Friday, July 30, 2010

The Case of the Disappearing Pension

In 1975 Jack started working for a large US Corporation.

“You’ll have great benefits,” his parents said.

“As long as you do a good job, you’ll never have to worry,” his new boss said.

Making the decision to accept the job was easy. Jack was really pleased to be working for a company that was the leader in its industry, and was known for taking care of its employees. In fact, on his first day, he learned that, “Respect for the Individual,” was one of the company’s core values.

Jack set out to be the best employee he could be, always striving to do excellent work, and believing that if he did his best, the company would take care of him. He planned to work for thirty or thirty-five years, and then take an early retirement. “Why not?” he thought, the pension plan was designed to allow him a nice bump in those later years of his career.

As the years went on, Jack felt some pressure to put in more hours, and saw some years where he got an evaluation that was less than he expected, and sometimes he even had to go twenty-four months without a raise. But he loved his job, and he believed that his boss would take care of him.

In the early eighties when his employer offered a tax-deferred savings plan he took advantage of it, but only up to the employer match. He didn’t feel the need to put in the full amount allowed by law – after all, his monthly pension checks should replace about 75% of salary when he retires.

Then in the mid-nineties Jack’s company announced a change to the pension plan. Employees who were within five years of eligibility for retirement remained on the old plan, but everyone else saw a significant change to the pension plan. That nice bump Jack was expecting in his later years disappeared. He would only get about 65% of his salary in retirement.

Now in his early forties, Jack increased his 401K contributions to make up for the loss. Despite seeing many friends and colleagues let go in resource actions, Jack still trusted that the company was doing the right thing, and he remained tremendously loyal to the company.

In the late nineties, the company did something Jack thought he’d never see – they announced that anyone who wasn’t already forty years old would be shifted from the existing defined benefit pension plan to a cash balance plan. Jack’s colleague Jill missed the age cut-off by just one month. She would be lucky to get half of what she expected to get when she first joined the company. It was the first time Jack was happy about his age – at least he was still taken care of.

Jack was now maxing out his 401K contributions, and even took advantage of the additional amount he could set aside when he turned fifty, but retiring at age fifty-five now seemed out of the question.

The company announced more changes in the mid-2000’s, this time primarily affecting older workers like Jack. Employees were told that their pensions would be frozen. This meant that Jack’s pension would no longer accrue additional value. The last few years he worked up to that point would be the final years used to decide what his pension payout would be, regardless of how many more years he worked or whether he got another salary increase. Jack’s expected pension value at retirement was now less than half of what he thought he’d get when he first started working for the company thirty years earlier. Even if he worked to age sixty-five, it was impossible to make up what he had lost.

The company tried to lessen the blow by agreeing to put in additional contributions to Jack’s 401K plan for the next few years, but before he could take advantage of that benefit, Jack found himself caught up in a resource action, and forced to take early retirement with less-than-adequate pension and retirement savings.

A real life story…

While dates and specific plan changes may vary from what my fictional character Jack experienced, this story is far from fiction for many private sector employees who have seen their retirement wither away.

The Boston College Center for Retirement Research estimates that the number of employees covered by a defined benefit retirement plan (the ones we think of as traditional pension plans) declined from 62% in 1983 to 17% in 2007.

Especially badly hit are those who started working in the seventies and early eighties (who were in their mid-thirties to late forties when changes to traditional pensions started to occur). Many of these employees started working before tax-deferred savings plans were introduced, and joined Corporate America when the fairy-tale that their employers would take care of them was still real.

In a brief entitled “Why Are Healthy Employers Freezing Their Pensions?” the BC Center notes that mid-career employees with high years of service have far more to lose from pension freezes than their younger counterparts. Even with enhanced 401K rates, as in my example, the study notes that employees fifty and over lose from a freeze.

Those who were able to retire before the shift from defined benefit plans to cash balance and 401K plans took place are the luckiest of the bunch, and younger employees are able to take advantage of many years of accrual in a cash balance plan. But the BC study notes that these younger workers are at risk if they fail to take advantage of their benefits and invest wisely. The message to those joining Corporate America today is clear – save, save, save.

What’s your take on how corporations are changing their pension plans? What has it meant for you?


Traub Motorcycle Detective said...

Pension? That was some fantasy of the olden days of yore. Except if you are in the government...

That is the real problem- politicians and government employees need to have the same retirement plans as the rest of the working public...

Anonymous said...

I worked for the same company as Jack....with a different ending. I was laid off just before my 50th birthday, after 24 years with that company....even before the pension freeze.

The defined benefit plan was designed for participants' greatest annuity growth to occur in the final years. Cutting an employee off, however it was done, in those final years meant a significant loss of planned and promised income.

It's hard to believe that preferentially laying off or selling off older employees, attempting the proposed cash balance conversion and freezing the plan are not considered to be age-discriminatory by the courts.

Unfortunately, our government and elected officials are heavily influenced by large corporations whose only interests are based on short-term results.

Diahann said...

I really wish that wasn't a true story. Sometimes 'progress' doesn't feel like real 'progress', does it?

I feel like we should start a grass roots effort for change, but wouldn't have the slightest idea where to start.

Anonymous said...

Whist retiring with a nice pension would be nice, in reality I expect to be working in one form or another pretty much until I stop breathing.

Whilst the company I work for is not bad as far as retirement related stuff goes with matching contributions etc, I really don't expect the company, nor any company that I work for, to 'take care' of me.

In today's world, they pay me, I am loyal. They stop paying me, I am gone. Sad to say but that's the extent of company 'loyalty' today.

They are in business, I am in a way also in business even though I work for them. At the end of the day my future is down to me. I don't trust the company (sad but that's the way it is), nor do I trust the government to take care of me either!

I can understand the trend from the companies point of view though. Look where the problem of pension benefits got companies like GM.
Whilst we work for a company we are an asset (I hope!). Once we are gone we are a liability.

Maybe the days of us all being 'contractors' instead of employees is not too far away.

Colette said...

You all make some great points. Traub Motorcycle Detective -- thanks for pointing out the discrepancy between the private sector and public sector. Until our lawmakers feel the same crunch as we do I doubt if we'll see any change.
Anonymous (1) - just before your 50th birthday and 24 years -- that really stinks. If you were on the defined benefit plan you really lost out there.
Diahann -- I think we all agree that we wish this weren't a true story.
Anonymous (2) - I think you've got the right lesson -- each man/woman for himself/herself.

Anonymous said...

This is Anonymous (2).
I don't like to post anonymously but I have to be careful when saying anything that may reflect upon my employer. Better safe than fired!

Hope you understand.

PS. Love the blog and your posts. Makes Fridays worth waiting for!

Anonymous said...

Jack? I thought you were talking about me! But, I was less than 4 months away from my 54th birthday and so I missed the 1 year bridge to retirement (to age 55 in my case) when they laid me off. Therefore, I missed the bump in my pension (at 55 or 30 yrs) even though pension contributions ended in 2007.

According to my calculations I lost 30% of my pension and, of course, I lost the piddly retirement medical benefit. But 30%, that really hurts, and it really hurts that a company that did use to "respect the individual (employee)" just throws them away now so the CEO and execs can get a great bonus! (Yeah, sounds really great for the company overall, huh?)

(I figure the big push to layoff and offshore is because the company is exceeding their 5 year goal of 10% EPS by this year, which I expect means BIG bonuses for those at the top.)

I think this particular company should be stripped of its name. I imagine that the company's founders would want that. The company they created and worked so hard for is gone now anyway.

Colette said...

Anonymous 2 -- and all other anon posters. I totally understand the desire to share your opinions anonymously and welcome it!

The stories where employees just missed a cut-off date (as in the last anon post) are the most frustrating, aren't they?

SteveB said...

My sincere empathy for Jack and all the other Jacks out there. I know some to them. Fortunately that scenario did not apply to me. Sometimes it is good to be old(er).

Paula Greenspan said...

When I was hired, the recruiter said: No guarantees of course (wink wink) but we've never laid anyone off! You have job security here.

The problem is not just that we ended up with a smaller pension than expected and no job. It's that we were told we could count on them. It's a hard blow to readjust your thinking.

So okay, I'm employed again now in a completely different field which carries absolutely no pension options. I make just enough to live and enjoy myself on and I'm happy about it because I'm loving my work and travel. No one else around me has a pension either, and they're not worrying about it. Of course, it's also the norm here in Indonesia that extended families take care of their parents/relatives for life. I think if we're going to get rid of pensions as a norm, we'll need to return to that expectation - that we may need to be financially supported by our families in our old age. As usual, those caught in the middle of change miss out on both ends - we have the lower pension but our kids weren't expecting to support us. And we don't want them to - we want our independence.

I agree that company loyalty has gone - I had pretty much lost almost all of mine before I was laid off. But it's the change that's hard; they hired us with promises and they broke those promises. Perhaps they had to, although perhaps not.

That's right - it's everyone for him or herself - but I can't blame people for being bitter about the let-down.

Colette said...

Paula, thanks for weighing in. Yes, we all need to readjust our thinking.I am glad to hear that you are doing so well!

Anonymous said...

When I left college and started working at Jack's company, I was shocked ... my first impression was that I was working for a cult. Managers there routinely made promises to manipulate and control employees that no company could ever keep. Fresh out of college I thought these guys were NUTS ... as I was told routinely " need to work harder and later ... after all, you have been given a JOB FOR LIFE". At first I resisted, then became complacent and was sucked into the Cult in Endicott NY. I saw other members buy multi-family homes for retirement income and work at their Job For Life till retirement, walking out with fat pensions and extra income .. and looked forward to getting the same! After almost 20yrs, as the decay and breakdown of the cult occurred, I saw my chance to get away on the last buyout offered. The great investment idea pushed on me by those managers touting the Job For Life work ethic ... my multi-family income property near the Endicott plant was now worth less than 1/2 what I paid for it, due to groundwater contamination from my employer ... no problem, I was able to take out a loan for the cash needed at the closing for that property, LOL! I don't expect to ever collect anything from the pension I supposedly have coming. I knew they were lying when I joined that company, but that doesn't make it all my fault ... almost all managers there did continuously make Job For Life promises, conveying that message was very much a part of the corporate culture, a mis-leading empty promise that has caused many former employees serious financial harm.

Anonymous said...

This is not the company that Dilbert works for is it? :)

The company? It sure sounds like --- IBM.

I know how and what Jack feels.

I worked over a quarter century for IBM. I was "selected" for a "resource action" (which means I was to be permanently laid off) and informed the same day I returned from a lengthy medical leave of absence. I know my IBM Director determined my fate since the resource action notice paper had a date on it when I was out on disability no less! My IBM Director has no backbone and did it so he can make his quarterly profit margins and maximize his bonus payment(s). And, thus, of course, he remains employed.

IBM has no heart. They have no soul. And IBM, thus, has no shame.

I now pity the poor IBM employees remaining who suffer Jack's fate but have no clue that they are just like Jack.

Anonymous said...

I forgot to add in the previous comment I was force converted into the cash balance plan by not being 40 years old by about 18 months or so and I also lose the future medical account since I am not 55 years old despite working for the company for over a quarter of a century.

Anonymous said...

Well the disappearing pension has led to a temporary fattening of the bottom line for these corporations and upper-echelon VPs and higher. Some here sound like these decisions were all a part of necessary cost-cutting, but the reality is the cutting of benefits like pensions for the middle-class created yet another siphoning off of money from the middle-class to the upper-class. Now wealth is very greatly concentrated in the upper 1% of income earners who earn over 75% of all the income in the country. This has been the great money grab of the new millenium and record profits in 2009 amidst the worst recession since the Great Depression is another sign of robbing the middle class to increase the already obscene wealth of corporations and executives. I ask the corporate executives this: If there is no middle class, who is going to buy your: Fill in the blank, for example who is going to buy you iPad if there are no middle class consumers left? The guy working at Foxconn in China can't even afford to go back to the farm.

Anonymous said...

well i work for Jack's company too and am old enough to have escaped the cull. However its not just Jack's company. My daughter has been made redundant twice from small struggling companies. Jacks place hasnt even got that excuse. It is neither small nor struggling.

Anonymous said...

IBM does HAVE an Age Discrimination policy, it is about money, the money you never received all those years that were supposedly set aside to fund your "golden years". Wall Street, Gerstner took over IBM. I laughed when he was recognized as one of the richest 400 as a "self made man". He had a net worth of $600 Million, and the 20 million IBM shares he gave himself propelled him into the "Richest 400" and 150,000 of us were sytematically forced out the door before our pensions maximized. I took them on, and the tentacles of IBM stretch a long way into Congress. We have the best Congress money can buy, a large donation in the Congressman's State, a phone call to the Federal Judge, two months later, IBM awarded Summary judgement on Retaliation and Age Discrimination. If you wonder why you lost your pension, look no further than the influence IBM and other Corporations have on "greasing the palms of Congress" mainly Republicans but other party elected officials as well. No COLA, so any sort of Pension loses half its value every 20 years. I figure, the 32 year pension just might pay for the health insurance.
I am not sure if World Trade countries have as much corruption as the USA in Pension theft, I hope not. My Congressman, when he retires or fails to get elected, will receive 80% of his final salary, free medical and a COLA. My particular Congressman is disgusting but I do believe, what goes around, will come around.
Good luck but I just wanted to confirm that you are NOT mistaken, IBM has a formal attrition program to get rid of you in your early 50's to get your defined benefit pension.
Really sad, I enjoyed working for IBM, helped new hires get started, and believed in what the company stood for.
Gerstner and Wall Street changed all that and the current Executives of IBM are of the same mold as Gerstner.

Anonymous said...

Just an added comment. When the demise of the DB plans started, as the DB pensions were just too ripe to ignore, a potential to "boost earnings" if a creative way could be found to eliminate them and then take the surplus DB pensions to "boost the profits" that would let the Executives make a lot of money.
This started in the mid 1980'2 throught out the next two decades as DB pensions were "converted" through creative plans like defined Contributions. Wall Street was behind it,
You look at the run up of the early 90's of the stock market in the S&P 500 of the large Corporations who were raiding the DB plans and using those funds to generate "vapor profits". As the DB plans disappeared, Wall Street looked aroung and went after the Home Equity and created the venue for liar loans, sub primes, and how to get to the equity of the Great American Dream for the average American, Homes. They succeeded, today, there are One million homes in foreclosure, estimated over four million will be foreclosed on in the next four years.
Our Congress passed or did not pass laws that enabled the home equity, like defined benefit pensins fuel profits, false profits, of US Corporations. In the meantime, the loyalty of CEO's of US Corporations are not to the people in the USA, as they tramp through the world looking for cheap labor to boost profits including giving away technology that could affect national security.
I certainly hope our government passes laws to prevent the outsourcing of jobs, this country needs.
Hopefully, we can throw out the Corporate Congressmen this coming election and get some who are more favorable to the middle class.
30 years of flat income of the middle class verses huge increase of the wealth of the elite must come to an end. Otherwise, the USA will be like other third world countries we worked so hard, in the 40's. 50's and 60.s to raise us out of poverty.
We need to bring back the draft so the elite sit in the same foxhole as the unclean middle class along with the fairness doctrine and legislation to stop outsourcing for profit and to hell with the country.

Anonymous said...

One point that I coach my kids, and my co-workers, and anyone who will listen is that the 401(k) plus any pension is still not enough for your retirement. You have to also maximize your IRA contribution and save in other accounts outside of both of those programs. Our goal has always been at least 25% of our income. Most people are spending too much today and not saving for tomorrow.

We went through the same scenarios as "Jack", but we are fully prepared to leave next year, age 55, having achieved our retirement savings goals. We have a three pronged approach - pension, personal savings, and social security. Losing any one of the three would crimp, but not be a catastrophe. I constantly model assuming that I lost one, and see what I have to adjust.

Doesn't help anyone close to retirement now... but it's not how much you earn but how much you save. We as a society have not been disciplined about it. I agree that the changes are sad, but we all know changes will be coming... the only thing we can and must do is prepare.

Colette said...

To the last three (or four) anonymous posters --

Thanks for pointing out that this is not just about Jack's company. Just about everyone I know who works for a large corporation in the private sector has had a similar experience.

I agree that those who are older are hit the hardest by these changes -- particularly when you partner the pension changes with resource actions. This is largely due to the fact that we bought into the concept that the company would take care of us. Which brings me to the point from the last anonymous poster -- there's no such things as too much when it comes to saving. Save, and save early in your career.

Anonymous said...

I'm torn over this situation. One the one hand, I'm similar to Jack, having started just a few years later with likely the same company (and am still employed by them). On the other hand... even though there were promises of security, I never really trusted them. Who can predict the future? Also, my fear that I wouldn't succeed led me to not only work harder and try to excel, but to always ask the question "what happens if I get get fired this year?" Finally, I just always believed in taking responsibility for my own situation, regardless of how others promised to help me. My my pension has also gone through those same changes - but in the meanwhile, I made what many might call "frugal" personal finance and investing decision that are now paying off. I passed on promotions to minimize moving around in houses, and now our house is paid off. I bought cars and held them for a long time, and so have had long periods when I did not have any car payments. And my family always tried to live below our means, and managed to accumulate 7 figures along the way. So while I do sympathize with "Jack's" plight, I also saw a LOT of entitlement among employees over the years. I heard the quote many times "you'd have to be caught having sex in the parking lot with the branch manager's spouse to get fired from this company". There was a lot of complacency. I do believe there are two sides to every story. When someone offers you something too good to be true it's time to be wary. Certainly I do not think the company is blameless, but all I can tell younger folks today is "focus on real, tangible skills, take advantage of what the company still does offer to grow and expand your skills, and be loyal to your skills and not a company". There is is no way things are going to return to the past, and I follow Satchel Paige's advice of not looking back. Instead of yearning for the good old days it is best to roll up ones sleeves and figure out how to make todays situation work for one.

David Kra said...

Some of us at Jack's company are in the unusual situation of having an option to take some of our pension as a lump sum (to be rolled over to an IRA) with the remainder as a monthly payment. This is called the Annuity Lump Sum Option (ALSO).

I urge anyone eligible to seriously consider it for several reasons.

The era of companies voluntarily raising Defined Benefit payments due to inflation (COLA) is w a y over. The purchase power of your monthly payment will erode over time with inflation.

However, you get to invest the lump sum and hopefully you will succeed in growing it with inflation.

The amount paid in the lump sum is paid when you start to take your pension. Even if you die the next month, your survivors get 100% of it.

The default goal in defined benefit plans is for the survivor to get 50% of the monthly payment. If the survivor has 100% of the unspent portion of the lump sum, what should the survivor % be on the monthly annuity to end up at 50% overall? Based on my calculations on my numbers for my situation, I came up with 22% as the survivor benefit % for the monthly annuity. This significantly raised the monthly payment while I am alive.
The right % for your situation will probably be different.

3)Inferior Life Expectancy
If you and your survivor, if any, have chronic diseases that reduce your life expectancy, then taking the ALSO will extract the most money from the pension.

4) Eligibility for State & Federal Assistance

Once you reach a certain age, you can start spending it, such as giving it to relatives, without withdrawal penalty and without it around to become part of your estate. Once you do that, it is also not part of your assets or income for the purpose of eligibility for certain kinds of state/federal assistance. Because you took the ALSO, your monthly income is lower.

Anonymous said...

From the first "anonymous": Bottom line in all of this: When our leaders are allowed to make different rules for themselves than for the rest of us, the rest of us get screwed.

Anonymous said...

I am a Jack, also. The only difference is I started in Feb 1981 and was RA'ed in April 2008. After 27 years with a company that I thought was better than it is today. I am paying a fortune for COBRA.

Colette said...

David, thanks for adding your thoughts on pension selection options. Definitely an individual choice.

Anon 1 - yes, inequities are all around us.

Anonymous - Oh my gosh -- yes, COBRA is really prohibitively expensive. Medical benefits is a whole other topic!

Anonymous said...

It’s funny to find out just how many different sites the internet has on this subject. :)

You nicely summed up the issue. I would add that this doesn’t exactly concenplate often. xD Anyway, good post…