How Bedrock Promises of Security Have Fractured Across America

For more than two decades, Lowell Seibert made a living driving piles and erecting machinery across the industrial Midwest.

But with mortgage payments, college tuitions and the prospect of retirement looming, Seibert traded in his outdoor job 14 years ago and went to work for the Packard Electric division of auto parts giant Delphi Corp. He was offered $19 an hour (now $30), good benefits and, perhaps most important, the promise of a solid pension and old-age health insurance.

“Heavy construction is a rush,” he said of his old position, “but Packard was a sure thing.”

Or so it seemed until Oct. 8.

That’s when Delphi Chief Executive Robert S. “Steve” Miller, citing global competition and crippling “legacy costs,” ushered the $28.6 billion-a-year company into one of the largest industrial bankruptcies in U.S. history. In short order, Miller called for slashing workers’ compensation by almost two-thirds, threatened to void the company’s union contracts, and hinted broadly that he would follow the playbook he had used elsewhere of pushing responsibility for paying the firm’s pensions to the federal government and dumping its retiree health benefits altogether.

Although Delphi has since backed off a bit -- it says it’s willing to negotiate with its unions and its former parent and largest customer, General Motors Corp. -- the parts firm has left little doubt that its ultimate aim remains steep reductions in wages, benefits and retiree costs.

Delphi is at the cutting edge of a crisis that’s engulfing the U.S. auto industry, much as it did steel and airlines. Its actions are adding to a gathering trend, a shift of economic risks once largely borne by business and government to the backs of working families.

Before the trouble is over, some believe, a corporate icon such as Ford Motor Co. or GM could be swept from the American landscape. So too could much of what remains of the already frayed relationship between millions of working people and their employers.

“When the history of this period is written, Delphi will be viewed as the tipping point where the auto industry either got its act together or failed,” said David E. Cole, the son of a former GM president and head of the Center for Automotive Research, based in Ann Arbor, Mich. “The spillover to the rest of the economy is going to be tremendous.”

For Seibert, 56, the spillover was immediate. That’s because in addition to his pension, he had been socking away money in a company-administered savings account similar to a 401(k). Unfortunately, he had directed almost all of its $84,000 balance into Delphi stock. When the company declared bankruptcy, its shares plunged from a 12-month high of $9 to 33 cents, all but wiping out his account.

The result: “I’m not going to be retiring anytime soon.”

Guaranteed benefits

Pensions such as those still offered by Delphi are designed to provide their recipients with a guaranteed income in old age almost no matter what.

Because employers promise to make fixed payments to retirees, they are known as “defined benefit” plans. Because the payments for current workers are so far in the future, grow with employees’ tenure and must continue until retirees die, employers are expected to save and invest funds to ensure they can meet their obligations. But whether or not they do, the responsibility for paying, and the risk of investing, are entirely the employer’s, not the employee’s.

Should an employer fail to make good on its promise, the government steps in. After a series of spectacular corporate failures in the 1960s and early ‘70s, the White House and Congress created the Pension Benefit Guaranty Corp. to collect premiums from companies and act as a pension insurer.

The combination of a company-provided, government-guaranteed pension and Washington’s two big defined benefit programs, Social Security and Medicare, makes for a powerful bulwark against destitution in old age.

By contrast, 401(k)s involve no similar promise of income, as Seibert painfully discovered. Instead, what these accounts offer is a tax break in return for saving out of pay. Employers may contribute, which is why 401(k)s are called “defined contribution” plans. But that’s the limit of their obligation. The risks and responsibilities are all on the employee.

Risk or not, however, 401(k)s and similar accounts are sweeping the field. Since 1980, the fraction of the full-time private sector workforce covered by pensions has fallen from 35% to under 20%, according to the Employee Benefit Research Institute, which is sponsored by big business.

One in every six to 10 companies that still offer pensions have frozen their plans by limiting or eliminating employees’ right to accrue additional benefits or no longer covering new hires, according to studies by the Pension Benefit Guaranty Corp. and Chicago-based Aon Consulting. Among those that will freeze at the beginning of 2006 is Tribune Corp., which owns the Los Angeles Times.

The trends for 401(k)s and similar accounts are the mirror opposite. In a nutshell, America is quickly converting from a defined benefit society to a defined contribution one.

Explanations for why such a deep-running change is occurring vary widely. In Delphi’s case, Miller has said the answer is simple: The firm’s competitors don’t provide generous pensions or retiree health benefits, so it can’t either. But many business and political leaders trace the move from defined benefit to defined contribution to fundamental shifts in the economy and work.

“The nation used to have big units of production like the car companies that needed very predictable workforces,” said Alicia H. Munnell, a retirement expert at Boston College and former Clinton administration economist. “Pensions helped firms to retain people by raising employees’ benefits the longer they stayed, and to signal them when it was time to go.

“But the economy is much more competitive today,” Munnell said. “For companies, that means fewer long-term promises like pensions. For workers, it means having to be agile, entrepreneurial. They have to be ready to switch jobs and employers at the drop of a hat and manage their retirement money all on their own.”

Amid all of the switching and decision-making, many Americans wonder whether they will be able to lead tolerably stable lives while they work and financially secure ones when they retire. That’s a special concern for Lowell Seibert, who in some sense has operated on both sides of the dividing line and has experienced some of the drawbacks of the coming economy.

Planning retirement

Seibert is the son of a unionized millwright, a job that involves setting up industrial equipment. After finishing high school in the late 1960s, he followed his father into Carpenters and Millwrights Local 171 in Youngstown, Ohio, and into the itinerant life of heavy construction.

Roaming from western Pennsylvania across Ohio to eastern Indiana, he hired on to help build steel mills, power generators, assembly plants, even college campuses. He never stayed in one place more than a year. At least at first, that suited him fine because it meant new people and new problems to solve with each new job.

In 1971, he married hospital nurse Christine Ferranti, and six years later, the couple had the first of their two daughters. He began devoting nights and weekends to building the family a new house. The project provided him the first of several glimpses into how easily his family’s fate could slip beyond his control.

He purchased a lot and began work on the house in the mid-1970s, but he ran out of money after installing the driveway and basement. When he got back to the project in 1980, he had to take out an $85,000 “wrap-around” loan that included the new house and the couple’s existing home. With inflation driving mortgages through the ceiling, he found himself saddled with a double-digit interest rate. Shortly after finishing the two-story Dutch Colonial in late 1981, the steel industry crashed, the Midwest skidded into recession and the Seiberts couldn’t find a buyer for their old place.

Then just after the birth of his second daughter, he was thrown out of work for a year.

“We had enough to make one more house payment, then the bank was going to take both places,” he said.

The family survived the close call and, with steel and the region staging a short-lived comeback, mended its finances -- only to face another round of reversals.

In 1991, Seibert landed a general foreman’s job installing a continuous caster at WCI Steel Inc. in Warren. The machine, 10 stories high and about 500 feet long, is fed liquid steel from a giant ladle and casts the steel into huge flat slabs. Even today, he talks with pride about orchestrating the assembly of the device to within a few thousandths of an inch, or about the thickness of a fingernail, so that it operated smoothly on its maiden run.

But in the midst of the project, he fell 30 feet from scaffolding, and was stopped from falling much farther only by landing belly-first on a cross bar. A few months later, his father died at age 68 from what the son describes as the wear and tear of a life in construction. By the end of the year, Seibert was at Delphi.

At first, working indoors with the same people on pretty much the same problems did not sit well with him. “I was going to quit,” he said. “I’d been there 13 months, and I realized I’d never held a job that long.”

But gradually, he discovered the appeal of steady employment. He got home every night for dinner and was able to coach his daughters’ softball team. He managed to pay for college educations for both of his children without a serious cash crunch.

And he devised what he thought was a foolproof financial plan for the couple’s old age -- earning his current monthly income by drawing the equivalent of one week’s pay from each of his Millwright’s union pension, his Delphi pension, his Delphi stock and some outside savings.

The goal was to retire at 62, he said. “I thought we were pretty much set.”

The 1984 deal

The switch from traditional pensions to 401(k)s is the most clear-cut example of the risk shift underway in America from business and government to working families. But it hardly is the only one.

Across the country, safety nets that working people once depended on to shield them from economic dislocation -- for example, unemployment compensation, disability insurance, job training and healthcare coverage -- have been scaled back or eliminated. At Delphi, the battle lines have formed not just over retirement, but also wages, benefits, job security, indeed the company’s very survival.

For Delphi executives, the fundamental issue is how to fix two flaws at the heart of the firm. Spun off from GM in 1999, Delphi is saddled with what Miller describes as the high compensation of its former parent in what has quickly converted into a low-compensation, and largely offshore, auto parts business. In addition, though technically separate, the company still depends on GM for about half its revenue at a time when the auto giant is losing market share and hemorrhaging money.

Despite the dimensions of GM’s problems, GM executives have thus far taken comparatively incremental steps, winning some healthcare concessions from its unions, closing a few plants and reducing white-collar staff. By contrast, Miller has launched what appeared -- at least until recently -- to be a full frontal attack.

Since arriving at Delphi in July, the former Chrysler executive, who has led other troubled companies such as Federal-Mogul and Bethlehem Steel into bankruptcy, has made a series of incendiary remarks seemingly calculated to push the company’s unions to within a hair’s breadth of a strike.

“Paying $65 an hour for someone mowing the lawn at one of our plants is just not going to cut it in industrial America,” he said at one news conference, a reference to the average combined wages, benefits and pensions of an hourly Delphi worker. Miller refused through a company spokesman to be interviewed for this article.

For the Packard Electric workers, what’s at stake is a 20-year-old deal that they say guaranteed them lifetime employment in return for concessions that enabled the company to take on low-wage foreign competitors.

“They made the commitment no one would lose their job due to a business decision, and we cooperated on all sorts of changes to make them more competitive,” said Harold E. Nichols, the chief union bargainer behind the 1984 deal. Among the changes: instituting a two- and later three-tier wage structure and agreeing to let work once performed in Warren be moved to Mexico and elsewhere.

Nichols is with the International Union of Electronic Workers-Communications Workers of America, which represents the Packard workers. Many of Delphi’s 34,000 U.S. employees are represented by the United Auto Workers. The two unions’ agreements with the company differ somewhat.

Packard workers are not alone in viewing the 1984 deal as crucial. Company executives, too, have said it represented a sharp break with the confrontational labor-management relations of the past and have sought to maintain key provisions of the bargain in all subsequent union contracts.

“This agreement really makes the union a part of management,” Packard chief negotiator Larry L. Haid said at the time of the deal.

Indeed, what most galls Packard workers about the current situation is not just that cutbacks are coming; virtually everyone interviewed earlier this month seemed to accept them as inevitable. It’s that after so many years of buying into the ideas of cooperation and teamwork at the heart of the 1984 deal, Miller would haul out the old stereotype of union members as overpaid, under-worked and sliding toward early retirement and wield it as a club.

“Miller makes it sound like everybody around here is getting paid $65 an hour, which nobody is,” said Christine Grzelewski, a 37-year-old Delphi worker and mother of two who earns $26 an hour. “We kept our end of the bargain,” she said. “Now, he’s trying to throw it out.”

Grzelewski and her husband Eric, 39, also a Delphi employee, have lived almost their entire work lives under the 1984 deal, carefully plotting their futures around its terms. With the rules about to change on them, the couple fear they are overextended and are scrambling to protect what they can.

Christine was hired in 1988 under a provision of the deal that allowed the company to start new workers at 55% of regular wages or, in her case, $7.59 an hour. It took her 10 years to reach full pay and benefits. Eric was hired under an even more stringent provision that prevented him from getting any raise for several years.

When their son was born, the couple started working alternate shifts so one could always be home with the boy and the family could save on child care. They waited until their daughter was born and both parents were close to reaching full pay before taking out a $137,000 mortgage for a split-level ranch house in a prosperous community near Warren and buying the Silverado pickup truck that Eric had always wanted.

Since Delphi’s bankruptcy filing, the couple has turned down the thermostat, reduced the weekly contributions to their Christmas Club, and looked into how much they can save by canceling their cable service and cellphones. Eric may go for a commercial trucker’s license so he has something to fall back on in case of layoffs.

“The hardest part of all this is there was no warning,” he said recently. “If we could have had a couple years’ warning, we could adjust our lifestyle.

“But we’ve become dependent on our salaries.”

Government obligations

For older workers like Seibert, a couple years’ warning would not have done much good. That’s because with so much of their work lives behind them, they have less time left to adjust. And the problem is compounded for those like Robert Montgomery, 67, who retired from Delphi in April 2004 after 31 years.

These people have to hope that, bankruptcy or not, the company will make good on its pension and retiree health promises or, if it doesn’t, that Washington will step in to cover at least the pensions. (There is no government insurance program for retiree health benefits.)

Until the last few years, they could have rested easy that the Pension Benefit Guaranty Corp. would ensure that they got paid. But that was before many of the nation’s steel companies and some of its biggest airlines declared bankruptcy and dumped their pension obligations on the government. Among them: Miller-managed Bethlehem Steel, whose retirement promises will cost the pension agency $3.7 billion.

Suddenly, the Pension Benefit Guaranty Corp.’s $9.7-billion surplus in 2000 became a $22.8-billion deficit, and some analysts suggest that this was just the beginning of the trouble.

Seizing on the agency’s estimate of a $450-billion mismatch between the assets and liabilities of all of the nation’s private pension plans, these analysts say that a financial crisis of the magnitude of the savings-and-loan fiasco of the 1980s is in the offing. Others say that a second, similar-sized crisis is on the way for state and local government pensions, which the Pension Benefit Guaranty Corp. does not insure, but which carry a kind of implicit public guarantee.

Coming atop President Bush’s concerns about the solvency of Social Security, the new warnings seem to suggest that America has over-promised; that even if current and near retirees like Montgomery and Seibert get their pensions, younger workers won’t get -- or even be offered -- anything similar; that the era of defined benefit protection is coming to a crashing close.

So what sort of shape is the Pension Benefit Guaranty Corp. really in?

Asked last week, Executive Director Bradley D. Belt said, “Clearly, the agency is facing the largest set of challenges in its 31-year history.” But Belt said that some of the most negative assessments were overstated.

The $450-billion figure, for example, represents what the agency -- or the taxpayers -- would have to pick up if every private pension plan in the nation failed simultaneously. “It’s a Chicken Little number,” said Mark Ugoretz, president of a Washington-based group that lobbies on benefit issues for the nation’s top 200 corporations.

The Pension Benefit Guaranty Corp. estimates that its exposure to troubled companies, which are the most likely to dump their retirement obligations, is closer to $108 billion than $450 billion. And if the agency’s recent history is any guide, about one-third of that amount, or $35 billion, will end up on its books -- a substantial amount, but manageable.

The big problem is that almost no one in Washington can agree on precisely how to manage it.

The House and Senate have each approved bills that would require companies to contribute more to their pension plans and raise premiums for Pension Benefit Guaranty Corp. insurance. But the two bodies have yet to agree on how to reconcile the measures.

The administration has advanced its own overhaul proposal. The president recently promoted it as requiring firms to contribute more than the congressional plans and on a tighter schedule. But critics warn the requirements are so stringent they would have the effect of driving more companies out of defined benefits, and may even have been designed to do so.

“The administration would like to have employers get out of defined benefit plans and put people into individual accounts,” said Alan Reuther, the nephew of labor legend Walter Reuther and the UAW’s legislative director.

“The president tried to push [individual] accounts with his Social Security privatization. He tried to push them with his health savings accounts, and now he’s trying to push them with pensions,” Reuther said.

Administration officials deny they intend to uproot traditional pensions.

Even if Washington resolved the traditional system’s immediate financial problems, there remains the question: In the new global economy, can companies -- or the government -- afford to promise the kind of long-term protection that pensions provide?

To all appearances, Delphi’s Miller thinks the answer is “No,” and Lowell Seibert isn’t waiting to find out for sure.

He has put away the golf clubs he bought recently. He and his wife have put off plans to replace the family room furniture. And he has given up ordering an extra-wide Lay-Z-Boy recliner so his 28-month-old grandson Anthony can sit beside him when he reads bedtime stories.

The way Seibert now figures it, Anthony will be closing in on his teenage years by the time he can afford to retire.