The Retirement Robbery

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Since putting email back in its corral, I’ve turned some recovered time to reading actual books in print — the latest being Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers by Ellen E. Schultz. If a nation of sheep shall beget a government of wolves, then the lesson from Retirement Heist is that today the shears are sharpened with numbers.

Retirement Heist is, as one blurb describes, a “meticulously researched and gripping as a crime thriller.” Each chapter explains, with detailed research data and outrage-generating examples, yet another method corporations use to steal retirement benefits and mask the theft behind accounting shenanigans. It is one of the few books (since Cadillac Desert) to describe outrageous behavior so well that I threw it across the room.

In calling the tricks accounting shenanigans, I might be unfairly maligning the accounting profession. From the joke on page 54, I learned the difference between accountants and actuaries:

A CFO is interviewing candidates for a job as a benefits consultant. He calls the first one, an accountant, into his office and asks, “What’s two plus two?” The accountant says, “Four.” The CFO sends him away, calls an actuary into the room, and asks, “What’s two plus two?” The actuary closes the door, pulls down the blinds, then leans in and whispers, “What do you want it to be?” He gets the job.

Among the wonders worked by these benefits, consultants are teaching companies how to degrade benefits without reprisals. One method is to make a series of changes, each perhaps illegal but small enough not to be worth a lawsuit. Then make a big degradation. If anyone sues, the defense is that, by not protesting the earlier changes, employees gave implicit consent to this change.

Among such explanations of wholesale deception, there are a few heartening stories — for example, of Fred Loewy (page 191), an 80-year-old former French resistance fighter and rocket engineer who retired from Motorola and found a $100-per-month error in his pension payment. He politely asked for the amount to be reviewed. After years of denial and runaround, including certified letters sent back unclaimed (the company later described its behavior in court as exhaustive cooperation), he filed a federal lawsuit. It got certified as a class action because the same mistake had been made with hundreds of other retirees. A few months before Loewy died, the retirees won a settlement of $11 million.

One’s joy is tempered because federal pension law (ERISA) includes no punitive damages, not even for such egregious behavior. The damages are limited to rectifying the errors. Thus, it is in the corporate interest to make “mistakes.” The worst that can happen is that an ex-resistance fighter and rocket engineer turns up, and you end up paying some of your legal obligations. Mostly, however, no one notices, or they die while waiting for a speck of justice.

The savings from the shenanigans hardly go to Mother Theresa’s orphanage. Rather, as Retirement Heist demonstrates, they go to outsized pensions and other benefits for executives (such as pumping up the stock price, thereby enriching executives with stock options). For some companies, one-third of their pension obligations were just for the executives.

Mirroring the degradation of retirement security described by Schultz, I’ve been under three pension systems, the second slightly worse than the first, and the third a lot worse.

My first real job was at the University of Cambridge, where I was part of the Universities Superannuation Scheme (USS). I contributed 6.25 per cent of my salary, and Cambridge University contributed 18.75 per cent (triple matching). This total of 25 per cent went to USS, an independent organization set up by the UK universities. At retirement, USS provides a lump-sum payment and a final-salary pension calculated as follows:

After 8 years of service, I left the USS scheme and came to MIT. The MIT plan had a similar pension formula:

For short-term employees, whose average and final salaries are comparable, MIT’s plan with its smaller denominator is better than the USS plan. For long-term employees getting raises at 2-3 per cent (if you can find any), whose final salary is significantly greater than the average salary, the USS plan is better. Furthermore, the USS plan was multi-employer. One could take an academic position anywhere in the United Kingdom and still accumulate years of service.

Both the USS and MIT plans are a traditional, defined-benefit pension where the retiree gets a defined amount at retirement. As Retirement Heist describes, these high-quality plans are the plans that companies have been eliminating (except for their executives).

My third and current plan is a defined-contribution plan. I put in 2.5 per cent of my salary and Olin College puts in 7.5 per cent. This total of 10 per cent contribution is mine to use upon retirement. Great news! However, the 10 per cent that is contributed is a lot less than the 25 per cent that USS uses to provide a decent pension. Furthermore, all the risk is mine. When the invisible hand slaps the world upside the head, turning 401(k)’s into 201(k)’s, it’s my problem. Another 25 years of service on this latest and greatest plan, which I am sad to say is better than what many people in the United States have, might provide me something comparable to what I get for 8 years of service on a real, defined-benefit pension plan. No wonder defined-contribution plans have been called “The 401(k) ripoff.”

After learning of the scams and frauds described in Retirement Heist, I realized perhaps the biggest benefit of the USS scheme: The contributions were real money, and managed by a separate entity whose sole purpose was ensuring that it could pay the pensions it promises. Under the USS system, there are no incentives to shift pension funds toward executive compensation or to use them to pump up the stock price (not least because USS has no stock).

In corporate America, the same entity providing pensions has many other needs, so it uses the pension fund as a casino as much as the law allows and often beyond (with hardly any penalty). As but one example, bankruptcy of the company mostly destroys the workers pension and the company’s pension obligations, giving companies an incentive to go bankrupt.

If the degradation of pensions were done to cure cancer or bring safe drinking water to all the world, I might be happy to make the sacrifice. However, executive compensation and stock-price manipulation are hardly charitable works. The moral of all this: Unless you are an executive with huge payments extracted from the 99 percent, you are being ripped off, and Shultz shows the how and why.

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  1. Mike B says:

    It’s arguable that cutting worker pensions are only to aid the executives. I can list a whole host of Blue Clip giants that were undermined and in some cases driven into bankruptcy by their retiree obligations. What workers fail to understand is that pensions were by and large never intended to paid out to begin with. Now I don’t mean that the companies expected to claw them back from their employees, but in the pre-1960′s when these defined benefit pension plans were created the average worker would be very lucky to reach “retirement”. Basically if your job didn’t kill you, smoking or unhealthy foods would. What changed is that we learned what a carcinogen is and medicine became effective. Today a good majority of the baby boomers can expect to live decades into retirement, which under a defined benefit plan, is all at company expense. Without massive annual economic growth this sort of pyramid scheme is simply unsustainable even if executives worked for free.

    The whole notion of a golden years “retirement” where one can live off the kindness of others for several decades is an aberration born of the 1950′s much like the all-white suburb and a car centric lifestyle. People need to accept the fact that they are going to have to work almost until the die. The only difference is that after age 65 they will have a great deal more freedom to choose when, where and how they work. Don’t look so glum, studies have shown that an idle retirement is a sure fire way into an early grave.

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    • Owen says:

      Let me see if I understand your two points:

      1. Don’t be mad that your retirement plan is being robbed because it was never meant to be paid out anyways.
      2. “People need to accept the fact that they are going to have to work almost until the die.” Except for the executives. Working until you die actually makes you happy.

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      • David says:

        If you replace retirement plan with Social Security in point 1 and elected officials for executives in point 2, it also rings true.

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      • Mike B says:

        Hidden due to low comment rating. Click here to see.

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  2. BL1Y says:

    “I contributed 6.25 per cent of my salary, and Cambridge University [students] contributed 18.75 per cent (triple matching).”

    Fixed that for you. Hope you thanked your students for their generosity.

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    • Deepak says:

      There are other sources of income for universities, which form larger share of their income. e.g. grants, royalties, consultancy etc.

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  3. Laurie Mann says:

    Since most of us under 60 never worked for a company that offered pensions, what were our options? It was clear back in the ’80s that pensions were going away, and 401ks were the only reasonable option. My husband and I have contributed to 401ks for nearly 30 years, didn’t panic in 2008 and think we’ll be OK when we retire in about 10 years or so, even if SSI and Medicare may be less reliable. We also expect to have a house paid off in 10 years and have always bought stock. We understand that pensions were better, but since pensions were basically done away with, what should people have done? Sadly, many people have chosen to do nothing. I have a bad feeling that people with 401ks will do better in their retirements than the people who didn’t believe in saving for retirement.

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    • Laurie Mann says:

      I was hoping for an answer – if 401ks (and the like) are merely rip-offs, what were the retirement options for workers who started to save for retirement in the ’80s?

      Putting money in savings accounts that then paid 5% wasn’t an awful idea then, but now that savings accounts are paying almost nothing, putting money under your mattress is probably a better idea.

      CDs were good investment options in the ’70s and ’80s but have since become pretty worthless.

      The stock market and real estate are good places to put some of your investments, but both are extremely volatile.

      While I don’t think 401ks are panaceas, I think they’re the best option given the tax and market laws today.

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    • Enter your name... says:

      Pensions are only better for the people who live a long time after retirement. If you die close to when you retire, your heirs get 100% of the contents of your defined-contribution retirement accounts. They get nothing at all from your defined-benefit pension (except possibly your legal spouse, although this person can easily lose everything if you divorce, or if your widow/widower remarries).

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  4. Jim says:

    “Furthermore, all the risk is mine. When the invisible hand slaps the world upside the head, turning 401(k)’s into 201(k)’s, it’s my problem.”

    However, when the invisible hand turns your 401(k) into 801(k)’s, the gain is all yours, as well.

    As is often the case, there are elements of truth in the arguments laid out here but they are not, in and of themselves, the entire truth – rather, those truths that support the conjecture that the writer set out to prove. DB plans, by there very nature, pile loads of uncertainty on the employer while reasonably prudent investment principles – and the law, in most cases – require them to make extremely conservative investments. Further, even the most financial-savvy employee has no opportunity to select greater risk in search of greater reward.

    DCs are by no means a panacea. There are a great many employees who lack sufficient knowledge of risk-preference profiles, capital markets, securities pricing, and the like, who are unprepared to take ownership of their retirement portfolios. There are many others who many have adequate knowledge, but prefer the simplicity of company-managed plans. But for those employees who have the desire to be active participants in establishing their future financial resources, the DC plans at least give them a chance to do so. Most are still hampered by the very limited range of investment opportunities afforded by most DC plans, though.

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    • J1 says:

      One truth Sanjoy only touches on that makes defined benefit pensions insane is that they can vanish in an instant. The PBGC will cover some of the loss, but if you’re above their benefit cap, you’re SOL.

      If you don’t know how to invest, get an advisor who does. Either way, until that money is in your hand, there’s no guarantee you’ll ever see it. Having learned the hard way, I would never, ever voluntarily agree to a defined benefit pension if a DC plan was available; give me my retirement money now, and I’ll take care of myself. Think it can’t happen to you, even if you’re in the public sector or some other line that looks like it’ll never go bust? Think again. And if your plan, is going to go under, pray it happens before it”s too late for you to recover, and thank God it didn’t happen after you’d retired.

      If something can’t go on forever, it won’t.

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  5. Michael says:

    I’ve always found the idea of pensions and retirement plans kind of peculiar. Why should a company continue to pay for your work after you stop working for them? If they’re really paying you for work you did while still employed, why isn’t that just called salary?

    I’m certainly nowhere near to being rich, but I don’t feel like I’m getting ripped off. Each year my company puts a few additional percent of my salary into an SEP, which doesn’t have very much money in it at all and accumulates fairly slowly. The majority of my retirement savings each year comes from simply not spending all that I earn, letting my account balance grow and grow. I suppose the extra cash my company throws in as retirement is nice and all, but the compensation they owe me is my salary, the extra stuff is just a bonus.

    I don’t like pension plans; at an individual level they discourage people from making long term financial decisions/planning . At a company level they obscure and confuse labor costs.
    They keep the entire economy less fluid, as they lessen the ability of an employee to move to a better job by forcing them to be more invested in their current job.

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    • m.m. says:

      “I’ve always found the idea of pensions and retirement plans kind of peculiar. Why should a company continue to pay for your work after you stop working for them? If they’re really paying you for work you did while still employed, why isn’t that just called salary?”

      In the US, pensions (and health insurance) became huge during WWII, because they allowed a way for labor-strapped companies to attract workers without violating salary and wage restrictions that had been put in place during the war.

      Inertia has left us where we are today.

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    • James says:

      “The majority of my retirement savings each year comes from simply not spending all that I earn, letting my account balance grow and grow.”

      Yet the contrary assumption – that you’ll spend every cent you earn – is even built into retirement planning. Virtually everything I’ve seen on retirement planning insists that you’ll need a certain percentage, usually 80% or more, of your present income in retirement. Yet for years I’ve managed to live quite comfortably on about 50-60% of my not-exorbitant income, with the rest going to savings.

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  6. Jeff S says:

    When I read the title “The Retirement Robbery”, I thought this article was going to be about how changing age demographics, longer lifespans, and expanding entitlements are forcing those of us under 50 to work the equivalent of two jobs while skipping health insurance so that baby boomers can play golf in Florida for the rest of their (ever-lengthening) days.

    Or maybe: How failing old-line companies are dumping their lavish pension obligations on the state, forcing me to pay for the kind of antiquated, unrealistic benefits that I will never see in my lifetime.

    But no.

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  7. Kyle says:

    I suppose given the thievery that happened with DB retirement plans, we should applaud the effort to switch over to DC plans. At least now the money is all in the employees’ hands.

    For those of us that have always worked in a DC era, there really isn’t much lost (except lower employer matches) because every dollar I invest has 40 years of compound interest to grow before I retire.

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    • Erik Dallas says:

      40 years of interest (at current low 0.1%) is 1.001^40 = $1.0407. If you take 40 years of CPI at our current low of 2% this is 1.02^40 = $2.20803. You have now lost half the purchasing value of your savings! This is the 2nd biggest problem with DC / 401(k) / 403(b) plans is that participants make conservative investments when compared to a professional money managers, thus a company’s earnings would be better spend (or spend half as much) on providing employees with a decent traditional defined benefit retirement plan. The biggest problem with 401(k) plans being that employees are not participating or not contributing to the plan and thus the employee has noting (or almost nothing) to retire on. Eventually companies will realize that having a bunch of well-paid senior employees who cannot afford to retire might be less profitable than having younger less well paid employees. This is less of an issue in the white collar era of desk jobs, or it may just become apparent at a much more senior age; in the old blue collar manufacturing days employers clearly knew that they needed pension plans to get older employees to stop working and retire.

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      • Enter your name... says:

        Your analysis is flawed in two ways:

        You wrongly assumed that today’s record lows for savings account-style interest rates would continue for 40 years, and you wrongly assumed that a person investing for 40 years would invest in a cash account, rather than in equities, real estate, or other investments with significant potential for long-term growth.

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  8. Caleb b says:

    Coming from my American perspective….

    Pensions are stupid.

    I can’t think of any reason why an entity would agree to pay an employee until the day they, or their spouse, die. It could be 40yrs till they both croak. Sounds like a model for failure to me.

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    • alex in chicago says:

      They are supposed to fail of course! That is the same reason that government employees have continually been promised higher retirement benefits. State Reps have an ingenious plan: provide money to state workers without increased taxation! Its win win for them because they are gone before the pensions set in, just like the CEO is gone before pensions set in. 401k plans are popular now just as much because of employees demanding them as companies offering them. A 401k gives you so many additional benefits like heritability etc.

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    • James Brown says:

      The company agreed because otherwise they would have had to pay higher wages. Pensions aren’t a gift from the company they are a form of deferred compensation. If the company later fails to deliver, the company isn’t the victim, the worker is. After all, the company can’t give you back your labor. The company got the full value they asked for but didn’t pay the full price. The companies may have underestimated the cost of the pensions they were offering, but again it’s not the workers fault that the company made a bad business deal. Of course, the legal system enabled the companies to turn their mistake into the workers loss.

      Strangely, companies have no problem still making those types of lifetime commitments to their top managers – with sufficient assets carefully segregated to insure that the company won’t default on those commitments.

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