http://bernie.house.gov/documents/articles/20030908190103.aspPublished on 9/8/2003 in the Business Week
The Great American Pension-Fund Robbery
by Robert Kuttner
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But if pensions are under water, the cause is less a perfect storm than a leaky boat ravaged by pirates. For more than a decade, corporate sponsors of pension plans have been systematically looting them. The great pension raid is of a piece with the other accounting deceptions of the 1990s, and it had the same motivation -- to boost reported earnings and stock prices.
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Among the favorite gimmicks for creative theft of pension assets:
-- Project an unrealistically high rate of return and claim that the plan is overfunded. Then reduce contributions to the plan and divert the plan's assets to fattening the bottom line. This maneuver allowed corporations to hype reported earnings by 10% to 15% during the 1990s, which in turn contributed to the same stock market bubble that supposedly justified the inflated rate of return. When the bubble burst, pension plans found themselves underfunded.
-- Convert from conventional plans to "cash-balance plans." This was invented by Bank of America in 1985 and widely imitated. Terminating a pension plan results in a large tax penalty, so consultants invented a hybrid that quacks like a 401(k) but doesn't trigger the penalty. The Internal Revenue Service went along with the fiction that a cash-balance plan, which reduces payouts, is not really a termination of the plan. The conversion creates imaginary individual accounts that pay a set rate of return. Companies then book their projected future savings as current earnings, thanks to a bizarre determination by the Financial Accounting Standards Board. On July 31, in response to a lawsuit by IBM workers, a federal judge ruled that such conversions constitute illegal age discrimination.
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Once, pension plans were intended to induce loyalty and long service in workers. Now, big corporations and their executives seem to care about only one category of worker -- top managers, who loot the plans while protecting their own assets. Ordinary long-tenured employees are deemed liabilities.
The remedy for depleted pension funds is much tougher regulation. But the Bush Administration wants to weaken anti-discrimination rules to make it even easier for top executives to have one set of rules for employees and another for themselves. To solve the underfunding problem, the government should be forcing companies to disgorge money that was improperly diverted from plans to corporate bottom lines, thus making the plans whole. Instead, the Administration wants to allow companies to use more liberal accounting assumptions about rates of return.
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