The Multinational Monitor

July/August 1987 - VOLUME 8 - NUMBERS 7 & 8



The Trust Betrayed

by David Kusnet

On the same day in March, two little-noticed and seemingly unrelated demonstrations tried to call attention to what may be the labor issue of the 1990s and beyond: the fate of pension benefits that millions of workers are counting on for their retirement.

On March 10, 1987, 25 busloads of retired steelworkers from Youngstown, Ohio went to Washington, D.C. to demand that the LTV Corporation restore their full pension and health benefits.

Meanwhile, retired and active textile workers from the Reeves Company in North Carolina traveled to Richmond, Virginia to hold a protest in front of the Sovran Bank, one of nine banks participating in a$100 million loan scheme requiring Reeves to take funds from its workers' pension plans.

The protest in Richmond was organized by the Reeves employees' union, the Amalgamated Clothing and Textile Workers, and the Youngstown workers protest was sponsored by a new, locally-based organization, Solidarity USA. These demonstrations are part of what promises to be growing worker activism over an increasingly important issue: the failure of the private pension system to live up to workers' expectations.

It is a problem that affects both workers in troubled industries where failing companies are unable to keep up their pension contributions and workers whose pension funds are financially healthy and, therefore, represent a tempting target for cashhungry managers and corporate raiders. And it is a problem that will become more urgent as the population increases in age.

Already, the growing pension fund crisis has affected more than two million active and retired workers.

  • Edward Price worked for LTV's steel plant in Aliquippa, Pennsylvania for 32 years. This year, his $1,100-a-month pension was cut to $640 a month. Now he says he can't support himself, his wife, and their two children.
  • Clifford Graham retired last year after 17 years with Reeves. His monthly pension check is only $44. The bankers' raid on Reeves' pension fund will make it more difficult for the company's employees to win pension improvements.
  • Antonio Pierorazio, a retirede steelworker in Baltimore, just had his monthly pension payment from the ailing Eastern Stainless Steel Corporation cut from $1,239 to $632. I worked many conditions dirty, filthy, oily, hot and cold," he said. "I did not refuse any job because I knew I was building my pension."

Pension Woes In Troubled Industries

Through what might be considered the Catch-22 of the American pension system, workers at some companies have suffered because their pension fund had too little money, while workers at other companies suffered because their pension fund had too much money.

For thousands of retired steelworkers in Youngstown, and potentially for almost 70,000 retired steelworkers throughout the country, the story of LTV shows all too clearly the precarious position of pension funds in declining industries.

Over the years, the Dallas-based LTV became the nation's second largest steelmaker. It absorbed companies that once were giants in the industry: Republic Steel, Jones and Laughlin Steel, and Youngstown Sheet and Tube.

But like its counterparts, LTV's subsidiary LTV Steel was hard hit by the problems afflicting the steel industry. It declared bankruptcy, suspending payment of medical and life insurance benefits to retirees and reducing pension payments.

The major casualties of the pension cuts were the $400-amonth pension supplements for workers taking early retirements as a result of job losses in the steel industry. These bonuses were intended to help workers make ends meet until they qualified for Social Security. However, soon after promising these bonuses for early retirement, LTV Steel terminated its pension plan, announcing that it was $1.5 billion in debt.

LTV's pension plans have been taken over by a federal agency, the Pension Benefit Guaranty Corporation (PBGC). The PBGC will insure the retirees regular retirement pensions, but not the $400-a-month supplement. As a result, the pensions of many younger retirees have been dramatically cut.

The problems at LTV may well foreshadow the future throughout the steel industry, where more and more companies are filing for reorganization under the bankruptcy laws and more and more pension plans are facing financial difficulties. The fact that there are now more than three retirees for each of the steel industry's 140,000 remaining workers makes the situation even more severe.

Corporate Cookie Jars?

Retirement incomes of workers with well-funded pension funds are also in jeopardy.

When Reeves Brothers was taken over last year by Schick, a disturbing new chapter in financial history opened. The nine banks that financed the takeover imposed an unprecedented condition for their loan: that Reeves terminate one of its pension plans and give the banks any "excess" funds - up to $20 million - as partial prepayment of their loan. While workers' retirement money had been used before to pay for corporate takeovers, this appeared to be the first time that a loan agreement had specifically required the termination of a pension plan.

What happened at Reeves is typical of how pension funds look to corporate managers and takeover artists in this increasingly competitive and anxious economic era: just one more line item on the books or, in the case of Reeves, "corporate assets" that could be bought and sold along with the company itself. In fact, Reeves had become an attractive takeover target largely because actuaries had reported that the company's pension plans were "overfunded" by more than $23 million.

Like other companies in similar situations, Reeves will continue providing pension benefits for current and future retirees by paying out its existing obligations. But by skimming off the "surplus" from the pension plan, Reeves has made it much less likely that its employees will be able to win improvements in their retirement benefits, which currently average less than $200 a month. Just as the problems at LTV are typical of what happens when pension funds are too lean, the shenanigans at Reeves are typical of what happens when pension funds look too "fat."

A booming stock market and high interest rates have dramatically increased many pension funds. In fact, from 1980 through 1986, the total value of American pension funds soared from $563 billion to $1.4 trillion.

As the funds have gotten fatter and fatter, there have been more and more pension fund terminations, with employers stripping what they consider "overfunded" plans, using some of the money from the plans to meet cxisting commitments andkeeping the rest of the cash. Among the companies that have used pension funds to bolster or even create corporate earnings are such corporate giants as Exxon, American Express and Texaco. As Kathleen Utgoff, the executive director of the federal Pension Benefit Guaranty Corp, warns, pension funds are often being treated like "corporate cookie jars."

Partly in response to new guidelines drawn up in 1984 by the Reagan administration, which made clear how corporations could legally skim off "surplus" funds, pension fund raids have increased dramatically in recent years from only nine in 1980 to 1400 in 1986. Between 1980 and 1986, more than $16 billion had been pulled out of more than 1400 plans, according to the House Select Committee on Aging. A good portion of this money then went to fund takeovers, according to the Senate banking committee.

There is the real danger that, with a downturn in the stock market and a decline in interest rates, or simple miscalculations, the "overfunding" of many pension systems may be illusory. As Phyllis Borzi, counsel on pensions to the House Subcommittee on Labor Management Relations, warns: "A snapshot of any healthy fund is going to make that plan appear overfunded, at least to some extent. But these decisions shouldn't be made on snapshot looks."

Financially troubled United Airlines exemplifies what can go wrong. Two years ago, during a strike by its pilots, United tried to seize control of an estimated $960 million in "excess" money its pension fund had generated because of rising interest rates and successful stock market investments. During the next few months, however, interest rates plunged, and the nearly $1 billion surplus looked more like S200 million. Company officials then changed their minds about raiding the fund.

Proposals for Reform

Pension conflicts and crises such as those at LTV and Reeves have spurred Congress and the Reagan administration to take a new look at the federal role in the nation's private pension plans.

Unlike most industrial nations, the U.S. government had little role in protecting its citizens' pension rights until 1974. In that year, the Employee Retirement Income Security Act (ERISA) set minimal standards for pension plans, and the Pension Benefit Guaranty Corporation was created to assist and, if necessary, bail out and take over failing pension plans.

Today, the PBGC has been forced to pick up so many underfunded pension plans that it has a cumulative shortfall of nearly S4 billion. Although it is currently asking Congress for an increase in the rates it charges to guarantee pension plans, it says that it has enough money to meet its obligations until the year 2003. Together � ith the plundering and collapse of many private plans, the PBGC's woes have prompted a number of proposals to bolster the federal Pension Benefit Guaranty Corporation and tighten ERISA's protection of private plans.

The U.S Department of Labor has developed proposals which it says will halt the rush to raid pension plans, a trend that itself was prompted largely by the administration's 1984 guidelines. Former Assistant Secretary of Labor for pension and welfare benefits Dennis Kass explained: "We cannot tell companies not to terminate plans, and I don't think we want to." But, he said, if the proposals are enacted it will make it "less lucrative and, therefore, less attractive" to terminate plans.

The Labor Department's proposals on fund withdrawals would require companies to set aside a "cushion" of additional funds for paying benefits.

Although labor and public interest groups are divided on exactly what type of protections should be included in any new proposal there is widcpsread skepticism about the Reagan administration-Labor Department proposal.

This proposal and the variations to it which are now being included in the Budget Reconciliation bill "will actually legilimize pension raiding and make it much more likely that companies will strip their plans," says Karen Ferguson, director of Pension Rights Center.

Although minimal protections for workers are included in some of the proposals, the fact that working people cannot count on even minimal retirement security in 1987 demonstrates just how far America has to go.

As the workers at Reeves and LTV learned from bitter experience, a half century after the Social Security Act and more than a decade after ERISA, companies still can decide for themselves whether to provide pensions, what benefits to offer, and whether to close down their pension plans at will.

But as increasing numbers of working people learn how vulnerable their pensions really are, we will hear more about the grievances of those who, as the old labor song put it, are "too old to work and too young to die."

David Kusnet directed publicity in organizing campaigns for the American Federation of State, County, and Municiple Employees (AFSCME). He was a speechwriter for the late AFSCME President Jerry Wurf and for Walter Mondale during the 1984 presidential campaign.

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