Retirement Heist: how companies plunder and profit from the nest eggs of American workers

One common use of pension assets has been to finance restructurings. In 1994, Bell Atlantic, formed after the breakup of the Baby Bells in the early 1980s, was transforming not only its technology but also its workforce. In 1994, it had 100,000 employees, many of whom had been on the job for decades. This was exactly the cohort that many industries, including the fast-changing telecom sector, were eager to whittle down. Workers were in their peak earnings years, and the value of their pensions, which was based on tenure, was about to spike. Severance is typically paid for with cash, so shedding this large cohort would be costly.

Fortuitously, Bell Atlantic had a lushly overfunded pension plan and, like many companies, it offered to sweeten the pensions of those it was letting go. Over the next six years the company used $3 billion in pension assets to finance early-retirement incentives for 25,000 managers. Using pension surplus not only saved the company cash but saved payroll taxes, because, unlike severance pay, money paid from a pension in lieu of severance isn’t subject to the 7.65 percent Social Security (FICA) taxes.

Pension law doesn’t allow companies to use pension assets to pay severance, so companies characterized the payments as “termination benefits,” “shutdown benefits,” or “additional pension credits” that might provide people additional years of service or the equivalent of, say, an additional year of an employee’s pay.

Bell Atlantic merged with GTE (formerly known as General Telephone & Electronics Corp.) in 2000 and changed its name to Verizon Communications, but the pension withdrawals continued. Over the next five years, Verizon continued to pay for retirement incentives using pension assets, even though the surplus, which had peaked at $24 billion in 2000, had shrunk to only $1.7 billion by the beginning of 2005, thanks to market losses and company withdrawals.

Verizon then had to make a critical decision: It could stop withdrawing assets to finance layoffs, and let the pension plan rebuild its cushion of assets to provide employees and retirees with greater retirement security. Or it could cut pensions, which would lop off some of the liability, making the plan better funded.

The company chose the latter strategy, and froze the pensions of its fifty thousand management employees. The move eliminated $3 billion in liabilities from the books and replenished the surplus. Of course, Verizon didn’t describe the transaction that way. “This restructuring reflects the realities of our changing world,” Verizon chairman and CEO Ivan Seidenberg said in a statement announcing the change. “Companies today, including many we compete with, are not adopting defined benefit pension plans.” Verizon subsequently withdrew $5 billion from the surplus, and the 2008 market crisis wiped out the rest. By early 2011, the plan had a deficit of $3.4 billion.

Seidenberg wasn’t affected by the pension freeze. His supplemental executive pensions and deferred-compensation plans had grown to $96 million by the beginning of 2011.

In the 1990s, dozens of companies, including utilities, defense contractors, and manufacturers, began relying on their pension funds to finance restructuring. Unfortunately, the companies with the biggest incentive to do this were companies in a downward financial spiral. Delta and United, struggling in the travel slump after the September 11 terrorist attacks, each used roughly half a billion dollars to fund buyouts and pay termination benefits to employees they laid off. Each subsequently declared bankruptcy, and the pension plans they handed over to the Pension Benefit Guaranty Corp. (PBGC), the federal pension insurer, were so underfunded that employees lost billions in pensions they were entitled to.

The Big Three automakers took this route, too. General Motors, the poster child for chronic underfunding, used $2.9 billion in pension assets to pay for lump-sum severance benefits in 2008. In 2007, Ford Motor Co. used $2.4 billion, a move that left it with no cushion when the market cratered in 2008. By 2011, the pension had a $6.7 billion shortfall. Delphi, the eternally troubled auto parts spin-off of GM, entered bankruptcy in 2005, yet the following year used $1.9 billion in pension assets to pay for its “special attrition program,” which is what it called its buyout program. The pension never recovered, and Delphi dumped the plans for seventy thousand workers and retirees on the PBGC in 2009. Delphi employees were devastated. Mark Zellers, a Delphi retiree in Columbus, Ohio, lost a third of his pension and took a $9-per-hour job at Home Depot to help make up for the difference and pay for his health care, which was also eliminated in the bankruptcy.

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