When Bad Things Happen to Good
Pensions—Promises Get Broken
“I feel like I was kicked in the stomach.”
That's what a salaried Verizon Communications employee said to a reporter in December 2005 when her company announced it was freezing its defined benefit pension plan. Her defined benefit pension benefit, as is the case for most DB plans, was based on salary at the time of retirement and total years of service. But, since Verizon froze the plan, she will not earn any more years of service credits and her pension will be based on her salary at the time the plan was frozen, not the higher salary at the time she retires. She figured that as a result of the freeze she would lose $400,000 in total retirement benefits.1 Surely, you can relate to how she felt. Think about how you would feel if you lost what you thought was yours, if what you lost was a big chunk of your pension and, as a result of that loss, you had to plan to work more years than you expected. Your retirement future is busted. You feel conned, like a chump. Betrayal hurts, right in the gut. The traditional defined benefit pension was at the heart of the pension system of all employers, including Verizon. Defined benefit pension plans covered about half of all private-sector workers in the United States in the 1960s, and almost all employees in the largest companies.
Curiously, fundamental trends—such as an aging work force and companies keen to attract and retain skilled workers—should have made defined benefit pensions expand instead of shrink. This chapter describes how defined contribution type pensions—the most common are the 401(k) plans— once supplemented defined benefit pensions but are now displacing them. Starting in the mid–1990s, workers all over the United States were facing pension losses, not only workers who lost pensions because they were employed by companies that went bankrupt, but also workers who lost pensions because they were employed by healthy firms engaged in profitable restructuring.