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

I’m writing to tell you we’ve found a solution. It may seem complicated at first glance, but, when all is said and done, you will have the same coverage under the new plan.... So here’s what we’re going to do. First, health care coverage provided by McDonnell Douglas to non-union retirees will end Dec. 31, of this year, and retirees are then responsible for obtaining and paying for their own coverage. BUT, second, as of that date, coverage identical to what you have had (but arranged by McDonnell Douglas, rather than provided by McDonnell Douglas) will be made available to you.

What was really happening: McDonnell Douglas would be paying for the additional coverage—using pension assets—for four years. After that, well, the retirees would pick up 100 percent of the costs (with their premiums being subtracted from their pensions). McDonnell maintained in his letter that this plan, which supposedly would enable retirees to continue their benefits “without denting your pocketbook,” would save the company millions. In fact, McDonnell Douglas’s pump-and-dump maneuver gave it a pretax gain of $698 million. Without the gains from cutting retiree medical benefits, the company would have had a loss for the year. Companies could take the gains all at once, even if the cuts wouldn’t take effect until later; the bigger the bath, the bigger the pile of gains.

CFOs and consultants didn’t call attention to this, and most analysts were oblivious to the way non-cash gains from benefits plans were enhancing income. But one prescient observer, Jack Ciesielski, an independent accounting analyst in Baltimore, warned in a 1994 client newsletter that the new rules gave employers an incentive to inflate their liabilities. “Companies that were the most adversely affected may have made the most dire assumptions in setting up their postretirement benefits liabilities—and thus have the largest ‘reserves’ to call upon should they need a little earnings help in the next economic downturn,” he wrote. “It’s programmed-in earnings improvement.... By bulking up their assumptions, they created a piggy bank of earnings improvers.”

McDonnell Douglas illustrates another key difference between pensions and retiree health plans. While federal law dictates that companies can’t cut pensions that have already been earned, this is not the case for health plans. Unless the benefits were protected by a union contract (and sometimes not even then), companies could pull the plug on benefits that employees, including retirees, had already earned.

McDonnell Douglas’s profits came at the cost of thousands of retirees like Robert Taylor, who joined the company shortly after the Second World War and retired in 1979. He died four years later, at age seventy-nine, just when the company started passing the costs on to the retirees. As the company phased out its share of the coverage, the retirees’ share grew, until they were paying 100 percent of the costs. Rhada Taylor, Robert’s widow, continued to get the coverage, which supplemented Medicare and covered such things as prescription drugs. Initially, the premium she paid for this was $168. As is common practice, the company deducted the ever-increasing premium from her widow’s pension of $420 a month. The premiums increased bit by bit each year, and by 2000 her pension had disappeared altogether, leaving her with only a Social Security check of $1,009 a month to live on.

R.R. Donnelley, a printing company based in Chicago, dispatched a similar letter to its retirees in October 1992, also blaming “skyrocketing” health-care costs and FAS 106: “We have another problem—a new accounting rule we must use, beginning in 1993. This of course has a serious negative impact on our earnings.” Regretfully, the company began to charge retirees for their once free health care, “to remain competitive.” That last part was true: It remained competitive with the other companies that were cutting retiree health coverage.

While some companies like McDonnell Douglas chose to report all of its gains in a single year, R.R. Donnelly took the more common approach and spread them over several years. Donnelley’s gains were fed into income throughout the nineties.

LET THE GAINS BEGIN