Retirement Heist: how companies plunder and profit from the nest eggs of American workers

Not everyone was fooled when their employers changed to a cash-balance plan. Jim Bruggeman was forty-nine when his employer, Central and South West, a Dallas-based electric utility, took this step in 1997. “The changes being made are good for both you and the company,” the brochure noted. Bruggeman, an engineer in Tulsa, was eager to find out how, and was uniquely qualified to do so. He also had a background in finance, his hobby was actuarial science, he had taken graduate-level courses in statistics and probability, and he knew CSW’s old pension plan inside and out. After considerable tinkering with spreadsheets, he was able to finally figure out that the supposedly “better” pension would reduce the pensions of many employees by 30 percent.

He wasn’t about to keep this finding to himself. At a question-andanswer session on the new plan, Bruggeman spoke up and told co-workers how their pensions were being reduced. He had a sheaf of spreadsheets to prove it. The next day, his supervisor went to his office with a message from CSW management in Dallas. They were concerned that his remarks would cause an “uprising” and warned him that if he continued to talk to other employees about the pension change, they’d think he wasn’t a team player and his job could be in jeopardy. In his next performance evaluation, his supervisor’s only criticism was that he “spends too much time thinking about the pension plan.” CSW saved $20 million in the first year it made the change. Bruggeman was fired in 2000.

Another engineer one thousand miles away was equally perplexed. Steven Langlie had spent three decades designing military engines, but he couldn’t figure out how the cash-balance plan his employer changed to in 1989 worked. The skeptical engineer relentlessly pestered his employer, Onan Corp., a unit of Cummins Engine in Minneapolis, for answers. When they refused to spill the beans, the increasingly apoplectic Langlie wrote to local lawmakers, complained to the Minnesota Department of Human Rights and the IRS, and traveled to Washington, D.C., to deliver a petition signed by 460 fellow workers to the Department of Labor.

As Langlie’s pension complaints escalated, he was transferred, denied training, and demoted, despite favorable job-performance reviews. The company also refused to upgrade his computer from a primitive IBM 286—the industry equivalent of an Etch A Sketch, which couldn’t run engineering software or communicate with the company’s servers. Finally, the human resources department told Langlie’s supervisor that it would “help retire him” and eliminated his job. After Langlie’s thirty-seven years with the company, his pension, which would have been $1,100 a month under the old pension plan, was just $424 a month.

Deloitte & Touche, the giant accounting firm, made a big miscalculation when it tried to switch to a cash-balance plan in 1998: The finance guys apparently forgot that a large number of the firm’s employees were older, experienced actuaries and accountants, who took a professional interest, as well as a personal one, in the plan’s novel design. They were horrified when they connected the dots and saw that their pensions would go over a cliff. They went ballistic, and the firm backtracked, allowing all who were already on the staff when the cash-balance plan was adopted to stick with the old benefit if they wished.⁵

IBM also underestimated the über-nerds on its staff, though it’s not hard to understand why the company was so complacent: It had cut pensions several times in the 1990s, and no one had noticed. Traditionally, it provided 1.5 percent of pay for each year of service, which resulted in a pension that replaced roughly one-third to almost one-half of a person’s salary in retirement. The calculation was simple: years of service times average pay in the final few years times .015. For example: If someone worked thirty years, and his average pay in the final years was $50,000, the pension would be worth $22,500 a year in retirement ($50,000 x 30 x .015).

Reducing any of these factors would produce a smaller pension. In the early 1990s, IBM reduced all three. In 1991, it capped the number of years of service that got taken into account when calculating pensions, limiting it to thirty years. This meant that if people worked longer than that, their pensions wouldn’t grow. Next, it lowered the multiplier from 1.5 percent to 1.35 percent, again reducing the pensions. Finally, it reduced the salary component; instead of basing the pension on the average salary an employee earned in the final five years of service, it began to use an average based on the entire time of service, including the early years when pay was low.