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It is my opinion that the United States must begin to innovate at a greater pace because many of today’s jobs can be shipped to China and India where people will work for just a few dollars a day. This globalization is a job killer for the United States. And it brings to the forefront one of the biggest problems facing U.S. corporations: legacy promises.

A legacy promise is one where the company agrees to pay an employee after they stop working and enter retirement. In 1875, the American Express company pioneered the concept of a defined pension. The invention of the pension was a way to solidify their human capital in terms of recruiting talent and retaining it. Today, pensions are a nightmare for corporations because of their severe impact on the financial statement. Pensions are a massive expense to these corporations that must compete not just with other companies here in the United States, but with companies all around the world.

How does a company burdened with legacy promises continue to compete in this new world? Their competitors are getting talent in other countries for a mere fraction of the costs here, and those competitors are not paying retirees $50,000 a year even though they are no longer producing value for the company.

It’s a situation that is becoming increasingly important for companies to deal with. Competitive forces and greed are pushing them to take bold steps to get rid of their pension plans once and for all.

The Corporate Bankruptcy Loophole

401(k)s Put Pressure on Companies to File

Chapter 11 Bankruptcy

Imagine sitting in a corporate board meeting discussing the high costs of pension plans. Everyone in the room is focused on solving the same problem: How to legally burn the contract binding the corporation to fulfilling these legacy promises. The goal is to reboot the company and wipe the pension expense off the books to dramatically improve the financial situation of the company.

In days gone by, corporate bankruptcy was a process to shut down a company when it became insolvent. The process was like administering last rites before the company was dead and buried. At that point, the remaining assets were taken into possession by the courts, sold off, and whatever funds were generated were used to pay off the creditors.

Today, bankruptcy has undergone drastic changes. It is no longer a death ritual; now it is a rebirth ceremony. Look across the corporate landscape and you’ll see what I mean. General Motors went bankrupt, and now they are back. Delta Airlines and United Airlines also went bankrupt, and yet they are still flying travelers around the world. Over time, the laws changed so that companies facing true bankruptcy could receive a little protection from their creditors while they renegotiated loans to stay afloat. The original intent for this protection was to help these companies restructure themselves and stay afloat. Helping them stay in business was good for the workers and good for the economy. However, as we’ve shown time and again, unintended consequences pop up where we least expect them.

Bankruptcy courts and laws are now used by corporations to accomplish their objectives of profits at any cost. To them, restructuring isn’t about staying in business for a greater cause. The laws now give corporations the ability to break their promises to employees in favor of more profits. Specifically, they are lining up to break the legacy promises they made to support their employees in retirement with pension plans, health insurance, and other forms of support.

Chapter Eleven

This legal but morally questionable tactic by corporations is proving to be effective in breaking unions. As unions work to gain more benefits for their members, bankruptcy court is making those promises meaningless by legally breaking them under the guise of restructuring. These corporations see it as a way to cut costs. For many it is far less expensive to go through bankruptcy than to keep their pension promises.

If you are a major auto manufacturer, what else do you do when you have sold about the same number of cars as Toyota, but you also have to continue to pay out more to the workers who are long gone from your work force? Bankruptcy has been a blessing in disguise for these amoral corporations. Just file chapter 11, burn all your pension promises, and replace them with 401(K)s. Another win for big business and another loss for the worker.

This is another strategy being used to hunt down and kill defined benefit retirement plans that will lead to their permanent extinction. Remember that it has been just over one hundred years since the first pension plans appeared in the late 1800s. Employers used the pensions to attract the best employees to work at their companies. The idea caught on and became widespread by the mid-1950s. Social Security was added in 1934 as another way to supplement the pension plan. Less than a century later, it appears that both of these systems of retirement income are on their way out.