Daily Blog: Rich Executives Cause Pension Crisis

There was a very important article in The Wall Street Journal yesterday and I posted this at Daily Kos yesterday.

It's almost become an article of faith in the public lore that "generous" pensions for hard-working Americans are the cause of many of the financial binds that private companies (and municipalities) face. I'd bet that many Americans, and readers here, have already internalized this notion--helped by the relentless media stories about the bankruptcies in the airline industry, the crisis at General Motors and a host of other examples.

That's why today's story in The Wall Street Journal is really, really important--and I'm sorry if this diary goes on a bit. This story (it's subscription only so I'll take the liberty of excerpting chunks here) shows that additional side of the absolute greed and robbery underway in America today. It's headline: *As Workers' Pensions Wither,Those for Executives Flourish: Companies Run Up Big IOUs, Mostly Obscured, to Grant Bosses a Lucrative Benefit*

That executives are piling up pension riches isn't necessarily revealing or surprising. What this story does, however, is highlight the role executives pensions play in fueling a financial crisis that, then, ends up being dealt with or resolved by going after the pensions and pay of average working Joes and Janes. (Kudos to reporters ELLEN E. SCHULTZ and THEO FRANCIS; I've watched Schultz's reporting over a long time and I'd say she's is probably one of the best, if not the best, pension reporter in the MSM).

Here's the story's summary:

Even as many reduce, freeze or eliminate pensions for workers -- complaining of the costs -- their executives are building up ever-bigger pensions, causing the companies' financial obligations for them to balloon. Companies disclose little about any of this.

But a Wall Street Journal analysis of corporate filings reveals that executive benefits are playing a large and hidden role in the declining health of America's pensions. Among the findings:

* Boosted by surging pay and rich formulas, executive pension obligations exceed $1 billion at some companies. Besides GM, they include General Electric Co. (a $3.5 billion liability); AT&T Inc. ($1.8 billion); Exxon Mobil Corp. and International Business Machines Corp. (about $1.3 billion each); and Bank of America Corp. and Pfizer Inc. (about $1.1 billion apiece).

* Benefits for executives now account for a significant share of pension obligations in the U.S., an average of 8% at the companies above. Sometimes a company's obligation for a single executive's pension approaches $100 million.

* These liabilities are largely hidden, because corporations don't distinguish them from overall pension obligations in their federal financial filings.

* As a result, the savings that companies make by curtailing pensions for regular retirees -- which have totaled billions of dollars in recent years -- can mask a rising cost of benefits for executives.

* Executive pensions, even when they won't be paid till years from now, drag down earnings today. And they do so in a way that's disproportionate to their size, because they aren't funded with dedicated assets.

Indeed, it is already the case that the pensions of regular workers at many, if not most, companies, are dropping--while pensions for executives are on a very steep rise:

By curtailing pensions for regular workers, large companies have reduced pension obligations to them by billions of dollars in recent years. So pension obligations to regular workers are stable or shrinking at many companies while those for executives rise. At BellSouth Corp., for example, the obligations for pensions for ordinary workers have edged down 3% since 2000. The liability for pensions for executives is up 89% over the same period.

One of the reasons we know very little about this problem is that most reporters are not competent to dig into the financial records of companies. But, it's also the case that companies are very adept at hiding the information that this article teases out:

Even if a company's liability for executives' pensions totals hundreds of millions of dollars, its employees and shareholders may never know. Companies don't have to report this obligation separately in federal financial filings. A few specify it in a footnote, and some provide clues that make it possible to derive the figure.

The minimal disclosure dates from the late 1980s, when companies first were required to report pension liabilities but were allowed to aggregate all of them. At the time, distinguishing executive pensions was less of an issue because they were smaller. When they ballooned along with executive pay in the 1990s and 2000s, the rules didn't change. Most employers have continued to blend pension figures together. Wall Street Journal publisher Dow Jones & Co. said it hasn't broken out executive-pension figures but will "re-examine whether to do so going forward."

When they do mention executive pensions in filings, companies often use terms that only pension-industry insiders would recognize. Time Warner Inc.'s filings include -- as part of a category called "other, primarily general and administrative obligations" -- a footnote reference to "unfunded defined benefit pension plans." Those are executive pensions.

Lumping pensions together can also give a false impression of the security of ordinary workers' plan. Someone browsing Time Warner's filings might think its pensions for regular employees were underfunded by 7%. This impression would be illusory. *The pension plan for regular Time Warner employees has more assets set aside in it than the plan needs to pay benefits well into the future. The shortfall is due entirely to a plan for highly paid employees. That one has a $305 million unfunded liability.*

The final example is one that really gets my blood hot. As a proud member of the United Auto Workers, I've watched my sisters and brothers agonize over their future, over whether they should take the buy-outs being offered by General Motors, which is trying to get rid of tens of thousands of workers because of the financial mess its executives have created. Those buy-outs will leave may workers with a very scary future. So check this out:

When General Motors cites retiree costs, the giant auto maker has a point: It owed nearly 700,000 U.S. workers and retirees pensions that totaled $87.8 billion at the end of last year.

But $95.3 billion had already been set aside to pay those benefits when due.

All of these assets are earning investment returns, which offset the pensions' expense. GM lost $10.6 billion in 2005. But deep as its losses have been, they would have been far worse without the more than $10 billion per year in investment income that the GM pension plan for the rank and file generates.

The pension plan for GM executives is another matter. Unfunded to the tune of $1.4 billion, it detracts from GM's bottom line each year. This is criminal. The workers' pensions--their money that they agreed to forego in each paycheck so they would have a decent living down the road during retirement--is generating cash for GM, while the executives' pensions is truly the drag on the company.

I would say "unbelievable" but nothing seems unbelievable in a world where Republicans reject a minimum wage of average people yet fight tooth and nail to eliminate the estate tax that benefits a few thousand of the wealthiest families in the country.

It seems to me that our elected representatives in Congress have to stop this robbery. And they can do so in two ways:

1. Force companies to tell the truth about pension obligations.

2. Change the bankruptcy laws. I m really sick and tired of reading about companies that have used bankruptcy laws to terminate pensions--yet they continue to give executives hundreds of millions of dollars even at companies in financial distress. We should push for changes that essentially impose a proportional hit executives to whatever hit workers take--and I would say, given the level of pensions granted executives, it should not be a one-to-one hit but a ratio that significantly scales back executive pensions in comparison to the rank-and-file worker. These changes would be one way some Democrats could make up for their outrageous support of the recent bankruptcy bill that was a gift to the credit card industry.