BY DONALD L. BARLETT and JAMES B. STEELE It Was Part of The

G5010L1R1

I N - D E P T H g n i THE BROKENPR g a It was part of the American Dream, a pledge made by corporations to their m I workers: for your decades of toil, you will be assured of retirement beneÞts E M

I like a pension and health care. Now more and more companies are walking T

K away from that promise, leaving millions of Americans at risk of an Y

M impoverished retirement. How can this be legal? A Time investigation looks C at how Congress let it happen and the widespread social insecurity itÕs causing BY DONALD L. BARLETT AND JAMES B. STEELE G5020L1R1

$1,200 ThatÕs how much monthly income Joy Whitehouse, 69, lost when her husbandÕs death beneÞt was canceled. She collects cans to make ends meet C

OMISE M Y K T I M E I m a g i n g

Photographs for TIME by Steve Liss G5031L1R1

THE BROKENPROMISE $47 he little shed behind joy whitehouseÕs modest Was the amount home is Þlled with aluminum cansÑsoda cans, soup that Polaroid retiree Betty Moss, 60, cans and vegetable cansÑthat she collects from neigh- received from the bors or Þnds during her periodic expeditions along the company after roadside. Two times a month, she takes them to a recy- losing tens of cler, who pays her as much as $30 for her harvest of thousands of dollars in beneÞts T castoffs. When your Þxed income is $942 a month, an extra $30 here and there makes a big difference. After paying rent, g utilities and insurance, Whitehouse is left with less than $40 a n i week to cover everything else. So the money from cans helps pay g medical bills for the cancer and chronic lung disease she has been a battling for years, as well as food expenses. ÒI eat a lot of soup,Ó says m the tiny, spirited 69-year-old, who lives in Majestic Meadows, a I mobile-home park for senior citizens near Salt Lake City, Utah. E Whitehouse never envisioned spending her later years this way. M

I SheandherhusbandAlvaDonraisedfourchildren.Inthe1980sthey

T lived in Montana, where he earned a good living as a long-haul truck driver for PaciÞc Intermountain Express. But in 1986 he was killed K on the job in a highway accident attributed to faulty maintenance on Y his truck, as his company struggled to survive the cutthroat pricing of M congressionally ordered deregulation. After her husbandÕs death, C Whitehouse knew the future would be tough, but she was conÞdent in her economic survival. After all, the company had promised her a death beneÞt of $598 every two weeks for the rest of her lifeÑa commitment she had in writing, one that was a matter of law. She received the beneÞt payments until October 1990, when the check bounced. A corporate-takeover artist, later sent to prison for ripping off a pension fund and other Þnancial 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 agree- ments with their employees. To support herself, Whitehouse had already sold the coupleÕs Montana home and moved to the Salt Lake

P U B L I C V S . P R I V A T E WherePensionsAreGolden

ll pensions and health-care falling) of the private work force. increases, a fringe beneÞt absent personal-beneÞt slush fund for plans are not created equal. Even though the commitment from private pensions. council members and senior ofÞ- At the same time millions of is there, the money isnÕt. A study Some public-employee cials.Ó Not only did high-ranking Aworkers in private industry by analysts at Barclays Global pension plans are well managed San Diego ofÞcials give them- have lost the beneÞts they once Investors in San Francisco and adequately funded. Most are selves preferential treatment for thought they had for life, anoth- estimates that public-employee not. A study of 64 state pension their pensions, they also distrib- er group is doing quite nicely, pension funds in the U.S. are systems by Wilshire Associates, an uted outsize beneÞts to city work- secure in the knowledge short $700 billion. ThatÕs more investment advisory company, ers. A department director with that their beneÞts are San than all state and local found that 54 of them were under- 39 years of service collects protected foreverÑ Diego governments collected funded by a total of $175.4 billion. $148,000 a year for life; an not by some last year in property, The situation is even worse at the assistant port director with 31 government $1.4 sales and corporate municipal level. San Diego, which years, $132,000. So far, the agency, but income taxes is on the brink of bankruptcy, is in scandal has cost the mayor his job, nsions directly by you, the BILLION in pe combined. As a result, the hole for $1.4 billion in pensions six pension-fund trustees have owed but not taxpayer. covered many employees in the owed but not covered. been charged, city services are They are public em- private sector will get hit How could this happen? being slashed and investigations ployees in state and local with a double whammy: while Politicians neglected to put mon- have been launched by the FBI, governments, ranging from their pensions erode, increasing- ey into pension plans, made poor the SEC and the U.S. Attorney. teachers to cops. Most collect ly they will be hit with cuts in investments, handed out extra- San DiegoÕs excesses have guaranteed pensions provided government services and forced ordinarily generous retirement attracted attention, but the city is through state and local taxes and to pay higher taxes to cover the packages and gave special hardly alone. The California Public their own contributions and pensions of public employees, treatment to their fellow politi- EmployeesÕ Retirement System, investment returns. Overall, the kind they can only dream cians. As San Diego city attorney better known as CalPERS, handed 90% of public employees enjoy a about. In three-fourths of the Mike Aguirre put it, ÒWhat has out a pension check last year for deÞned-beneÞt pension, com- states, public pensions even happened is that the pension $272,200 to a retired university pared with only 20% (and come with annual cost-of-living plan has somewhat become a professor. A former water-district G5041L1R1

City area, where she had family and friends. With her savings running out, she applied early (at a reduced rate) for her husbandÕs So- cial Security. She needed every penny. For health reasons, she couldnÕt 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 artiÞcial bladder were installed. Her children and other relatives offered to help, but Whitehouse is Þercely self- sufÞcient. Friends and neighbors pitch in to Þll her shed with aluminum. ÒYou put your pride in your pocket, and you learn to help C yourself,Ó she says. ÒI save cans.Ó M Throughnofaultofherown,Whitehousehadfoundherselfthrust Y into the ranks of workers and their spousesÑpreviously invisible but K

now fast growingÑwho believed the corporate promises about retire- T

mentandhealthcare,oftenafÞrmedbytheFederalGovernment:they I M would receive a guaranteed pension; they would have company-paid health insurance until they qualiÞed for Medicare; they would receive E I

company-paid supplemental medical insurance after turning 65; they m would receive a Þxed death beneÞt in the event of a fatal accident; and a

theywouldhaveamodestlife-insurancepolicy. g

They didnÕt get those things. And they wonÕt. i n

Corporate promises are often not worth the paper theyÕre print- g ed on. Businesses in one industry after another are revoking long- standing commitments to their workers. ItÕs the equivalent of your bank telling you that it needs the money you put into your savings account more than you doÑand 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 indus- triesÑapparel, 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 autosÑwith no end in sight. ThatÕs why Whitehouse, as difÞcult 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 Ameri-

under age 65. Many who work for local taxpayers everywhere will state or local governments may get their Þrst full picture of cur- retire in their 40s and collect a rent and future health-care costs pension as well as receive subsi- of public employees. ThatÕs when dized health care. Although future new accounting rules go into pension costs are well known effect requiring governments to general manager collected retirement checks. That was after because contributions and esti- itemize health-care spending and $206,300. CalPERS, by the way, the city had sold $1.2 billion in mates of potential liabilities must forecast costs for coming years. invests in vulture funds formed by pension-obligation bonds in 1999, be accounted for, such is not The change in bookkeeping will Wilbur Ross, the New York billion- the equivalent of paying your mort- the case with health care. either set off a wave aire who specializes in buying gage with a credit card. At the other Governmental entities of tax increases, bankrupt companies, slashing end of the state, Pittsburgh was in pay the bills out of cur- Illinois reductions in gov- costs and then selling the Þrms for even worse shape. In 2003, the rent revenue. As is the ernment services an oversize proÞt. Among the costs police pension plan had enough case with everyone or both. Lest any- pared: pensions. In short, a public- assets to cover just 33% of elseÕs, those bills are $43.1 one think state and employee pension fund makes promised retirement pay. That, exploding. So, too, are BILLION local retirement- money from the killing of private too, was after Pittsburgh peddled future obligations, as in unfunded pension plan sponsors may pensions. $302 million in pension-obligation the baby boomers liabilitiesÑnearly emulate those in Across the U.S., retirement bonds between 1996 and 1998. prepare to leave their double the stateÕs corporate America plans in big cities and In the end, taxpayers in both cities government jobs. This entire budget and simply walk small ones are will have to pick up the tab. The year New JerseyÕs State away from the prom- Philadelphia underwater. In place with the biggest problem Health BeneÞts Program ised health-care Philadelphia, is the state of Illinois, whose will cost taxpayers $1 billion for beneÞts, think again. More $2.6 the cityÕs three unfunded liability was estimated active workers and an additional than once, courts have ruled big pension last year at $43.1 billion, or nearly $900 million for retirees, ac- that health beneÞts promised to BILLION funds were double the stateÕs budget. cording to Fred Beaver, director government workers (among what the cityÕs major short $2.6 bil- And everywhere, the worst is of the Division of Pensions and them judges and legislators)Ñ pension funds were short in Õ03 lion at the end yet to come: health-care obliga- BeneÞts. By 2010, the state will unlike those promised to work- of 2003. The tions. A 2004 study by Workplace spend more on health care for ers in private industryÑmust be police plan had Economics Inc. found all 50 state- retirees ($2.3 billion) than for honored. ÑBy Donald L. Barlett enough assets to cover government employers offered active workers ($1.8 billion). and James B. Steele. With only 59% of promised health-care beneÞts for retirees Come 2007, state and reporting by Jeremy Caplan G5052L1R1

THE BROKENPROMISE

cans, it is also a window into the future for many millions more. A United Auto Workers leadership to rescind $1 billion worth of Time investigation has concluded that long before todayÕs working health-care beneÞts for its retirees. If ratiÞed by the union member- Americans reach retirement age, policy decisions by Congress fa- ship, the retrenchment will hasten the end to company-subsidized voring corporate and special interests over workers will drive mil- health care for all retirees. From 1988 to 2004, the share of employ- lions of older AmericansÑa majority of them womenÑinto poverty, ers with 200 or more workers offering retiree health insurance push millions more to the brink and turn retirement years into a plunged, from 66% to 36%. The end result: a fresh and additional time of need for everyone but the afßuent. The transition is well un- burden on retirees. Concluded a report by the Kaiser Family Foun- derway,erodingeffortsofthepastthreedecadestoeliminatepover- dation and Hewitt Associates: ÒFor the majority of workers who re- g

ty among the aging. From taxes to health R tire before they turn age 65 and are eligible E n B i care to pensions, Congress has enacted leg- BANKRUPT: At E for Medicare, the coverage provided under C C g the car-parts islation that adds to the cost of retirement A employer plans is often difÞcult, if not im- C a and eats away at dollars once earmarked for maker, beneÞts O possible to Þnd anywhere else.Ó For retirees O

are in jeopardy K Ñ m food and shelter. That reversal of fortunes is over 65, Òemployer plans remain the pri- I R E

staggering, and even those already retired U mary source of prescription drug coverage T E E

or near retirement will be squeezed by R for seniors on Medicare ... This coverage is S M

I changing economic rules. more generous than the standard prescrip-

T CongressÕs role has been pivotal. Law- tion drug beneÞt that will be offered by makers wrote bankruptcy regulations to al- Medicare plans beginning in 2006.Ó K low corporations to scrap the health insur- Perhaps the best yardstick to assess the Y ance they promised employees who retired outlook for the later years is the deÞned- M earlyÑsometimes voluntarily, quite often beneÞt pension, long the gold standard for C not. They wrote pension rules that encour- PENSIONS IN PERIL retirement because it guarantees a Þxed in- aged corporations to underfund their retire- come for life. The number of such plans The number of 120 ment plans or switch to plans less favorable In thousands offered by corporations has plunged from company- 100 to employees. They denied workers the sponsored 112,200 in 1985 to 29,700 today. Since 1985, right to sue to enforce retirement promises. pension plans 80 the number of active workers covered in the They have refused to overhaul AmericaÕs in the U.S. 60 private sector declined from 22 million to 17 health-care system, which has created the has been million. They are the last members of what dropping for 40 worldÕs most expensive medical care with- once promised to be the U.S.Õs golden retire- years ... 20 29,651 out any comparable beneÞt. One by one, ment era, and they are fast disappearing. Private-sector single- 0 lawmakers have undermined or destroyed employer pension plans Õ85 Õ90 Õ95 Õ00 From 2001 to 2004, nearly 200 corporations policies that once afforded at least the possi- in the Fortune 1000 killed or froze their ... the $500 bility of a livable existence to many seniors, In billions deÞned-beneÞtplans.Mostrecently,Hewlett- amount while at the same time encouraging corpo- companies 400 Packard, long one of the most admired U.S. rations to repudiate lifetime-beneÞt agree- are short- 300 companies, pulled the plug on guaranteed ments. All this under the guise of ensuring changing pensions for new workers. An HP spokes- workers that they are in charge of their own their plans is 200 man said the company had concluded that climbing ... $450 destinyÑsuch as it is. 100 billion Òpension plans are kind of a thing of the Theprocesshasaccelerateddramatically Total underfunding among past.Ó In that, HP was merely following the private-sector single- 0 this year. Two major U.S. airlinesÑDelta and employer pensions Õ95 Õ97 Õ99 Õ01 Õ03 lead of business rival IBM and such other NorthwestÑturned to bankruptcy court to major companies as NCR Corp., Sears Hold- $10 ... and the In billions cut costs and delay pension-fund contribu- government 5 ing Corp. and Motorola. The nationÕs largest tions.ThisfollowedearlierbankruptcyÞlings fund that 0 employer, Wal-Mart, does not offer such covers by United Airlines and USAirways, both of Ð5 pensionseither.Atthecurrentpace,human- which jettisoned their guaranteed pension pension resources ofÞces will turn out the lights in defaults is Ð10 plans. Then on Oct. 8, the largest U.S. auto- running a Ð15 Ð$23.5 billion their defined-benefit section within a parts maker, Delphi Corp., Þled for bank- huge deficit Ð20 decade or so. At that point, individuals will ruptcy protection, seeking to cut off medical Ð25 assume all the risks for their retirement, just and life-insurance beneÞts for its retirees. Õ85 Õ90 Õ95 Õ00 as they did 100 years ago. DelphiÕs pension funds are short $11 billion. Source: Pension Benefit Guaranty Corp. The shift away from guaranteed pen- To Elizabeth Warren, a Harvard law profes- sions was encouraged by Congress, which sor who specializes in bankruptcy, this is just going to get worse, as structuredtherulesinawaythatinvitescorporationstoabandontheir ever more companies see the value to their bottom line of Òscraping deÞned-beneÞt plans in favor of deÞned-contribution plans, increas- offÓ employee obligations. ÒThereÕs no business in America that isnÕt ingly 401(k)s, in which employees set aside a Þxed sum of money to- goingtoÞgureoutaway togetridof[thesebeneÞtpromises].Ó wardretirement.Manycompaniesalsocontribute;somedonÕt.What- That may include the worldÕs largest automakerÑGeneral Mo- ever the case, the contributions will never be enough to match the tors. Although GM chairman Rick Wagoner has insisted that Òwe certain and long-term income from a deÞned-beneÞt plan. WhatÕs donÕt consider bankruptcy to be a viable business strategy,Ó some on more, once the money runs out, thatÕs it. If people live longer than Wall Street are skeptical, given the companyÕs array of problems. expected, get stuck with unanticipated expenses or suffer losses of Their view was reinforced when GM, the company that dominated other once promised beneÞts, they will have little besides their Social the American economy through the 20th century, announced on Securitytosustainthem. Oct. 17 that it had reached a precedent-setting agreement with the The dawning perception among Americans that when it comes

38 TIME,OCTOBER31,2005 G5060L1R1

THE BROKENPROMISE

to retirement, youÕre on your own, baby, is surely a reason that Presi- lose money in the 1990s. From 1995 to 1998, the company racked dent George Bush ran into so much opposition to his proposal to up $359 million in losses. As its balance sheet deteriorated, so did change Social Security from a risk-free plan into one with so-called the value of its stock, including shares in the esop. In October private accounts. Critics of the 70-year-old system were determined 2001, Polaroid sought bankruptcy protection from creditors. to chip away at Social Security as part of a larger effort to promote By then, PolaroidÕs shares were virtually worthless, having plum- what the Bush Administration calls an Òownership society.Ó As Trea- metedfrom$60in1997tolessthanthepriceofaCokeinOctober2001. sury Secretary John Snow told a congressional committee in Febru- During that period, employees were forbidden to unload their stock, ary 2004: ÒI think we need to be concerned about pensions and the based on laws approved by Congress. But what employees werenÕt al- g security that employees have in their pensions. And I think we need lowedtodoatahigherprice,thecompany-appointedtrusteecoulddo n i to encourage people to save and become part of an ownership socie- at the lowest possible priceÑwithout even seeking the workersÕ per- g ty, which is very much a part of the PresidentÕs vision for America.Ó mission. Rather than wait for a possible return to proÞtability through a Of course, itÕs much easier to own a piece of America when you restructuring, the trustee decided that it was Òin the best interestsÓ of m have a pension like SnowÕs. When he stepped down as head of CSX the employees to sell the esop shares. They went for 9¢. In short order, I Corp.Ñoperator of the largest rail network in the eastern U.S.Ñto a$300millionretirementnesteggputawayby6,000Polaroidemploy- E take over Treasury, Snow was given a lump-sum pension of eeswaswipedout.Manylostbetween$100,000and$200,000. M

I $33.2 million. It was based on 44 years of employment at CSX. Un- Moss was one of the losers. Now 60, she spent 35 years at Po-

T like most ordinary people, who must work the actual years on which laroid, beginning as a Þle clerk out of high school, then working her their pension is calculated, Snow was employed just 26 years. The way through college at night and eventually rising to be senior re- K additional 18 years of his CSX employment history were Þctional, a gional operations manager in Atlanta. ÒIt was the kind of place peo- Y gift from the companyÕs board of directors. ple dream of working at,Ó she said. ÒI can honestly say I never dread- M Snowisnotalone.Thephan- ed going to work. It was just the C tom employment record, as it sort of place where good things might be called, is a common were always happening.Ó One of executive-retirementpracticein $1,000 those good things was supposed corporate AmericaÑand one Vivian Persinger to be the esop, touted by the that is spelled out in corporate gets this monthly company as a plan that Òforced Þlings with the Securities and pension, but later employees to save for their re- generations like her Exchange Commission (sec). daughterÕs typically tirement,Ó as Moss recalled. Drew Lewis, the Pennsylvania donÕt. Ann Persinger ÒEverybody went for it. We had Republicanandonetimeheadof left a job in the been so conditioned to believe the U.S. Department of Trans- fashion industry to what we were told was true.Ó care for her mom portation, got a $1.5 million an- and lives off savings OncePolaroidenteredbank- nual pension when he retired in ruptcy, Moss and her retired co- 1996 as chairman and ceo of workers learned a bitter lessonÑ Union PaciÞc Corp. His pension that they had no say in the was based on 30 years of service security of beneÞts they had to the company, but he actually worked all their lives to accumu- worked there only 11 years. The late. While the federal Pension other 19 years of his employment history came courtesy of Union BeneÞt Guaranty Corp. (pbgc) agreed to make good on most of their PaciÞcÕs board of directors, which included Vice President Dick basic pensions, the rest of their beneÞtsÑnotably the esop accounts, Cheney. And then thereÕs Leo Mullin, the former chairman and ceo along with retirement health care and severance packagesÑwere of Delta Air Lines. Under MullinÕs stewardship, Delta killed the canceled. The retirees, generally well educated and Þnancially deÞned-beneÞt pension of its nonunion workersandreplacedit with savvy, organized to try to win back some of what they had lost by a less generous plan. Now, little more than a year after he retired, the petitioning bankruptcy court, which would decide how to divide airline is in bankruptcy and can dump its pension obligations. But the companyÕs assets among creditors. To no avail: PolaroidÕs man- you need not fret about Mullin. On his way out the door, he picked up agement had already undercut the employeesÕ effort. Rather than a $16 million retirement package. ItÕs based on 28.5 years of employ- Þle for bankruptcy in Boston, near the corporate ofÞces, the compa- ment with Delta, at least 21 years more than he worked at the airline. ny took its petition to Wilmington, Del., and a bankruptcy court that had developed a reputation for favoring corporate managers. There, PolaroidÕs management contended that the company was in terrible HOW SAVINGS CAN BE HIJACKED Þnancial shape and that the only option was to sell rather than reor- t the same time corporate executives are paid retire- ganize. The retirees claimed that Polaroid executives were under- ment dollars for years they never worked, hapless employ- valuing the business so the company could ignore its obligations to ees lose supplemental retirement beneÞts for a lifetime of retirees and sell out to private investors. actual work. Just ask Betty Moss. She was one of thousands The bankruptcy judge ruled in favor of the company. In 2002 A of workers at Polaroid Corp.Ñthe Waltham, Mass., maker Polaroid was sold to One Equity Partners, an investment Þrm with a of instant cameras and ÞlmÑwho, beginning in 1988, gave up 8% special interest in Þnancially distressed businesses. (One Equity of their salary to underwrite an employee stock-ownership plan, was a unit of Bank One Corp., now part of JPMorgan Chase.) Many or esop. It was created to thwart a corporate takeover and Òto pro- retirees believed the purchase price of $255 million was only a frac- vide a retirement beneÞtÓ to Polaroid employees to supplement tion of the old PolaroidÕs value. Evidence supporting that view: the their pension, the company pledged. Alas, it was not to be. new owners Þnanced their purchase, in part, with $138 million of Polaroid was slow to react to the digital revolution and began to PolaroidÕs own cash.

40 TIME,OCTOBER31,2005 G5070L1R1

THE BROKENPROMISE

Employees did not leave bankruptcy court empty-handed. They Corp., the onetime retail Þxture of Middle America that is now gone; all got something in the mail. Moss will never forget the day hers and the late Victor Posner, the Miami Beach corporate raider who arrived. ÒI got a check for $47,Ó she recalled. She had lost tens of thou- siphoned millions of dollars from more than half a dozen different sands of dollars in esop contributions, health beneÞts and severance companies,includingFischbachCorp.,aNewYorkelectricalcontrac- payments. Now she and the rest of PolaroidÕs other 6,000 retirees were tor that he drove to the edge of extinction. Those two raiders alone beingcompensatedwith$47checks.ÒYoushouldhaveheardthejokes,Ó raked off about $100 million in workersÕ retirement dollarsÑall per- shesaid.ÒHowaboutweallmeetatMcDonaldÕsandspendour$47?Ó fectly legal, thanks to Congress. By the time all the billions of dollars Under a new management team headed by Jacques Nasser, for- were gone and the public outcry had grown too loud to ignore, Con- g mer chairman of Ford Motor Co., Polaroid returned to proÞtability al- gressin1990belatedlyrewrotetherulesandimposedanexcisetaxon n i most overnight. Little more than two years after the company moneyremovedfrompensionfunds.Theraidsslowedtoatrickle. g emerged from bankruptcy, One Equity sold it to a Minnesota entre- During those same years, the pbgc, which insures private pen- a preneur for $426 million in cash. The new managers, who had re- sion plans, published an annual list of the 50 most underfunded of m ceived stock in the postbankruptcy Polaroid, walked away with mil- those plans. In shining a spotlight on those that had fallen behind in I lions of dollars. Nasser got $12.8 million for his 1 million shares. Other their contributions, the agency hoped to prod companies to keep cur- E executives and directors were rewarded for their efforts. Rick Lazio, a rent. Corporations hated the list. They maintained that the pbgcÕs M

I four-term Republican from West Islip, N.Y., who effectively gave up methodology did not reßect the true Þnancial condition of their pen-

T hisHouseseatforanunsuccessfulSenaterunagainstHillaryRodham sion plans. After all, as long as the stock market went upÑand never Clinton in 2000, collected $512,675 for a brief stint as a director. That down or sidewaysÑthe pension plans would be adequately funded. K amounted to nearly twice the $282,000 paid to all 6,000 retirees. The Congress liked that reasoning and, in 1994, reacting to corporate Y $12.08 a share that the new managers received for claimsthattheunderfundedlistcausedneedlessanxi- M little more than two years of work was 134 times the ety among employees, voted to keep the data secret. C 9¢ a share handed out earlier to lifelong workers. THE $12.08 A When the pbgc killed its Top 50 list, David M. Strauss, SHARE THAT then the agencyÕs executive director, explained, ÒWith fullimplementationof[the1994pensionlaw],wenow LETÕS BREAK A DEAL POLAROIDÕS have better tools in place.Ó pbgc ofÞcials were so bull- ashington has a rich history of cater- NEW ish about those Òbetter tools,Ó including provisions to ing to special and corporate interests at levy higher fees on companies ignoring obligations to the expense of ordinary citizens. Nowhere MANAGERS their employees, they predicted that underfunded isthismoreevidentthaninlegislationdeal- RECEIVED WAS pensionplanswouldbeathingofthepast.Asastoryin W ing with company pensions. It has been the Los Angeles Times put it, Òpbgc ofÞcials said the this way since 1964, when carmaker Studebaker Corp. 134 TIMES THE act nearly guarantees that large underfunded plans collapsed after 60 years, junking the promised pen- 9¢ A SHARE willstrengthenandthechronicdeÞcitssufferedbythe sions of 4,000 workers not yet eligible for retirement, pension guaranty organization will be eliminated pensions the company had spelled out in brochures HANDED OUT within10years.Ó for years: ÒYou may be a long way from retirement TO LIFELONG Not even close; instead they accelerated at warp age now. Still, itÕs good to know that Studebaker is speed. In 1994 the deÞcit in pbgc plans was $31 bil- building up a fund for you, so that when you reach re- WORKERS lion. Today itÕs $450 billion, or $600 billion if one in- tirement age you can settle down on a farm, visit cludes multiemployer plans of unionized employees around the country or just take it easy, and know that youÕll still be whoworkformorethanonebusinessinsuchindustriesasconstruction. getting a regular monthly pension paid for entirely by the company.Ó Since the pbgc no longer publishes its Top 50 list, anyone look- Oops. There oughta be a law. ing for even remotely comparable information must sift through It took Congress 10 years to respond to the Studebaker pension the voluminous filings of individual companies with the sec or the abandonment by writing the Employee Retirement Income Securi- Labor Department, where pension-plan finances are recorded, or ty Act (erisa) of 1974. It established minimum standards for retire- turn to the reports of independent firms such as Standard & ment plans in private industry and created the pbgc to guarantee PoorÕs. The findings arenÕt reassuring. According to S&P, Sara Lee them. Then President Gerald Ford summed up the measure when Corp. of Chicago, a global maker of food products, ended 2004 he signed it into law that Labor Day: ÒThis legislation will alleviate with a pension deficit of $1.5 billion. The companyÕs pension plans the fears and the anxiety of people who are on the production lines held enough assets to cover 69.8% of promised retirement pay. orintheminesorelsewhere,inthattheynowknowthattheirinvest- Ford Motor Co.Õs deficit came in at $12.3 billion. It could write re- ment in private pension funds will be better protected.Ó tirement checks for 83% of money owed. ExxonMobil Corp. was Perhaps for some, but far from all. down $11.5 billion, with enough money to issue retirement checks Another group that had no pension worries would turn out to be covering 61% of promised benefits. Exxon had extracted $1.6 bil- the biggest winners under the bill. Congress wrote the law so broadly lion from its pension plans in 1986 because they were deemed that moneymen could dip into pension funds and remove cash set overfunded. The company explained then that Òour shareholders aside for workersÕ retirement. During the 1980s, thatÕs exactly what a would be better servedÓ that way. cast of corporate raiders, speculators, Wall Street buyout Þrms and In reality, the deÞcits in many cases are worse than the published company executives did with a vengeance. Throughout the decade, data suggest, which becomes evident when bankrupt corporations they walked away with an estimated $21 billion earmarked for work- dump their pension plans on the pbgc. Time after time, the agency ersÕ retirement pay. The raiders insisted that they took only excess has discovered, the gap between retirement holdings and pensions assets that werenÕt needed. Among the pension buccaneers: Meshu- owed was much wider than the companies reported to stockholders lam Riklis, a once ßamboyant Beverly Hills, Calif., takeover artist who oremployees.ThusLTVCorp.,thegiantClevelandsteelmaker,report- skimmed millions from several companies, including the McCrory ed that its plan for hourly workers was about 80% funded, but when

42 TIME,OCTOBER31,2005 G5080L1R1

THE BROKENPROMISE

it was turned over to the pbgc, there were assets to cover only 52% of As the Government Accountability OfÞce put it earlier this year: beneÞtsÑa shortfall of $1.6 billion to be assumed by the agency. ÒpbgcÕs accumulated deÞcit is too big, and plans simply do not have How can this be? Thanks to the way Congress writes the rules, enough money in the system to back up the long-term promises pension accounting has a lot in common with Enron accounting, many employers have made to their workers.Ó To add to its woes, the but with one exception: itÕs perfectly legal. By adjusting the arcane agency has a record 350 active bankruptcy cases, according to formulas used to calculate pension assets and obligations, corporate Bradley D. Belt, executive director. Of those, Belt told Congress, Ò37 accountants can turn a drastically underfunded system into a Þnan- have underfunding claims of $100 million or more, including six in cially healthy one, even inßate a companyÕs proÞts and push up its excess of $500 million.Ó g stock price. Ethan Kra, chief actuary of Mercer Human Resources Congress idly watched United Airlines and USAirways un- n i Consulting, once put it this way: ÒIf you used the same accounting load their pension obligations on the pbgc. Now Delta and g for the operations side [of a corporation] that is used on pension Northwest are positioned to do the same. That increases the like- a funds, you would be put in jail.Ó lihood that other old-line carriers like American and Continental m The old pbgc lists of deadbeat pension funds served another pur- will be forced to do likewise. NorthwestÕs ceo, Douglas Steen- I pose. They were an early-warning sign of companies in troubleÑa land, bluntly told the Senate Finance Committee last June, E sign often ignored or denied by the companies themselves. ÒSome- ÒNorthwest has concluded that defined-benefit plans simply do M

I how,ifcompaniesaremakingprogresstowardanobjectivethatÕscon- not work for an industry that is as competitive and vulnerable

T sistent with [the pbgcÕs], then I think itÕs counterproductive to be ex- from forces ranging from terrorism to international oil prices posedonthispubliclisting,ÓcomplainedGaryMillenbruch,executive that are largely beyond its control, as is the airline industry.Ó In K vicepresidentofBethlehemSteel,a perennialfavoriteontheTop50. that, he merely echoed Robert Crandall, former chief of Y Time proved Millenbruch wrong. The early warnings about American Airlines, who told another Senate committee in M BethlehemÕs pension liabilities October 2004: ÒAll the [older] C turned out to be right on target. legacy carriers must get rid of Bethlehem Steel eventually Þled their defined-benefit pension for bankruptcy, and the pbgc $800 plans.Ó In all, the pension took over its pension plansÑ Future shock? funds of those airlines are which were short $3.7 billion. Pensionless Betty short $22 billion. Thecompany,onceAmericaÕssec- Dizik, 78, spends The sudden shift from an- that every month for ondlargeststeelmaker,nolonger medications. To nual pensions of a guaranteed exists. In the Top 50 pension help pay her bills, amount for a lifetime to a less- deadbeats of 1990, the pbgc re- she works at er and uncertain amount for a ported that the funds of Pan Am H&R Block limited period is taking its toll Corp.,operatorofwhatwasonce on workers. Robin Gilinger, the premier global airline, had 42, a United ßight attendant onlyone-thirdoftheassetsneed- for 14 years, sees a frightening ed to pay its promised pensions. Þnancial picture. She has an- PanAmdoesnotexisttoday. other 14 years to go before she Contrary to the assertions can take early retirement. of company executives, pbgc Under the old pension plan ofÞcials and members of Congress, one company after another on she would have received a monthly check of $2,184. Because of the 1990 Top 50 disappeared. To be sure, many are still around. Like givebacks, thatÕs down to $776Ña poverty-level annual income of General Motors. That year, the pbgc reported a $1.9 billion deÞcit in $9,312 by todayÕs standards, even before inßation takes its toll GMÕs pension plans. Today, by GMÕs reckoning, the deÞcit is $10 bil- over the coming years. And there is the distinct possibility it could lion. The pbgc estimates it at $31 billion. As for the pension-fund be less than that. Her husband lost his pension in a corporate deÞcit, if GM or any other company canÕt come up with the money, takeover. the pbgc will cover retirement checks up to a Þxed amountÑ Gilinger, who lives with her husband and 9-year-old daughter $45,600 this yearÑor until the agency runs out of money. ThatÕs pro- in Mount Laurel, N.J., is not planning on early retirement and cer- jected to occur around 2013. At that point, Congress will be forced to tainly couldnÕt afford it in the current situation. But she has con- decide whether to bail out the agency at a cost of $100 billion or cerns reminiscent of Joy WhitehouseÕs experience. ÒItÕs scary. more. When judgment day comes, other economic forces will inßu- What if something happened to my husband or if I got disabled?Ó ence the decision. Medicare, which is in far worse shape than Social she asks. ÒThen IÕm looking at nothing. Above all, whatÕs frustrat- Security, already is in the red on a cash basis. In what promises to ing is that we were told we were going to get our pension and weÕre play out as a mean-spirited competition, Congress has laid the not. The senior ßight attendants, the ones whoÕve worked 30 years, groundwork to pit individual citizens against one another, to Þght theyÕre worried how theyÕre going to survive.Ó Each time the pbgc over the budget scraps available for those and all other programs. 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 WHOÕS LEFT HOLDING THE BAG? receives no tax money. Its revenue comes from investment income n the meantime, pension plans that companies are dump- and premiums that corporations pay on their insured workers. As ing are so short of assets that the pbgcÕs Þnancial position is rap- a result, soundly managed companies with solid retirement plans idly deteriorating. In 2000, the agency operated with a $10 bil- are compelled to pick up the costs for plans in mismanaged com- lion surplus. By 2004, the surplus had turned into a $23 billion panies as well as those that just want to unload their employee IdeÞcit. By the end of this year, the shortfall may top $30 billion. beneÞts. A proposal by the Bush Administration to overhaul the

44 TIME,OCTOBER31,2005 G5090L1R1

THE BROKENPROMISE system, critics fear, would actually increase the likelihood that tained the guarantee of a Þxed retirement amount, just like corpo- more companies will kill existing plans and that other companies rations do for their executives. considering establishment of a deÞned-beneÞt plan will choose a As it is, 401(k) portability often impedes efforts to save for less expensive option. An analysis of 471 Fortune 1000 companies retirement. As todayÕs job hoppers move from one employer to by Watson Wyatt Worldwide, a global consulting Þrm, concluded another, most succumb to the temptation to cash out their Òhealthy companies would see their total pbgc premiums increase 401(k)s and spend the money, a practice hardly reflective of a se- 240% under the proposal, more than double the 113% increase for rious retirement system. Today $2 trillion is invested in those ac- Þnancially troubled employers.Ó counts. But to understand why the 401(k) is no substitute for a Barring a reversal in government policies, the pbgc could re- defined-benefit pension, look beneath that big number. Earlier C quire a multibillion-dollar taxpayer bailout. The last time that hap- this year the airwaves crackled with announcements that the val- M pened was during the 1980s and Õ90s, when another government ue of the average 401(k) had climbed to $61,000 in 2004. Y insurer, the Federal Savings and Loan Insurance Corp., was un- Noticeably absent from many accounts was any reference to the K able to keep up with a thrift industry spinning out of control. The median value, a more accurate indicator of the health of Amer- T

Federal Government eventually spent $124 billion. Unlike the icaÕs retirement system. That number was $17,909, meaning half I M fslic, which was backed by the U.S. government, the pbgc is not. held less, half more. Nearly 1 in 4 accounts had a balance of less That means an indifferent Congress could turn its back on the than $5,000. E I

retirement crash. By the agencyÕs estimate, that would translate m into a 90% reduction in pensions it currently pays. so it is that in the end, all but the most affluent citizens a

will have two options. They can join Joy Whitehouse in the can- g

collection business, or they can follow in the foot- i n

WHERE THE 401(K)FALLSSHORT steps of Betty Dizik of Fort Lauderdale, Fla., who is g he universal replacement to the pen- THE 401(K) into her sixth decade as a working American. She sion, by the consensus of the Bush Admin- WAS NEVER has no choice. Dizik did not lose her pension. Like istration, Congress, Wall Street and corporate most Americans, she never had one, or a 401(k). America, is the ubiquitous 401(k). As Bush INTENDED AS A After her husband died in 1968, she held a series of T explained at a gathering at Auburn University RETIREMENT jobs managing apartments and self-storage facili- in Montgomery, Ala., earlier this year, ÒWhen I was ties, tasks that brought her into contact with the young, I didnÕt know anything about 401(k)s be- PLAN. IT public. ÒI like working with people,Ó she said. But cause I donÕt think they existed. DeÞned-beneÞt EVOLVED OUT none of the jobs had a pension. plans were the main source of retirement. Now Hence the importance of her monthly Social theyÕve got what they call deÞned-contribution OF A TAX BREAK Security check, which comes to less than $1,000. plans. Workers are taking aside some of their own THAT The beneÞt barely covers her medications for heart money and watching it grow through safe and se- problems and diabetes, which she says can cost cure investments.Ó CONGRESS her as much as $800 a month. The new Medicare Tell that Òsafe and secureÓ part to the folks at AWARDED TO prescription-drug beneÞt, she estimates, will still Enron, who lost $1 billion in their 401(k)s. Or leave her with substantial out-of-pocket expenses. WorldCom employees, who also lost $1 billion. Or EXECUTIVES To pay rent, utilities, gas for her car and other liv- Kmart employees, who lost at least $100 million. ing expenses, Dizik has continued to work since Welcome to the 21st century version of Studebaker. she turned 65. For 10 years, she was with Broward County Meals Truth to tell, the 401(k) was never intended as a retirement on Wheels, which provides meals to seniors, some younger than plan. It evolved out of a tax break that Congress awarded to cor- she is. But three years ago, when she turned 75, driving 100 miles porate executives in 1978, allowing them to defer part of their a day began exacting a toll. salaries and cut their tax bills. At the time, federal income-tax Now she works at a nearby office of H&R Block, the tax- rates were much higher for upper-income individualsÑthe top return service. ÒI do everything there,Ó she says. ÒI am the re- rate was 70%. (Today itÕs half that.) It wasnÕt until several years lat- ceptionist. The cashier. I open the office, close the office. IÕm the er that companies began to make 401(k)s available to most em- one who takes the money to the bank. I do taxes.Ó A widow, she ployees. Even then, the idea was to encourage saving and provide lives alone in an apartment building for seniors. Her four chil- a tax shelter, not to substitute the plans for pensions. By 1985, as- dren help with the rent, but she is reluctant to accept anything sets in 401(k)s had risen to $91 billion, as more companies adopt- more. ÒAll my children are great, but I do not like to ask them for ed plans. Still, the amount was only about one-tenth that in anything,Ó she said. ÒIÕm waiting for myself to get old, when I will guaranteed pensions. need their help.Ó For the time being, she says, ÒIÕm going strong. All that changed as corporations discovered they could im- I have to.Ó prove their bottom lines by shifting workers out of costly deÞned- She doesnÕt have much hope that Washington will be able to beneÞt plans and into much cheaper (for companies) and more help seniors like her. ÒThey donÕt understand what itÕs like to wor- risky (for workers) uninsured 401(k)s. In effect, employees took a ry: Are you going to be able to make it every month, to pay the tele- hefty pay cut and barely seemed to notice. Lawmakers and sup- phone bill, the electric bill? How much are you going to have left porters advocated the move by pointing to a changing economy in over for food and other expenses?Ó Her key to getting by each which employees switch jobs frequently. They maintained that be- month is forcing herself to live within a strict budget. ÒYou learn cause deÞned-beneÞt plans are based on length of service and an to live very carefully,Ó she said. Although Dizik really would like to average of salaries over the last few years of work, they donÕt meet retire, she canÕt. ÒI will be working the rest of my life.Ó Soon, she todayÕs needs. But Congress could have revised the rules and made will have lots of company. ÑWith reporting by Laura Karmatz, Lisa the plans portable over a working life, just like a 401(k), and re- McLaughlin and Dody Tsiantar, and research by Joan Levinstein

TIME,OCTOBER31,2005 47