The Great Retirement Ripoff: The Broken Promise

October 31, 2005

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It was part of the American Dream, a pledge made by corporations to their workers: for your decades of toil, you will be assured of retirement benefits like a pension and health care. Now more and more companies are walking away from that promise, leaving millions of Americans at risk of an impoverished retirement. How can this be legal? A TIME investigation looks at how Congress let it happen and the widespread social insecurity it's causing

The little shed behind Joy Whitehouse's modest home is filled with aluminum cans—soda cans, soup cans and vegetable cans—that she collects from neighbors or finds during her periodic expeditions along the roadside. Two times a month, she takes them to a recycler, who pays her as much as $ 30 for her harvest of castoffs. When your fixed income is $ 942 a month, an extra $ 30 here and there makes a big difference. After paying rent, utilities and insurance, Whitehouse is left with less than $ 40 a week to cover everything else. So the money from cans helps pay medical bills for the cancer and chronic lung disease she has been battling for years, as well as food expenses. "I eat a lot of soup," says the tiny, spirited 69-year-old, who lives in Majestic Meadows, a mobile-home park for senior citizens near Salt Lake City, Utah.

Whitehouse never envisioned spending her later years this way. She and her husband Alva Don raised four children. In the 1980s they lived in Montana, where he earned a good living as a long-haul truck driver for Pacific Intermountain Express. But in 1986 he was killed on the job in a highway accident attributed to faulty maintenance on his truck, as his company struggled to survive the cutthroat pricing of congressionally ordered deregulation. After her husband's death, Whitehouse knew the future would be tough, but she was confident in her economic survival. After all, the company had promised her a death benefit of $ 598 every two weeks for the rest of her life—a commitment she had in writing, one that was a matter of law.

She received the benefit payments until October 1990, when the check bounced. A corporate-takeover artist, later sent to prison for ripping off a pension fund and other financial 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 agreements with their employees. To support herself, Whitehouse had already sold the couple's Montana home and moved to the Salt Lake City area, where she had family and friends. With her savings running out, she applied early (at a reduced rate) for her husband's Social Security. She needed every penny. For health reasons, she couldn't 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 artificial bladder were installed. Her children and other relatives offered to help, but Whitehouse is fiercely self-sufficient. Friends and neighbors pitch in to fill her shed with aluminum. "You put your pride in your pocket, and you learn to help yourself," she says. "I save cans."

Through no fault of her own, Whitehouse had found herself thrust into the ranks of workers and their spouses—previously invisible but now fast growing—who believed the corporate promises about retirement and health care, often affirmed by the Federal Government: they would receive a guaranteed pension; they would have company-paid health insurance until they qualified for Medicare; they would receive company-paid supplemental medical insurance after turning 65; they would receive a fixed death benefit in the event of a fatal accident; and they would have a modest life-insurance policy.

They didn't get those things. And they won't.

Corporate promises are often not worth the paper they're printed on. Businesses in one industry after another are revoking long-standing commitments to their workers. It's the equivalent of your bank telling you that it needs the money you put into your savings account more than you do—and 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 industries—apparel, 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 autos—with no end in sight.

That's why Whitehouse, as difficult 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 Americans, it is also a window into the future for many millions more. A TIME investigation has concluded that long before today's working Americans reach retirement age, policy decisions by Congress favoring corporate and special interests over workers will drive millions of older Americans—a majority of them women—into poverty, push millions more to the brink and turn retirement years into a time of need for everyone but the affluent. The transition is well under way, eroding efforts of the past three decades to eliminate poverty among the aging. From taxes to health care to pensions, Congress has enacted legislation that adds to the cost of retirement and eats away at dollars once earmarked for food and shelter. That reversal of fortunes is staggering, and even those already retired or near retirement will be squeezed by changing economic rules.

Congress's role has been pivotal. Lawmakers wrote bankruptcy regulations to allow corporations to scrap the health insurance they promised employees who retired early—sometimes voluntarily, quite often not. They wrote pension rules that encouraged corporations to underfund their retirement plans or switch to plans less favorable to employees. They denied workers the right to sue to enforce retirement promises. They have refused to overhaul America's health-care system, which has created the world's most expensive medical care without any comparable benefit. One by one, lawmakers have undermined or destroyed policies that once afforded at least the possibility of a livable existence to many seniors, while at the same time encouraging corporations to repudiate lifetime-benefit agreements. All this under the guise of ensuring workers that they are in charge of their own destiny—such as it is.

The process has accelerated dramatically this year. Two major U.S. airlines—Delta and Northwest—turned to bankruptcy court to cut costs and delay pension-fund contributions. This followed earlier bankruptcy filings by United Airlines and USAirways, both of which jettisoned their guaranteed pension plans. Then on Oct. 8, the largest U.S. auto-parts maker, Delphi Corp., filed for bankruptcy protection, seeking to cut off medical and life-insurance benefits for its retirees. Delphi's pension funds are short $ 11 billion. To Elizabeth Warren, a Harvard law professor who specializes in bankruptcy, this is just going to get worse, as ever more companies see the value to their bottom line of "scraping off" employee obligations. "There's no business in America that isn't going to figure out a way to get rid of [these benefit promises]."

That may include the world's largest automaker—General Motors. Although GM chairman Rick Wagoner has insisted that "we don't consider bankruptcy to be a viable business strategy," some on Wall Street are skeptical, given the company's array of problems. Their view was reinforced when GM, the company that dominated the American economy through the 20th century, announced on Oct. 17 that it had reached a precedent-setting agreement with the United Auto Workers leadership to rescind $ 1 billion worth of health-care benefits for its retirees. If ratified by the union membership, the retrenchment will hasten the end to company-subsidized health care for all retirees. From 1988 to 2004, the share of employers with 200 or more workers offering retiree health insurance plunged, from 66% to 36%. The end result: a fresh and additional burden on retirees. Concluded a report by the Kaiser Family Foundation and Hewitt Associates: "For the majority of workers who retire before they turn age 65 and are eligible for Medicare, the coverage provided under employer plans is often difficult, if not impossible to find anywhere else." For retirees over 65, "employer plans remain the primary source of prescription drug coverage for seniors on Medicare ... This coverage is more generous than the standard prescription drug benefit that will be offered by Medicare plans beginning in 2006."

Perhaps the best yardstick to assess the outlook for the later years is the defined-benefit pension, long the gold standard for retirement because it guarantees a fixed income for life. The number of such plans offered by corporations has plunged from 112,200 in 1985 to 29,700 today. Since 1985, the number of active workers covered in the private sector declined from 22 million to 17 million. They are the last members of what once promised to be the U.S.'s golden retirement era, and they are fast disappearing. From 2001 to 2004, nearly 200 corporations in the FORTUNE 1000 killed or froze their defined-benefit plans. Most recently, Hewlett-Packard, long one of the most admired U.S. companies, pulled the plug on guaranteed pensions for new workers. An HP spokesman said the company had concluded that "pension plans are kind of a thing of the past." In that, HP was merely following the lead of business rival IBM and such other major companies as NCR Corp., Sears Holding Corp. and Motorola. The nation's largest employer, Wal-Mart, does not offer such pensions either. At the current pace, human-resources offices will turn out the lights in their defined-benefit section within a decade or so. At that point, individuals will assume all the risks for their retirement, just as they did 100 years ago.

The shift away from guaranteed pensions was encouraged by Congress, which structured the rules in a way that invites corporations to abandon their defined-benefit plans in favor of defined-contribution plans, increasingly 401(k)s, in which employees set aside a fixed sum of money toward retirement. Many companies also contribute; some don't. Whatever the case, the contributions will never be enough to match the certain and long-term income from a defined-benefit plan. What's more, once the money runs out, that's it. If people live longer than expected, get stuck with unanticipated expenses or suffer losses of other once promised benefits, they will have little besides their Social Security to sustain them.

The dawning perception among Americans that when it comes to retirement, you're on your own, baby, is surely a reason that President George Bush ran into so much opposition to his proposal to change Social Security from a risk-free plan into one with so-called private accounts. Critics of the 70-year-old system were determined to chip away at Social Security as part of a larger effort to promote what the Bush Administration calls an "ownership society." As Treasury Secretary John Snow told a congressional committee in February 2004: "I think we need to be concerned about pensions and the security that employees have in their pensions. And I think we need to encourage people to save and become part of an ownership society, which is very much a part of the President's vision for America."

Of course, it's much easier to own a piece of America when you have a pension like Snow's. When he stepped down as head of CSX Corp.—operator of the largest rail network in the eastern U.S.—to take over Treasury, Snow was given a lump-sum pension of $ 33.2 million. It was based on 44 years of employment at CSX. Unlike most ordinary people, who must work the actual years on which their pension is calculated, Snow was employed just 26 years. The additional 18 years of his CSX employment history were fictional, a gift from the company's board of directors.

Snow is not alone. The phantom employment record, as it might be called, is a common executive-retirement practice in corporate America—and one that is spelled out in corporate filings with the Securities and Exchange Commission (SEC). Drew Lewis, the Pennsylvania Republican and onetime head of the U.S. Department of Transportation, got a $ 1.5 million annual pension when he retired in 1996 as chairman and CEO of Union Pacific Corp. His pension was based on 30 years of service to the company, but he actually worked there only 11 years. The other 19 years of his employment history came courtesy of Union Pacific's board of directors, which included Vice President Dick Cheney. And then there's Leo Mullin, the former chairman and CEO of Delta Air Lines. Under Mullin's stewardship, Delta killed the defined-benefit pension of its nonunion workers and replaced it with a less generous plan. Now, little more than a year after he retired, the airline is in bankruptcy and can dump its pension obligations. But you need not fret about Mullin. On his way out the door, he picked up a $ 16 million retirement package. It's based on 28.5 years of employment with Delta, at least 21 years more than he worked at the airline.

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