers don't lose benefits they've earned. Rather, they simply stop accruing new benefits. That's bad news for veteran employees. Frequently, final pension benefits—paid out as a lump sum or as a per-year payment for life—are a percentage of the employee's average salary over his or her last several years of service. Continuing to accrue benefits as you age and as your salary rises means you'll have a richer pension. For employees whose plans are frozen, the payments they'll start to receive when they hit 65 will be calculated as a percentage of their salary at the time of the freeze.

All the companies that are freezing pensions are replacing them with enhanced 401(k) plans. IBM claims its 401(k) is "one of the richest in U.S. business." But for people in their 50s, that's not much of a help. A 55-year-old manager only has 10 years to contribute, receive matching grants, and hope that investments grow. And instead of being guaranteed, as pensions are, 401(k)s rise and fall at the whim of the market. What's more, companies have been known to cut back or eliminate 401(k) contributions when they encounter a few tough quarters.

It's hard to read this trend as anything but a reduction in wages for employees. After all, benefits like pensions and health insurance are an important component of compensation, particularly for older workers. The companies that are freezing their pensions are gleefully telling shareholders how much they'll save. IBM said its moves "will result in worldwide retirement-related expense savings of $450 to $500 million for 2006, and $2.5 to $3 billion for the period 2006 through 2010." Verizon said it expects to save $3 billion over 10 years by freezing its plan.

The freezing trend also tells us something about the state of the labor market and of the attitude of employers toward managers. In theory, companies that unilaterally slash compensation for experienced employees and managers would seem to be at a competitive disadvantage in the marketplace. But IBM, Verizon, and HP are effectively telling veterans that they're expected to do the same job in the future at a lower effective salary than had been promised.

When it comes to compensation for top executives, publicly held companies like IBM and Verizon love to benchmark. They look at what other companies are paying their CEOs and then match or top it. But benchmarking also works in the other direction. When everybody else is cramming down their employees, the logic goes, shouldn't you? HP explicitly said it was freezing the pension to "better match industry benchmarks." By freezing their pensions, industry leaders like IBM, Verizon, and HP are effectively lowering the bar for everybody else.

Above all, the movement to freeze pensions is a sign that the cram-down is moving up the management ladder. Companies can't freeze pensions that have been agreed to as a result of collective bargaining agreements with unions. So they're going after the low-hanging fruit—benefits for nonunionized workers and managers—and gambling that the moves won't hurt their need to retain key people. If these trends continue, the only people in the companies who continue to get pension benefits in future years will be their overpaid CEOs.
 
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M

Murphys Law

#2
The original pensions originated in Germany (Bismark, I believe) and the majority of people who retired were worn out by manual labor, and tended to die not much longer after retiring.

Of course, pensions have evolved since then and it is a problem affecting most 1st world countries. Europe also has their problems albeit in their cases, it is from the social security system which is severely underfunded. Look at France where so many people are employed by the government and they can retire at 50 !

For the big blue chip US companies, their pension ideas were set at a time when they competed at national level. Everybody did it and business conditions were rosy in that US was on a financial roll. Besides, pensions were many decades off and companies were growing.

Today, companies are competing against other foreign labor conditions that pay less direct costs and certainly less indirect ones: The foreign competition may not offer a pension at all. (Will that be something Free trade people will look at : Free trade under equal conditions perhaps ?) . Growth for these companies is pretty much stagnant.

Demographically, the key problem with pensions is that people are living longer and retiring earlier. For GM this is a disaster where I understand there are about 2.5 retirees for every worker. It is feasible that someone can work for 30 years and draw a pension for another 15. This means that for every GM car sale, about $1500 needs to go to legacy committments not current costs. (I wonder for all their TS16949 preaching they had not done an financial FMEA on that !)

The companies and politicians are a contributor to the problem. Many have taken. Pension holidays during 'good times' (bull stock market periods) and accountancy rules are very lax which allow this. Did you know that most defined private pensions assume they will get ~9% growth on their investments. You try and do that today and maintain it. Profiles of pension funds is that they have become more agressive in their investments. It used to be predominantly 'safe investments' meaning bonds but since they are in catch up mode, many have moved to stocks.

I like the idea of the 401K in that it is portable and is up to you. However, the drawbacks are that it assumes you can take an interest in your financial decisions (most people are not interested) and that it relies on a bull market. The quality of the 401K options varies considerably. I luckily, have a self directed 401K which means that I can invidual trade stocks, any mutual fund or even buy bonds direct. However, most 401K do not offer anything like that and some are extremely limited meaning you can only move between a handfull of funds a few times per year. Imagine if the market is nosediving but you cannot move out it: Just like Enron.

If you haven't guessed it already, I am very pessemistic when it comes to pensions.

On the wider scale, it is not just big companies which are going to have problems. Municipal and local governments have also promised pensions they can afford. Look at San Jose which a number of politicians and advisors ahve been charged and my current town, Houston. Here we had policmen retiring with 100K salaries yet their normal salaries were 40K. It got to the state where they were looking at terminating current employees to pay for retirement. Local tax people would not pay more.

Coming back to demographics. We will have a big retirement wave hit the US starting 2008. On financial principles only, this should mean an exodus out of stocks and into fixed income. (Nearer you are to retirement, the less risk you should take). If commodities, energies and financial defecits (meaning US dollar) keep going the way they are, then outlook at the time these people are retiring does not look good. Even Social security cannot be counted upon as our myopic politicians are busily bankrupting the country.

There are going to be a lot of people who suddenly find out they cannot financially retire. I personally do not expect to be retiring at 65. :mg:

If we think pensions are bad, wait till we see the train wreck that will happen on medical costs...:nope:
 
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Jen Kirley

Quality and Auditing Expert
Staff member
Admin
#3
I've read that some families are moving in together again: young adults not able to afford their own homes, and retirees moving in with grown children due to lack of funds.

My dad died within 2 years of his retirement. My own mother lives with my sister.

I won't be able to retire securely at 65 either, and my house won't be paid for. Like I wrote to BusinessWeek, I shall make nice with my kids because we could be together for a long time.

But that's okay from where I view it here and now. I can't imagine staying home all the time.
 

Wes Bucey

Prophet of Profit
#4
Jennifer Kirley said:
I've read that some families are moving in together again: young adults not able to afford their own homes, and retirees moving in with grown children due to lack of funds.

My dad died within 2 years of his retirement. My own mother lives with my sister.

I won't be able to retire securely at 65 either, and my house won't be paid for. Like I wrote to BusinessWeek, I shall make nice with my kids because we could be together for a long time.

But that's okay from where I view it here and now. I can't imagine staying home all the time.
As you baby boomers reach retirement age in a few years, you may be facing what I and my contemporaries have already experienced:
  1. Adult children facing midlife crises over layoffs, putting kids through college, still struggling with their own college loans from graduate school.
  2. Elderly parents (80's and 90's) who may have funds to pay normal living expenses, but are unable to live independently due to poor health. The cost of assisted living, whether in their own home or in a commercial center exceeds the funds available for the rest of their projected lives.
  3. Personal anxieties whether the funds prudently set aside for retirement for ourselves will have to be expended to bail out parents, children, or some unforeseen economic reverse. (my contemporaries who were airline pilots have found their retirement income cut by 2/3 due to the airline bankruptcies and many have come out of retirement to try to find work to supplement their retirement income so they can keep homes and cars because of loans which they thought were easily covered before financial disaster.)
Criminal defense attorneys have a catchphrase they tell all their defendant clients, "Hope for the best; prepare for the worst!" Seems like good advice for all of us in these perilous financial storms.
 

Jen Kirley

Quality and Auditing Expert
Staff member
Admin
#5
Wes Bucey said:
Criminal defense attorneys have a catchphrase they tell all their defendant clients, "Hope for the best; prepare for the worst!" Seems like good advice for all of us in these perilous financial storms.
Yes indeed. Would those same attorneys have forseen contractural pension plans undone with a procedure like bankruptcy? I wouldn't have, I would have been naive enough to think contracts must be honored.

At my 10 year point in the Navy I underwent the typical "midlife" question to stay or go. Already the retirement benefits had undergone congressional whittling: adding 10 years to receive 75% of base pay for stipend, dependent health care opportunities disappearing. What we had thought was contractural when we signed turned out to be just policy, which can be changed at the will of leadership.

I chose not to remain in the service, in large part because of that newfound reality.

And so reality has changed for U.S. workers all over the place like your pilot friends.

We'll learn to adapt to our new economic environment (buy smaller houses, live more humbly: drive smaller cars, shop for bargains, learn to save enough to buy a 2-year-old car with cash versus carry a loan, etc.), but there will be moaning because unrequited loyalty hurts.

I can personally vouch for the midlife crisis associated with layoffs. I figured an education degree would be just the ticket. Wrong. Try as I might, I have not managed to erase the quality auditor in me, to move into a new profession. I'm so insufferably left-brained that I chafe at inefficient systems and the lack of power to help improve them. My heart still remains with Quality, so I jump at those oh-so-rare opportunities like the last one.
 

Randy

Super Moderator
#6
Murphy's Law said:
The original pensions originated in Germany (Bismark, I believe) and the majority of people who retired were worn out by manual labor, and tended to die not much longer after retiring.
Actually the oldest pension program I'm aware of was for Roman soldiers that survived after 20 years of fighting both under the Republic and then during the Empire period. Soldiers were given land and a annual payment for services rendered to the Roman people in the name of the Senateand People of Rome leaders like Gaius Julius Ceasar who had profited from the services rendered.
 

Antonio Vieira

Involved - Posts
Trusted Information Resource
#7
Pensions are getting shorter everywhere. When my father was retired the Portuguese Social Security has so much money that they start lending money to people to build their own houses. There were 5 active workers paying the pension of one retired worker.
Today we have 3 retired worker having their pensions paid by just one active worker plus enormous taxes paid by everybody. This is not possible to maintain!
We have 21% of VAT in everything we buy. We have more than 80% tax in petrol; every car that is bought half the price is tax, we pay more than 50% of tax in all our incoming wage money. It’s to much!:(
 

Wes Bucey

Prophet of Profit
#8
Randy said:
Actually the oldest pension program I'm aware of was for Roman soldiers that survived after 20 years of fighting both under the Republic and then during the Empire period. Soldiers were given land and a annual payment for services rendered to the Roman people in the name of the Senateand People of Rome leaders like Gaius Julius Ceasar who had profited from the services rendered.
Of course, this "pension" was a pragmatic payment to keep "retired" soldiers (who still had weapons plus skill and experience which kept them alive) from banding together into roving bands of bandits which would have upset the Pax Romana which lasted for 1,000 years. (in Japan, unemployed samuri [ronin] became "mercenaries" - a polite term for bandits who formed outlaw gangs)

We were offering similar benefits for our own war vets until recent times (see Jennifer's comments.) The cessation of benefits for former soldiers in Roman times led in part to the downfall of Roman civilization and hastened the entry of Europe into the Dark Ages with recurrent plagues, famines, ill-fated wars and Crusades.

Strangely, the axiom "those who fail to study history are condemned to repeat it" has lost favor among current politicians and business "leaders." What may be the result of that?
 
#9
We have the same problem as the rest of you. Our population is getting older and older. This is putting the system under severe pressure, and there is talk about upping the norm pension age...

That would obviously save pension funds in two ways: Later retirement would mean a saving in that end, and there is ample evidence telling us that we would also die sooner, thus saving a bit in the other end as well.

If we die sooner however, that will ease the pressure a bit. I wonder where we will find some kind of equilibrium.

Oh well....:rolleyes: It remains to be seen when (if) I'll be able to retire. I'm sure the rules will look a bit different by then...

/Claes
 

Wes Bucey

Prophet of Profit
#10
Claes Gefvenberg said:
We have the same problem as the rest of you. Our population is getting older and older. This is putting the system under severe pressure, and there is talk about upping the norm pension age...

That would obviously save pension funds in two ways: Later retirement would mean a saving in that end, and there is ample evidence telling us that we would also die sooner, thus saving a bit in the other end as well.

If we die sooner however, that will ease the pressure a bit. I wonder where we will find some kind of equilibrium.

Oh well....:rolleyes: It remains to be seen when (if) I'll be able to retire. I'm sure the rules will look a bit different by then...

/Claes
I guess, like the poet, Dylan Thomas, I could never stand quietly by and say, "Oh well!"

Read this poem and think about how it might apply in such a situation. Isn't it time to think about joining with other "soon to be oldsters" and fight against the seeming inevitable?
Dylan Thomas - Do Not Go Gentle Into That Good Night
Do not go gentle into that good night,
Old age should burn and rave at close of day;
Rage, rage against the dying of the light.
Though wise men at their end know dark is right,
Because their words had forked no lightning they
Do not go gentle into that good night.

Good men, the last wave by, crying how bright
Their frail deeds might have danced in a green bay,
Rage, rage against the dying of the light.
Wild men who caught and sang the sun in flight,
And learn, too late, they grieved it on its way,
Do not go gentle into that good night.

Grave men, near death, who see with blinding sight
Blind eyes could blaze like meteors and be gay,
Rage, rage against the dying of the light.
And you, my father, there on that sad height,
Curse, bless, me now with your fierce tears, I pray.
Do not go gentle into that good night.
Rage, rage against the dying of the light.
 

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