As I See It: Changing the World, One Pension at a Time
February 6, 2006 Victor Rozek
It will sound improbable to people under 40 who have no memory of it, but not that long ago, families got by on the income of a single earner. One salary was enough to support a middle-class lifestyle. Back then, health care was actually affordable and the cost of health insurance wasn’t the equivalent of a second mortgage. You could attend a state college for next to nothing, and graduates did not begin life buried under a mountain of debt. Entire careers were spent working for a single company with a secured pension at retirement. The middle class flourished.
But the structure that made those things possible has been disassembled one decision at a time. Some will call it progress, but although progress is thought to be linear, it is multi-directional and does not always move us forward. Between the glory of Rome and the rebirth of the Renaissance, came 500 years known as the Dark Ages.
John Sweeney, president of the AFL-CIO, fears we are headed into an economic dark age. He is concerned about corporate decisions that are stripping American workers of good-paying jobs, eliminating their health care, and demolishing their pension plans. Speaking before the National Press Club, Sweeney called such policies “suicidal.” He pointed out that workers won’t be the only casualties of a diminished middle class. Businesses will suffer because consumers will have much less discretionary income to spend. And, as savings decline, the government will be faced with greater demands for public services and subsidies, with fewer taxpayers able to pay for them.
Sweeney’s point is self evident which is why IBM‘s recent decision to dump its traditional pension plan is so troubling–it’s one more step down the path to disaster.
Effective January 2008, IBM is dropping its defined benefit pension plan, (a plan which provides a guaranteed retirement income), and is moving towards a redesigned 401(k) savings plan, (a plan where the only guaranteed payout goes to the company managing the account). By doing so, the computer maker expects to save about $3 billion over the next five years. In its press release, the company said it made the move because it wanted the “predictable cost structure” of a 401(k).
Ironically, predictability is a concern for both sides. Employees want predictable pensions. Unfortunately, 401(k)s are far less certain than defined benefit plans because management of the funds falls to employees. Thus the financial future of IT professionals will be determined by the incertitude of the stock market. As we have seen, if you have the misfortune to retire just before the market tanks, you may be left with only a fraction of the money you invested. One of the ancillary benefits of a company-managed plan is that the money is out of reach. From personal experience I can attest to the fact that having ready cash laying around in a 401(k) is a grave temptation. My 401(k) was spent long before I even began contemplating retirement.
This was not IBM’s first attempt to escape its pension obligations. In 1999 the company proposed a reduction in pension benefits that threatened to halve the payout due older workers. That decision was challenged in court and IBM lost, but the decision was, of course, appealed.
To its credit, this time IBM went to great lengths to insure that workers covered under the old plan would not lose money. To ease the transition, IBM will give current plan participants an annual company-funded contribution of as much as 10 percent of their pay. To provide this benefit through what it calls its new “401(k) Plus Plan,” IBM intends to double the current dollar-for-dollar company match to up to 6 percent of salary deferrals, and to make additional automatic contributions of 1 to 4 percent of employees’ pay to their 401(k) account. Employees can take further comfort from the fact that IBM’s 401(k) plan, with more than $26 billion in assets, is the largest in the country. Nevertheless, for employees there will be greater risk and less downstream security. It’s like tearing a hole in the safety net workers have stitched together over a lifetime.
IBM is not the first company to jettison its pension plan. Nor is it simply a follower of business trends. By virtue of its size and prestige it is a hugely influential industry leader. Like a mountain, IBM can make its own weather which impacts those further down the slope. When IBM gives up on pensions, it sends a strong signal to the business community that the days of defined benefit pensions are over.
Pensions are dead, as dead as privacy, and no more likely to make a comeback than Tom DeLay. Mourning them is pointless, but we can recall with envy the time in which they flourished, a time we may look back upon as the golden age for IT professionals–a time when IBM was king and its subjects were princes.
There are still IBM employees who remember those days. I spoke with a friend of mine who is nearing retirement and he reminisced about his career with Big Blue.
“When I first started,” he said, “employees joked that IBM stood for ‘I’ve Been Moved.’ So profound was IBM’s commitment to its workforce that until the late 80s the company never had a layoff. When one division struggled, excess employees were sent to other locations where business units were thriving and needed additional help. If employees were asked to move and were unable to sell their homes, the company would purchase them for fair market value. ‘Respect for the individual’ was the company’s unofficial motto and because it was practiced, our loyalty was legendary.”
That was then.
Jump ahead several decades and even senior management can’t be induced to stay. Just last year at COMMON, wonder boy Peter Bingaman, vice president of iSeries marketing, told an audience of IT professionals that his job is “without a doubt. . . the best job I’ve ever had in my 18 year career. It has been an unbelievable ride,” he said. Given that he began his career hawking popcorn and mustard, you could understand his enthusiasm. But just a few months later, Bingaman left “the best job ever” to take a position with LexisNexis. Who knows, maybe LexisNexis has a better pension plan. Or maybe, the decisions we’ve made over the years have undermined the very notion of loyalty.
Decisions to ship jobs oversees; decisions to ignore the competitive impacts of the health care crisis (health care costs GM a crushing $1500 per car), leaving corporations unable to compete and millions of their employees uninsured; decisions to loot employee pension funds; that such decisions have made loyalty unaffordable.
Writing for The Register under the provocative headline “IBM Shatters the American Dream,” Mike Ballard observed that the net result of the “Big Blue pension retreat” is that “only the younger generation need get used to the idea of an uncertain future.”
Well, they’d better, because the seeds of their future were planted long before they’ll be able to identify the crop.
The fall of the Soviet Union was decades in the making; no one predicted it, but when it came it was swift and irrevocable. The evidence for global warming was ignored for decades but the process may now be irreversible with huge consequences for us all. Likewise, the slow assault on the middle class will have consequences beyond boosting corporate profits. And it will be the younger generations that will pay most dearly.
Abraham Lincoln, in his first annual message to Congress in 1861, said “Capital is only the fruit of labor. Labor is the superior of capital and deserves much the higher consideration.”
That, too, was changed, one decision at a time.