Our first day of work on a permanent job, was usually the day that we kind of put it in our minds that we would work approximately 30 years, around the age of 50, and then retire.  We would be secure with our lifetime income (our pension), our supplemental savings {401(k)}and our company-paid healthcare benefits.  With the addition of the 401(k) plan, that was sold as a wealth building tool, where the employee could invest PRE-TAX dollars taken directly from their paychecks before they got a chance to spend it, we just knew that this was the best chance to live at least 1/4 of the life style that they [the employer] lived. This 401(k) plan was the new revised edition of the former Defined Contribution Plan which allowed the employee to invest AFTER TAX dollars and the employer could match the amount with their own TAX FREE profits.  Those plans also allowed the employee to determine how much or how little they wanted to invest, but that changed Sept. 2, 1974 with the Employee Retirement Income Security Act [ERISA].    But the 401(k) plan was marketed as the “modern retirement plan.”  For every company that wanted to dump the traditional defined-benefit pension plan, this was a god-send.  The employer contributes a specific amount(defined-contribution plan), and the worker assumes all risk of investing that money.  If the employee is a savvy investor, they will end up with a lot of money.  But if they invest too safely, aggressively, or is not free to change investments when markets shift, then there will not be enough money when they want to retire. 

From the executive view, the deal is sweet.  First of all by switching from defined-benefit pensions to defined contribution retirement savings, it improves the appearance of their financial performance.  Less cost, more profit.  They also can sell the idea that if an employee has to rely on the stock of a company to fund their retirement, then they will work harder and oppose work rules of the union,which management believes impedes profits, or they will resist union altogether.  They could then vote out union or vote not to have union.  Wages could then be held down and workers could be pushed to work longer hours without overtime pay.  As the percentage of union workers declines, the wage levels can be held down or pushed back further.   

The companies already had a model for this line of thinking.  They had Microsoft.  Microsoft’s value rested on its monopoly status over the operating systems of at least 9 out of 10 desktop computers.  Microsoft hired contractors in order not to share profits and rising stock prices.  The message that companies like  Frontier(which was previously Rochester Telephone Company) and other companies were sending,  was that you could become rich if you just stop listening to your union.

The chief executive of Rochester Telephone had a plan from the onset to take his company into the big leagues.  He was aware of the developing strands of glass at Corning Glass and persuaded his board of directors to invest.. .the fiber optic network was born.    He also bought an independent long-distance company in Detroit.  The employees of the Detroit company were paid less and had less benefits than the union workers at Rochester Telephone.  He promised to keep the monopoly and the competitive Detroit company separate and renamed the entire company Frontier.  When revenue exploded in 1995, he then predicted he would double in size by 2000.  In 1996 Congress then passed  the Telecommunications Act.  Frontier was now unhampered by state utility regulators.  But despite steadily rising stock prices and huge percentage gains in dividend checks, the chief executive was determined to pay less to Rochester Telephone workers.  He thought that their wages should be more in line with the Detroit workers.  When their contract expired and the union refused to accept the lowering of wages and benefits, the chief exec. established them anyway as the new Telecommunications Act allowed him to do.  Then on Dec 31, 1996, He froze the pension plan and told the workers that the company could not afford to put anymore money into those un-rewarding pensions….the newly unregulated and competitive industry no longer came with guaranteed profits. 

Getting rich by being paid in stock, like executives was pitched over and over again.  What they neglected to tell the employees was that the conditions of stock ownership was different from those of the executives.  The executives had much more freedom to sell when their inside knowledge told them to, in order to increase their profits.  When the market price was higher than the fixed price they had paid, they made a huge cash profit, and used the cash to buy stocks and bonds from other companies, diversifying their portfolios.  The employees couldn’t sell for 5 years.  Some companies required the worker to keep their stock until they turned 55, when the federal law allowed them to slowly begin selling to diversify.  It is too late then to make up the sharp drops in the company shares.  The worker was never given the financial planning advice that the executives routinely received because it was forbidden by Congress.  If the worker wanted advice, they would have to pay for it themselves with after tax dollars. 

Many companies not only received professional advice with the company but the company also paid the taxes on the value of that advice.  The cost of which was more than most workers made yearly. 

Other companies, such as IBM, Eastman Kodak etc… that were required to keep much of their wealth in the company, were rewarded handsomely for the increased risk.  These rewards came in the form of huge compensation packages, so large that even if the company failed the executive would remain rich. 

When Rochester New York became the first city in the country to with open competition for local telephone service.  Rochester Telephone employees were told to expect layoffs and their pensions were frozen while the top executive’s pay rose 50 percent.  Along with other senior executives, the top executive was exempted from the pension freeze.   Just weeks after the pension freeze, on Dec 31, 1996, the members of Local 1170 voted on a new contract.  Not only did it include a pension freeze, it also included a wage freeze for 3 years and a cap on retirees health benefits.  The union voted it down and was accused by the company of being interested in entitlements instead of competition.  The important word propagandistically repeated over and over  is entitlements,(which the republicans use today to describe Social Security benefits)  as Frontier and other companies continued their push to reduce compensation for the workers, while dollars flowed even more generously to management, especially those at the top.  They labeled pension and health care benefits as entitlements and union members were like lazy welfare recipients who collect a check because they are entitled to them, except the union members show up to work.

When the company gave Rochester Tel. employees stock in Frontier, the value equal to 1/2 percent of their wages, approximately $1.oo  per work day.  This amount was less than 1/4 of what the company had been putting into the traditional defined-benefit pension, which carried no risk for workers and since 1974 had been guaranteed by the federal government.   If this plan was in effect from 1960 thru 1995, an employee would have retired with a lump sum (which they push) of about $17,500.00 instead of a pension of $19,000.00 per year.  When the company gives its match to the 401(k) in shares, those shares are counted at the current market value despite the  5 year restriction on their sale.  So that even with the match, the company is spending far less than in the traditional pension plan.  Had the plan been in effect with the match plus the 1/2 percent since 1960, after 35 years, the shares would be worth less than $71,000.00.    Had that same 3.5 percent been invested in diversified portfolios (instead of forced to stay in company stock) that grew a healthy 10 percent per year, it would be worth $122,000.00 which would be about the defined-benefit pension plan would pay in the first six years.

The workers were never given these comparisons, instead they were constantly sold on the idea of a rich future if they took this plan as the union (CWA Local 1170) tried to get the members to stay with the traditional pension plan.  With the company’s sales pitch and the stock doing well, these factors re-enforced what the company was saying, even though the union thought that the plan was a huge give back.  They warned the members that stock prices goes up and down and that the executives could cash out and the members couldn’t (and the members didn’t get any additional compensation to make up for the risk). They heightened executive retirement plans, with millions of dollars and stuffed their plans even more through tricks, such as adding years that they never worked and crediting their salaries with amounts that they did not make, to boost their pensions?  Most pensions are based on base salaries, but executives are based on base plus bonus.  Also the pension formula is higher for executives.  This is what is called “the eternal wealth syndrome.”  Their pensions alone provide executives with more than is needed for retirement so that they never have to touch any of the millions put away during their working years. 

This diversion of extra monies puts a huge strain on budgets for personnel.  Congress helped by passing a series of laws that allowed the companies to balance their budgets by taking away from the retirement income from lower salaried workers.  The worker had no way of knowing that their pensions will be reduced by part of the amount that they would  collect in Social Security benefits.  This hurts the low wager earner and those who leave after they become pension eligible years before they become eligible to collect that pension.  It reduces their benefits in some case by 1/5.  The law that Congress passed allowed the companies to apply inflation in two ways… reduce the workers benefits who switches jobs long before retirement freezing benefits in the dollars of the year that the worker left the job and giving full credit to the inflation adjustments made over time that boost the size of Social security benefits paid years later, offsetting the pension by that amount.

While companies have been increasing executive pensions, known as supplemental executive retirement plans (SERPs), the pensions for the worker has decreased by over 22 percent.   

All those years of contributing less to pension plans cost the plans $400 billion in assets by 2003 when the bubble burst on wall street.  Congress had listened to the donor class, did not enforce the rules requiring pensions to be solely and exclusively to benefit workers and retirees and allowed 60 percent of pension assets to be invested in stocks and other equities instead of fixed income assets like bonds.  During the stock market bubble rising stock prices made these pension plans appear more sound so little actual cash was put into them.  Not spending money on pension obligations made companies appear more profitable than they really were which pushed stock prices even higher.  This enriched those (executives) who were able to cash out their stock. 

Congress allows companies to exclude 30 percent of workers from pensions.  They also allow companies to count Social Security benefits as if they were provided by the company.  They skew the benefits so that lower paid workers get less and higher paid executives get more. 

The fact that these companies use their own stock to fund the modern retirement plans brings a company tax-free cash, cuts in taxes and makes the executive stock options more valuable by making finances appear stronger than they actually are. 

You save 3 percent of your pay in the 401(k) plan to buy company shares, the company gives you an equal number of shares.  For example, you save $100 that the company paid you and each share sold for $100.  You take that $100 that the company paid you and give it back to the company for a share of stock.  The company takes that share off the shelf but it’s still unissued stock and it now becomes capital for the company which is un-taxable income.  The company then issues a second share of stock (matching).  The company has zero cash expense at this point.  The $100 salary it paid you came back to them tax-free and the second share was declared to be worth $100 also because that is the amount it was trading for that day.  The company gets a tax deduction for both the $100 salary and the matching share of stock that it declared worth $100 when it put it into the 401(k) plan.  No money has flowed out but the tax break money has flowed in.

Those who cash out early (executives) walk away with lots of money.  Those who hold onto their shares for the long run as workers are required to do, end up paying inflated prices for their shares and get less in the end.

Another advantage for the company is that the plan has different voting rights.  The stock is held in a trust that the company controls.  In most cases the worker doesn’t vote their shares.  The trustee then votes them in proportion to how everyone else voted.  This is why your union will ask for your proxy in order to vote on your behalf. 

Frontier was then sold to Global Crossing.  Global Crossing used shares of its stock valued at $11.5 billion, [even though Global Crossing had no operating business and huge losses], to purchase Frontier.  They just sold the idea of fiber optics.   

Global crossing was the child of Gary Winnick, who was a former partner to Michael Milken, the junk bond king of the eighties. After  Enron filed for bankruptcy,  Global Crossing amended its executive retirement plan.  All but 15 of the 80 eligible execs converted $15 million of unsecured stock into $13 million of cash. This continued until $5.2 billion of stock in 41 months had been unloaded.  During that time Winnick bought politicians with millions of dollars.  In 2002 they filed for bankruptcy.  Later that year it  was sold to Citizens Utilities. 

The modern pension plan that was to make the worker a millionaire but instead was frozen in 1996 dollars will be worth about $100 a month in todays dollars when they retire in 2029.

This worked  well for the companies and without a fight from the employees.  In fact it worked so well that now they want to do away with pension altogther.  They already told you that you needed to work harder [you are now doing the work of 2 people for the price of one].  They still want to take away pension, your healthcare and they want you to wait to collect your Social Security benefits [they haven’t figured out a way to get you okay to privatize it yet].  They want you to believe that it will run out of money if you take it too soon.  Well that is because when they raised the amount that we pay into Social Security each pay period [the amount tripled] they told us that the would lock the box and the money would only be used for retirement and disability.  Well that didn’t happen.  They used it to pay for tax cuts for the wealthy and capped amount that the wealthy paid into Social Security to the first $76,200 of wages. 

All of this occurs without our knowledege because we have not paid attention or have fallen prey to the suggestion that we are deficient in understanding such matters.  When we neglect to pursue our own interest DEMOCRACY FAILS and the power of the donor class increases.

We must become INFORMED and ENGAGED or we will LOSE!  The fight is ours to win or lose, but the loss is guaranteed if we are afraid or unprepared to fight!

 Penny McQuaig


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  8. There is a profound shift here in wealth, away from funding proper retirement amounts, except for the few lucky to still be in “legacy” i.e. defined benefit systems.
    Since we have been sold the 401-K/IRA Bill of Goods, now we are dependent on the stock market, whose gains, we have been assured, are 8% a year historically. EXCEPT – the last ten years the stock market has actually DECREASED in value. Is this an aberration, or a harbinger of a nonproductive economy that has lost the engine of consumer buying power that used to drive it ahead? If so, one more loss of wealth for the masses on top of wages reduced by inflation and health care premiums jacked up by employers and providers. And of course the attacks on Social Security – at least one central institution around which we can rally a large-scale defense.

  9. Good research, Penny. This information has me deep in thought. This information should have been given to retirees before they made their decision awhile ago. In that way, they could have made a more informed decision. Good website. Keep up the good work!

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