Who Stole the American Dream? (24 page)

During the course of United’s three-year bankruptcy, CEO Glenn Tilton used the leverage of the bankruptcy process to squeeze United’s employees into accepting larger and larger financial concessions.

In the end, United cut twenty-six thousand jobs for good. It furloughed thousands more employees temporarily. And it reaped $5 billion in givebacks and cuts from employees and retirees, changed work rules, revised pay scales, and instituted a new type of pension
system. In all, fifty thousand employees and retirees, like Pat O’Neill, either had their pensions cut or were shifted over to 401(k)-style plans where they, not United, would foot most of the bill.

But the banks got back all of their loans, plus tens of millions of dollars in interest, plus millions more in loan and administrative fees. Jamie Sprayregen told me that his law firm had pocketed $100 million in fees on the United bankruptcy and that collectively, the law firms, accounting consultants, and restructuring experts that handled United’s bankruptcy had made at least $400 million—close to 10 percent of the money surrendered by the unions.

“That’s a tremendous amount of money,” I said. “Workers giving up, you know, $3 billion worth of pensions, and it’s costing $400 million to get the job done.”

“
I wouldn’t call it cheap,” Sprayregen conceded. “But … that’s in the range of what happens in restructurings, even in healthy companies, in Corporate America.”

In addition, CEO Glenn
Tilton preserved his own $4.5 million retirement benefit from a previous employer that United’s board had promised to pay when it hired him, and his management team got paid healthy “retention bonuses” during bankruptcy, offsetting the losses they took on their pensions. But the big payoff for executives was a grant of $400 million worth of stock for management in the new post-bankruptcy United Airlines, after union members lost their worthless stock in the old United.

Pat O’Neill had retired from United, but others such as Robin Gilinger, a picture-postcard image of a smart, slim, attractive flight attendant in her midforties, had to live with the altered regime at United after the harsh cutbacks forced by bankruptcy.

After two decades of flying with United, Gilinger found that she had to increase her flight hours by 30 percent to make up for a 30 percent cut in her pay. Even with more hours, she said, she was making
less than she had in the 1990s. She resented having to be away from home all that extra time.

“
You are juggling all the time,” she said. “You are very tired. You are in a different bed every night. You don’t really get to connect with your family. I have a fifteen-year-old daughter. In four years, she’ll be gone. I feel like I have to reconnect with her every time I come home. And then, before you know it, you are repacking and going back out again.”

What angered her the most, however, was United’s refusal to continue funding her lifetime pension and its decision to thrust its fifteen thousand flight attendants into the uncertain do-it-yourself world of retirement saving.
By Gilinger’s calculations, confirmed by the union, United’s bankruptcy had cost her about 40 percent of her anticipated pension benefits. For years, she had counted on being able to retire at fifty-five, after thirty-plus years of flying. Now she expects to work until sixty-five or beyond.

“The pension was like a final straw that we lost,” she said bitterly.

After the United bankruptcy, what troubled her most was
the uncertainty of having to manage her own finances for retirement—“not knowing if I’ll be able to make the right decisions.” Her sense of security was shattered not only by the United bankruptcy, but by her husband’s loss of his job in early 2009, after thirty years of work with one employer. He eventually got rehired, but that layoff left sickening doubts, not just about how to pay for her daughter’s college tuition, but about surviving financially over the long term.

“
I feel very uneasy about where I’m going to be in 20 years,” Gilinger told me. “And I’m afraid that I’m going to end up having to work my golden years….”

That prospect was already reality for Pat O’Neill. Financially crippled by the United bankruptcy, O’Neill had to scramble to find a new job instead of being able to stop work and kick back after
thirty-five years. O’Neill was supporting himself and his wife, paying college tuition for his daughter, and handling mortgage payments on a $141,000 farm north of Seattle. He needed another job.

For three years, O’Neill drove a sixteen-wheeler rig, hauling cargoes out of Port Seattle to Oregon, Utah, Idaho, and Montana. He was on the road six or seven days a week, for a slim weekly paycheck of $400. That plugged part of the hole left by his reduced pension, but it didn’t rebuild his lost retirement nest egg. Plus, being away from home for weeks at a time took a toll. “
You’d do six hundred miles a day in a heartbeat—that’s eleven hours of driving,” O’Neill said. “I couldn’t take being away from my wife all the time.”

After three years, O’Neill quit trucking and moved with his wife to rural eastern Washington State, where the cost of living was lower but where work was tough to find. “I put in forty applications,” he said. “Couldn’t find a job to save my soul.” Finally, he went into business for himself, mowing lawns for a new subdivision. The pay was poor, but it kept him afloat until a relative of the subdivision owner bumped him out of the job.

Still needing income, O’Neill took a wild plunge. Even though he was unknown locally and was a Democrat in solidly Republican Whitman County, he decided to run for county commissioner. To everyone’s surprise, he upset the incumbent Republican. He did it the old-fashioned way, by knocking on hundreds of doors and winning people over with his gregarious Irish charm. The job pays him $4,847 a month for a four-year term, and even though he puts in sixty-hour weeks, he’s thinking about running for reelection and serving into his seventies.

“That is the only thing that saves my bacon,” O’Neill chirped. But it’s still not enough to rebuild his retirement nest savings. For extra cash, he works part-time on weekends for a local company, setting up events and conferences.

“I’m still struggling, just trying to keep my head above water,” he confessed. “That’s all I know—is work. But I’m gettin’ tired, gettin’ older. My body doesn’t jump back the way it used to.
Twenty-two years on [the] graveyard shift is taking its toll.”

WHEN THE 401(K) WAS BORN
, no one dreamed—or intended—that it would become the mainstay of the retirement
system for the American middle class. It was enacted as an executive perk.

In the pivotal Congress of 1978, as we have seen, the 401(k) was inserted into the tax code,
like many arcane technical provisions, as a favor to two major corporations by Representative Barber Conable, a Republican from upstate New York. Conable’s district included the corporate headquarters of Kodak and Xerox, and the two companies had lobbied Conable to get them a legal tax shelter for deferred compensation for their top executives. The executives already had regular company pensions. The new wrinkle was to help executives who set aside a portion of their annual profit-sharing bonuses by giving them a long-term tax shelter. The goal was to cut the tax bite on executive pay.

As the ranking Republican on the tax-writing House Ways and Means Committee, Conable was perfectly positioned to tuck the 401(k) provision into a major tax bill as a tiny subparagraph.
It was a classic Washington move. Almost no one else in Congress or the Carter White House even noticed.

Three years later, the Reagan administration’s Treasury Department opened the floodgates by transforming the 401(k) into something radically different. Lobbied by corporate tax and pay consultants, the Reagan Treasury in 1981 adopted an aggressive interpretation of the tax code. It ruled that the ordinary income of rank-and-file employees could qualify for the 401(k) tax shelter along with the executive elite.

Things did not change overnight. Most companies moved gingerly in the early 1980s. Many were not sure they wanted to give this savings option to their rank-and-file employees. Their banks, which were making good money by managing traditional corporate pension plans, did not want to lose that lucrative pension business. What turned the pension game upside down, starting in the mid-1980s, was the discovery by the mutual fund industry that 401(k) plans represented an opportunity to capture an enormous windfall of new business if they could get 401(k) plans under their management.

“
The technology and methodology of mutual funds were a big advantage,” recalled Bob Reynolds, an early apostle of 401(k)’s as vice president of the Fidelity Investments mutual fund group. “The structure was perfect for the mutual fund industry—participant-directed, daily valuations, educating people on investing.”

With aggressive marketing, the mutual fund industry drove a boom in 401(k)’s in the 1980s. Mutual funds weaned Corporate America away from lifetime pensions by pointing out the savings to business of switching to mostly employee-financed retirement. For employees the siren lure was, “Be your own money manager.” Millions of Americans, imagining that they could all beat the market averages, took the bait. “
It had a lot of sex appeal. And it was power to the people …,” recalled Brooks Hamilton, a veteran pension consultant. “That’s the way it was sold.”

Riding the tide of financial populism,
401(k) plans grew from 7 million people with $92 billion in assets in 1984, to 25 million participants with $675 billion in 1994, to more than 44 million people with nearly $2.2 trillion in assets in 2004. No longer was the 401(k) the executive elite’s supplemental savings plan. It had become one of the two principal pillars of American retirement, along with Social Security.

This was a monumental transformation for the American middle class. “When the 401(k)’s came in,
there was a sea change, a huge shift in who was paying for retirement,” observed Brooks Hamilton. “In the old system, employers put up most of the money—89 percent. The employees contributed 11 percent. Those figures are from the Department of Labor. Fast-forward to the 401(k) system and today, employees are paying more than half—51 percent—and the companies, 49 percent. So there was a huge shift in costs from employers to employees—hundreds of billions of dollars.”

With up to 65 million average Americans now heavily dependent on 401(k) plans, the key question is, How well has the 401(k) done for middle-class families?

For an on-the-ground look, I visited National Semiconductor, one of America’s leading-edge computer chip companies and one of the first to adopt the 401(k) as its retirement plan. National Semiconductor prided itself on being an industry leader in employee benefits. It aggressively promoted its 401(k) plan to employees.

At the company’s chip fabrication plant in Arlington, Texas, managers boasted of their unusually high participation rate—90 percent.
Their secret was a higher-than-normal match—$1.50 from the company for each employee dollar—6 percent of pay for every 4 percent put in by individual employees. “What we found is that if we could provide an additional 50 cents on every dollar to the employees … we could raise our participation rates,” reported Brian Conner, National’s benefits manager. “We could actually get them to be responsible for their retirement.” And once employees were enrolled, the company’s responsibility ended. It was the employees’ job “to manage their dollars.”

That last point was crucial. Some people are good at it. Some are terrible.

The 401(k) was made for Gil Thibeau, who, like high-level executives, made enough money to save easily and who had a knack for investing. A tall, quiet-spoken New Englander who had moved to Texas, Thibeau was trained as an industrial engineer, plus he had an M.B.A. in business administration. For National Semiconductor, he was a technical troubleshooter for big corporate clients.

Thibeau’s job paid well—$90,000 to $100,000 a year. Not only did he religiously pump 6 percent of his salary into the 401(k) plan, but he put another 5 to 10 percent into National’s employee stock option program. Thibeau loved researching stocks on the Internet. His picks were good and his timing was lucky. He bought National stock when it slumped to a low of $8 a share and saw it climb to $30 plus. In fourteen years with National, Thibeau built up a solid retirement nest egg. By the time National laid him off in 2001, his retirement funds were a bit under “half a million,” he said half apologetically. “
If I had started earlier, I would have set my target at a million. But I waited too long….”