Review of Retirement Heist

Review of Retirement Heist:  How Companies Plunder and Profit from the Nest Eggs of American Workers

Ellen Schulz describes the different ways companies have reduced worker’s pension benefits in order to increase profits, manipulate earnings, cut costs, or fund pension benefits for top managers instead of workers.

Some highlights:

Chapter two describes how companies cut or froze benefits in the traditional defined benefit plan without antagonizing workers or creating bad publicity for the firm.   The replacement of a generous defined benefit plan with a new less generous plan is generally introduced in a way where changes are not transparent to workers.   Phillip Strella a lawyer with Mercer consulting advised the industry to “Pick your words carefully.  The law doesn’t require you say, “We’re significantly lowering your benefit,” “

Chapter three discusses how pension reductions allow companies to report greater earnings to shareholders. Management has a strong incentive to report good and stable earnings because their compensation is often tied to the stock price of the firm.  Pensions are often cut to increase earnings when the company suffers losses from its core business activities.  One of the main problems is that actuaries have great latitude in the assumptions used to price health and retirement benefits hence; official accounting standards allow management to reduce or increase the value of pension and health benefits in order to report whatever income figure it needs to report.

The drop in pension and health benefits and the increase in health premiums have significant impacts on workers, retirees and their families.  The most difficult situations revolve around the loss of health benefits because Medicare does not begin coverage until age 65.  According to a Department of Labor Review cited by Schulz by the late 1990s around two-thirds of retired workers with employer sponsored health coverage were dropping coverage when costs of the health plan rose.  The departure of individuals from employer sponsored health plans resulted in adverse selection or a “death spiral” because sicker workers and families tended to maintain coverage while healthier workers tended to exit.  One of the more important aspects of the still not fully implemented and tested Affordable Care Act was to fix this problem by mandating that all people be covered and by establishing age-rated premiums that will be unaffected by health status.

Schulz’s book includes a lot of personal stories.  Some of the anecdotes involved overpayments to workers that companies tried to reclaim.  Often companies that acquire other firms and their pension obligations look for past overpayments to retirees in order to claw the overpayments back.  This can create large problems for households who created a budget based on their anticipated and previously receive pension.

Chapter 11 discusses denial of benefits with a focus on disability claims in two industries -– energy and football.  The discussion of how the NFL aggressively denies claims to injured players was especially revealing.  It demonstrates that even in a small high-profile industry with a strong union the system is rigged against workers.

The pension system based on company-run defined benefit plans is experiencing a slow death.  The 401(k) has become the dominant pension vehicle for current workers.  There are a lot of problems with 401(k) plans including inadequate contributions by workers and a high degree of investment risk.  Schulz’s disturbing book vividly reminds us that there are also problems with traditional defined-benefit pension.