Manufacturers are Bringing Jobs Back to the U.S. But are Paying Workers Much Less and are Stripping Them of Pensions; Wages at General Electric are Down 37% with No Pension Plan (Wages for Federal Workers are Up Almost 40% Since 2001 with Three-Tiered Retirement Plans Including Pensions)
How Business Elites Looted Private-Sector Pensions
But as former Wall Street Journal reporter Ellen Schultz details below, the erosion of private-sector pensions didn’t “just happen.” It is the result of a deliberate transfer of wealth from workers to corporate executives and shareholders – a “pension heist,” to borrow the title of Schultz’s new book. The excerpt below summarizes her conclusions and details the recent case of General Electric; the book is filled with detailed accounts of similar maneuvers by other corporations.
The same corporate interests that attacked private-sector pensions yesterday are leading the charge to slash public-sector pensions today. For example, General Electric’s GE Asset Management is part of the Partnership for New York City, a corporate lobbying group that is one of the loudest voices calling for cuts in the pensions of public workers (see Clarion, April 2011).
Meanwhile, GE’s top executives have seen their pensions grow richer than ever.
March 2012
PSC-CUNY - In December 2010, General Electric held its Annual Outlook Investor Meeting at Rockefeller Center in New York City. At the meeting, chief executive Jeffrey Immelt stood on the Saturday Night Live stage and gave the gathered analysts and shareholders a rundown on the global conglomerate’s health. But in contrast to the iconic comedy show that is filmed at Rock Center each week, Immelt’s tone was solemn. Like many other CEOs at large companies, Immelt pointed out that his firm’s pension plan was an ongoing problem. The “pension has been a drag for a decade,” he said, and it would cause the company to lose 13 cents per share the next year. Regretfully, to rein in costs, GE was going to close the pension plan to new employees.
The audience had every reason to believe him. An escalating chorus of bloggers, pundits, talk show hosts, and media stories bemoan the burgeoning pension-and-retirement crisis in America, and GE was just the latest of hundreds of companies, from IBM to Verizon, that have slashed pensions and medical benefits for millions of retirees. To justify these cuts, companies complain they’re victims of a “perfect storm” of uncontrollable economic forces – an aging workforce, entitled retirees, a stock market debacle, and an outmoded pension system that cripples their chances of competing against pensionless competitors and companies overseas.
What Immelt didn’t mention was that, far from being a burden, GE’s pension and retiree plans had contributed billions of dollars to the company’s bottom line over the past decade and a half, and were responsible for a chunk of the earnings that the executives had taken credit for. Nor were these retirement programs – even with GE’s 230,000 retirees – bleeding the company of cash. In fact, GE hadn’t contributed a cent to the workers’ pension plans since 1987 but still had enough money to cover all the current and future retirees.
And yet, despite all this, Immelt’s assessment wasn’t entirely inaccurate. The company did indeed have another pension plan that really was a burden: the one for GE executives. And unlike the pension plans for a quarter of a million workers and retirees, the executive pensions, with a $4.4 billion obligation, have always been a drag on earnings and have always drained cash from company coffers: more than $573 million over the past three years alone.
So a question remains: With its fully funded pension plan, why was GE closing its pensions?
A look at what really happened to GE’s pensions illustrates some of the reasons behind the steady erosion of retirement benefits for millions of Americans at thousands of companies.
RETIREE PENSIONS UNFAIRLY BLAMED
No one disputes that there’s a retirement crisis, but the crisis was no demographic accident. It was manufactured by an alliance of two groups: top executives and their facilitators in the retirement industry – benefits consultants, insurance companies, and banks – all of whom played a huge and hidden role in the death spiral of American pensions and benefits.
Yet, unlike the banking industry, which was rightly blamed for the subprime mortgage crisis, the masterminds responsible for the retirement crisis have walked away blame-free. And, unlike the pension raiders of the 1980s, who killed pensions to extract the surplus assets, they face no censure. If anything they are viewed as beleaguered captains valiantly trying to keep their overloaded ships from being sunk in a perfect storm. In reality, they’re the silent pirates who looted the ships and left them to sink, along with the retirees, as they sailed away safely in their lifeboats.
The roots of this crisis took hold two decades ago, when corporate pension plans, by and large, were well funded, thanks in large part to rules enacted in the 1970s that required employers to fund the plans adequately and laws adopted in the 1980s that made it tougher for companies to raid the plans or use the assets for their own benefit. Thanks to these rules, and to the long-running bull market that pumped up assets, by the end of the 1990s pension plans at many large companies had such massive surpluses that the companies could have fully paid their current and future retirees’ pensions, even if all of them lived to be 99 and the companies never contributed another dime.
But despite the rules protecting pension funds, US companies siphoned billions of dollars in assets from their pension plans. Many, like Verizon, used the assets to finance downsizings, offering departing employees additional pension payouts in lieu of cash severance. Others, like GE, sold pension surpluses in restructuring deals, indirectly converting pension assets into cash.
To replenish the surplus assets in their pension piggy banks, companies cut benefits. Initially, employees didn’t question why companies with multibillion-dollar pension surpluses were cutting pensions that weren’t costing them anything, because no one noticed their pensions were being cut. Employers used actuarial sleight of hand to disguise the cuts, typically by changing the traditional pensions to seemingly simple “cash balance” pension plans, which superficially resembled 401(k)s.
Cutting benefits provided a secondary windfall: It boosted earnings, thanks to new accounting rules that required employers to put their pension obligations on their books. Cutting pensions reduced the obligations, which generated gains that are added to income. These accounting rules are the Rosetta Stone that explains why companies with massively overfunded pension plans went on a pension-cutting spree and began slashing retiree health benefits even when their costs were falling. By giving companies an incentive to reduce the liability on their books, the accounting rules turned retiree benefits plans into cookie jars of potential earnings enhancements and provided employers with the means to convert the trillion dollars in pensions and retiree benefits into an immediate, dollar-for-dollar benefit for the company.
EXEC PAY THRIVES
With perfectly legal loopholes that enabled companies to tap pension plans like piggy banks, and accounting rules that rewarded employers for cutting benefits, retiree benefits plans soon morphed into profit centers, and populations of retirees essentially became portfolios of assets and debts, which passed from company to company in swirls of mergers, spin-offs and acquisitions. And with each of these restructuring deals, the subsequent owner aimed to squeeze a profit from the portfolio, always at the expense of the retirees.
The flexibility in the accounting rules, which gave employers enormous latitude to raise or lower their obligations by billions of dollars, also turned retiree plans into handy earnings-management tools.
Unfortunately for employees and retirees, these newfound tricks coincided with the trend of tying executive pay to performance. Thus, deliberately or not, the executives who green-lighted massive retiree cuts were indirectly boosting their own pay.
As their pay grew, managers and officers began diverting growing amounts into deferred-compensation plans, which are unfunded and therefore create a liability. Meanwhile, their supplemental executive pensions, which are based on pay, ballooned along with their compensation. Today, it’s common for a large company to owe its executives several billion dollars in pensions and deferred compensation.
These growing “executive legacy liabilities” are included in the pension obligations employers report to shareholders, and account for many of the “growing pension costs” companies are complaining about. Unlike regular pensions, the growing executive liabilities are largely hidden, buried within the figures for regular pensions. So even as employers bemoaned their pension burdens, the executive pensions and deferred comp were becoming in some companies a bigger drag on profits.
WORKERS CONTINUE TO LOSE
With the help of well-connected Washington lobbyists and leading law firms, over the past two decades employers have steadily used legislation and the courts to undermine protections under federal law, making it almost impossible for employees and retirees to challenge their employers’ maneuvers. With no punitive damages under pension law, employers face little risk when they unilaterally slash benefits, even when promised in writing, since they can pay their lawyers with pension assets and drag out the cases until the retirees give up or die.
As employers curtail traditional pensions, employees are increasingly relying on 401(k) plans, which have already proven to be a failure. Employees save too little, too late, spend the money before retiring, and can see their savings erased when the market nosedives.
Today, pension plans are collectively underfunded, hundreds are frozen, and retiree health benefits are an endangered species. And as executive pay and executive pensions spiral, these executive liabilities are slowly replacing pension obligations on many corporate balance sheets.
Meanwhile, the same crowd that created this mess – employers, consultants, and financial firms – are now the primary architects of the “reforms” that will supposedly clean it up. Under the guise of improving retirement security, their “solutions” will enable employers to continue to manipulate retirement plans to generate profit and enrich executives at the expense of employees and retirees. Shareholders pay a price, too.
Their tactics haven’t served as case studies at Harvard Business School, and aren’t mentioned in the copious surveys and studies consultants produce for a gullible public. But the masterminds of this heist should take a bow: They managed to take hundreds of billions of dollars in retirement benefits that were intended for millions of workers and divert them to corporate coffers, shareholders, and their own pockets. And they’re still at it.
A former investigative reporter for The Wall Street Journal, Ellen Schultz covered the so-called retirement crisis for the Journal for more than a decade. Adapted from Retirement Heist by Ellen Schultz, by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © Ellen Schultz 2011.
GE, a pioneer of outsourcing, is bringing American manufacturing back to life (excerpt)
Quartz - ...GE’s current CEO, Jeffrey Immelt, tried to sell the entire appliance business, including Appliance Park, in 2008, but as the economy nosed over, no one would take it. In 2011, the number of time-card employees—the people who make the appliances—bottomed out at 1,863. By then, Appliance Park had been in decline for twice as long as it had been rising.
Yet this year, something curious and hopeful has begun to happen, something that cannot be explained merely by the ebbing of the Great Recession, and with it the cyclical return of recently laid-off workers. On February 10, Appliance Park opened an all-new assembly line in Building 2—largely dormant for 14 years—to make cutting-edge, low-energy water heaters. It was the first new assembly line at Appliance Park in 55 years—and the water heaters it began making had previously been made for GE in a Chinese contract factory.
On March 20, just 39 days later, Appliance Park opened a second new assembly line, this one in Building 5, to make new high-tech French-door refrigerators. The top-end model can sense the size of the container you place beneath its purified-water spigot, and shuts the spigot off automatically when the container is full. These refrigerators are the latest versions of a style that for years has been made in Mexico.
Another assembly line is under construction in Building 3, to make a new stainless-steel dishwasher starting in early 2013. Building 1 is getting an assembly line to make the trendy front-loading washers and matching dryers Americans are enamored of; GE has never before made those in the United States.
What has happened? Just five years ago, not to mention 10 or 20 years ago, the unchallenged logic of the global economy was that you couldn’t manufacture much besides a fast-food hamburger in the United States. Now the CEO of America’s leading industrial manufacturing company says it’s not Appliance Park that’s obsolete—it’s offshoring that is.
[...]
But beginning in the late 1990s, something happened that seemed to short-circuit that cycle. Low-wage Chinese workers had by then flooded the global marketplace. (Even as recently as 2000, a typical Chinese factory worker made 52 cents an hour. You could hire 20 or 30 workers overseas for what one cost in Appliance Park.) And advances in communications and information technology, along with continuing trade liberalization, convinced many companies that they could skip to the last part of Vernon’s cycle immediately: globalized production, it appeared, had become “seamless.” There was no reason design and marketing could not take place in one country while production, from the start, happened half a world away.
You can see this shift in America’s jobs data. Manufacturing jobs peaked in 1979 at 19.6 million. They drifted down slowly for the next 20 years—over that span, the impact of offshoring and the steady adoption of labor-saving technologies was nearly offset by rising demand and the continual introduction of new goods made in America. But since 2000, these jobs have fallen precipitously. The country lost factory jobs seven times faster between 2000 and 2010 than it did between 1980 and 2000.
Only 500,000 factory jobs were created between their low, in January 2010, and September 2012—a tiny fraction of the almost 6 million that were lost in the aughts.
[...]
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
[...]
Harry Moser, an MIT-trained engineer, spent decades running a business that made machine tools. After retiring, he started an organization called the Reshoring Initiative in 2010, to help companies assess where to make their products. “The way we see it,” says Moser, “about 60 percent of the companies that offshored manufacturing didn’t really do the math. They looked only at the labor rate—they didn’t look at the hidden costs.” Moser believes that about a quarter of what’s made outside the U.S. could be more profitably made at home.
Thomas Mayor, a senior adviser with Booz & Company who specializes in manufacturing strategy, says that in industry after industry, he is seeing the same kind of reassessment GE has made. When asked about the value of the original rush offshore, Mayor laughs.
“Twelve years ago, I saw a lot of boards of directors and senior executives saying, ‘Three years from now, I’m going to be sourcing $4 billion in product from China. Go figure out how to make it happen.’ ” Part of the rationale, from the start, was merely to gain a foothold in the Chinese market. And for many companies, that made sense, at least to some extent. “But if you press them on their savings by sourcing from China for North America, I get stories like ‘Oh, I asked about that six months ago. I had five finance guys working on it, and they couldn’t come up with any savings.’ At the end of the day, they say, ‘If we were doing this for the U.S. market, we should never have gone to China in the first place.’ ”
GE is not alone in moving the manufacture of many of its products back to the U.S.
One key difference between the U.S. economy today and that of 15 or 20 years ago is the labor environment—not just wages in factories, but the degree of flexibility displayed by unions and workers. Many observers would say these changes reflect a loss of power and leverage by workers, and they would be right. But management, more keenly aware of offshoring’s perils, is also trying to create a different (and better) factory environment. Hourly employees increasingly participate in workplace decision making in ways that are more like what you find in white-collar technology companies.
Lean management is not a new concept, but outside of car making, it hasn’t caught on widely in the United States. It requires an open, collegial, and relentlessly self-critical mind-set among workers and bosses alike—a mind-set that is hard to create and sustain.
Outsourcing and the disappearance of U.S. factory jobs were the result of what often seemed like irresistible market forces—but they were also the result of individual decisions, factory by factory, spreadsheet by spreadsheet, company by company.
Appliance Park will end this year with 3,600 hourly employees—1,700 more than last year, an increase of more than 90 percent. The facility hasn’t had this many assembly-line workers in a decade. GE has also hired 500 new designers and engineers since 2009, to support the new manufacturing.
GE’s appliance unit does $5 billion in business—and today, 55 percent of that revenue comes from products made in the United States. By the end of 2014, GE expects 75 percent of the appliance business’s revenue to come from American-made products like dishwashers, water heaters, and refrigerators, and the company expects that its sales numbers will be larger, as the housing market revives.
What’s happening in factories across the U.S. is not simply a reversal of decades of outsourcing. If there was once a rush to push factories of nearly every kind offshore, their return is more careful; many things are never coming back. Levi Strauss used to have more than 60 domestic blue-jeans plants; today it contracts out work to 16 and owns none, and it’s hard to imagine mass-market clothing factories ever coming back in significant numbers—the work is too basic.
Many offshoring decisions were based on a single preoccupation—cheap labor. The labor was so cheap, in fact, that it covered a multitude of sins in other areas. The approach to bringing jobs back has been much more thoughtful. Jobs are coming back not for a single, simple reason, but for many intertwined reasons—which means they won’t slip away again when one element of the business, or the economy, changes.
Even then, changes in the global economy were coming into focus that made this more than just an exercise—changes that have continued to this day.
- Oil prices are three times what they were in 2000, making cargo-ship fuel much more expensive now than it was then.
- The natural-gas boom in the U.S. has dramatically lowered the cost for running something as energy-intensive as a factory here at home. (Natural gas now costs four times as much in Asia as it does in the U.S.)
- In dollars, wages in China are some five times what they were in 2000—and they are expected to keep rising 18 percent a year.
- American unions are changing their priorities. Appliance Park’s union was so fractious in the ’70s and ’80s that the place was known as “Strike City.” That same union agreed to a two-tier wage scale in 2005—and today, 70 percent of the jobs there are on the lower tier, which starts at just over $13.50 an hour, almost $8 less than what the starting wage used to be.
- U.S. labor productivity has continued its long march upward, meaning that labor costs have become a smaller and smaller proportion of the total cost of finished goods. You simply can’t save much money chasing wages anymore.
But a problem soon became apparent. GE hadn’t made a water heater in the United States in decades. In all the recent years the company had been tucking water heaters into American garages and basements, it had lost track of how to actually make them.
Wal-Mart, GE execs say U.S. manufacturing becoming more competitive
August 22, 2013Market Watch - On Thursday, Wal-Mart Stores Inc. WMT +0.11% gathered 1,500 attendees, including 500 manufacturers, both from the U.S. and overseas, along with U.S. Secretary of Commerce Penny Pritzker, Dallas Federal Reserve President Richard Fisher; eight state governors among officials from 32 states for a manufacturing summit. General Electric GE +0.04% CEO Jeff Immelt also spoke and announced it’s making more energy-efficient light bulbs domestically. Televison producer Element said it’s going to make some TVs back in the U.S.
The manufacturing summit came after Wal-Mart said earlier this year it’s committed to buying $50 billion in additional U.S.-made goods the next 10 years. While that amount pales against the company’s global sales of $479.3 billion, it’s expected to gather some steam.
Wal-Mart’s move is not altruistic. Having more jobs in the U.S. would boost the spending level of its customers as they’ve been hurt by the job market and the 2% payroll tax hike. Bill Simon, Walmart U.S. chief, said manufacturing in the U.S. makes total “economic sense.” The company said sales of U.S.-made towels sold 30% more than foreign-made stock when it switched this year.
With wages in China, the world’s biggest manufacturing country, rising about 15% to 20% each year, China’s labor cost advantage is narrowing compared to the U.S., said Hal Sirkin, managing director at Boston Consulting Group. He said when factoring in components, raw materials and other product costs, China only has a 3 percentage point lead when it comes to product costs. Considering the rise in transportation costs, that has made Made in America sexier.
“We are at an inflection point,” he said. “U.S. is competitive with China.”
GE’s Immelt said U.S. on a relative basis “has never been more competitive,” helped by technologies and improved productivity. “High transportation costs mean you want to be closer. It’s not just pure labor arbitrage.” For instance, he said it only takes up to 3 hours to make a refrigerator, which makes the total cost lower to have it made domestically versus China or Mexico.
Wal-Mart CEO Mike Duke also described U.S. manufacturing at “a tipping point,” especially when transportation cost is going to continue to rise.
Luxury retailers including Saks Inc. SKS +0.03% have also talked about stocking more U.S.-made goods.
Related:
Federal Employees Three-Tiered Retirement System
When we talk about your FERS Retirement, we're really talking about several different benefits. FERS (Federal Employees Retirement System) has three main components:
- Basic FERS Pension
- Social Security
- Thrift Savings Plan (TSP)
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