Recently, the U.S. Treasury said that it is perfectly okay for companies to swindle employees out of their pension by offering one-time payments worth less than the pension that those employees are giving up. The Department of Labor, nominally responsible for protecting workers in retirement plans, said nothing. This isn’t the first time the government stood by as American businesses shifted risks onto their employees and retirees. Treasury and Labor, whose decisions shape the retirements of millions of people, have for years been letting companies offer a one-time payment instead of the lifetime pension they committed to.
The scandal is that the one-time payment doesn’t even have to be equal in value to the pension. It can be worth less—in fact, under rules passed by Congress and regulations issued by the Treasury, it usually is.
Lawyers for Treasury and Labor are famous for requiring voluminous disclosure of incomprehensible minutiae, yet neither department has ever required companies to mention their profit-taking at their employees’ expense. Employees, in theory, are free to figure this out on their own, but companies know that most will not.
How did this happen? Traditional employer-backed pensions that paid a lifetime income used to be the main form of retirement plan in the United States. In 1974, Congress enacted the Employee Retirement Income Security Act to preserve and protect these pensions. Responsibility for implementing ERISA was then split between Labor and Treasury. (The Pension Benefit Guarantee Corporation, which I ran from 2010 to 2014, also has some duties.) The departments turned out to be so inflexible that employers decided to abandon traditional pensions. Companies quickly learned that rather than being on the hook financially and legally for paying a lifetime pension, they could switch and offer a 401(k) savings account that pays a lump sum. Having done that, employers also wanted to unload the pension obligations they had already taken on, so Treasury gave them the option of offering employees an up-front payment instead of a lifetime guarantee.