You're Not Set for Life

Every so often, PBS reruns its superb documentary on the history of Bethlehem Steel. One of the most poignant lines comes from the wife of a Bethlehem Steel employee, who said, "Bethlehem Steel was a giant. You knew if you worked for a place like that, you were . . . set for life."

But Bethlehem Steel went bankrupt, and retirees who thought they were "set for life" found themselves out in the cold instead. As Lantz Metz, a historian with the National Canal Museum, pointed out, "The human tragedy [of Bethlehem Steel] is not so much the loss of jobs . . . The human tragedy is the many, many people who were dependent on benefits which they thought were guaranteed."

And it could happen again.

A cautionary tale
Over a century and a half of American history, Bethlehem Steel built the iron bones of our nation. But by the 1990s, Bethlehem's own bones had become frail. Wracked by debt and beset by foreign rivals, Bethlehem struggled to earn the profits needed to pay salaries to 11,500 workers and the pensions for 120,000 retirees and dependents.

In 2001, Bethlehem gave up and filed for bankruptcy. A year later, it transferred its pension obligations to the U.S. Pension Benefit Guaranty Corporation (PBGC).

In one fell swoop, Bethlehem's retirees -- people who had already fulfilled their side of the social contract -- were put at the mercy of the federal bureaucracy. The problem was that mercy isn't bureaucracy's strong suit.

The PBGC reneged on Bethlehem's agreement to let workers retire on full pensions after 30 years. When the PBGC took over, the 30-years-and-out agreement was scrapped, and workers got the standard deal: Retirement at age 62, period. Even if you were only a week away from your 30th anniversary, if you hadn't crossed the finish line, the PBGC erased it under your nose.

Nor were retirees any safer. You see, when pensions are underfunded, the PBGC doesn't always make up the difference. In Bethlehem's case, the PBGC determined that the pension fund needed a cash infusion of $4.3 billion. The PBGC made up much of the difference.

Unfortunately, Bethlehem's employees and retirees had also bargained -- and worked -- for the promise of health-care coverage in retirement. The PBGC calculated the value of that promise at $3.1 billion -- but didn't cover a dime of it.

"It could happen to you"
Heed the prophetic words of Ed McMahon. A recent study conducted by Merrill Lynch listed 40 U.S. companies with significantly underfunded pension obligations. As you might expect, the list includes smokestack industrialists such as Dow (NYSE: DOW  ) , Alcoa (NYSE: AA  ) and U.S. Steel (NYSE: X  ) . As of December 31, 2008, the three firms' unfunded pension liabilities totaled $8.2 billion.

More surprising are the representatives of industries you might not expect to be in this situation: massively profitable biotech shops like Johnson & Johnson (NYSE: JNJ  ) and Pfizer (NYSE: PFE  ) , for example, as well as black-gold rollers-in ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) .

What all these companies have in common is that they date from the era of the old social contract: You give your employer the best years of your life, and in return for your loyalty, and for taking a lower wage than you could have earned elsewhere, your employer will provide you a decent pension in your golden years.

It's time to master your money
Now every story needs a moral, and this one is no exception: The age of the old social contract is kaput.

Whether by design or incompetence, the managements of many of America's greatest companies of yesteryear are today unable to keep their word. As Steve Miller, the man brought in to "save" Bethlehem Steel in 2001, put it: "We do not have the money to make good on all the promises made by this corporation over the last 50 years."

If you're nearing retirement, or if you've already retired and depend on your former employer to keep paying your benefits, it's time to ask yourself how much faith you have in management.

Are you certain that your employer actually has the money to honor its promises? If you're not certain, then you need to do something about that. Because the sad truth is, there's only one person who can make your retirement secure for yourself and your family: You.

But here's the good news: You're not alone. At Motley Fool Rule Your Retirement, our sole goal is to help you be sure that when you're ready to retire, you're able to enjoy it. Take a free trial of the service now -- absolutely free. If you're not 100% thrilled with the service, we'll give you 30 days to cancel with no questions asked, no strings attached. Just click here to get started.

Already subscribe to Rule Your Retirement? Log in at the top of this page.

Fool contributor Rich Smith does not own shares in any of the companies named above. Johnson & Johnson is a Motley Fool Income Investor selection. Pfizer is an Inside Value choice. The Motley Fool's disclosure policy is fully funded.

Read/Post Comments (6) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2009, at 9:40 PM, Dannysea wrote:

    Have always been self-employed, with the highs and lows that ensue. When my wife and I were in our 20's, all our friends and family who were working for the man had a sweet life. Plenty of vacations, holidays paid off, Saturdays a breeze, and plenty of sports and play time and money. Now we are in our 50's and still self employed; life is good, retirement is secure and close, and those working for the man, are wringing their hands.

    Their main asset (their house) and pensions are all questionable, or have already been laid to rest.

    The PBGC is making the hard and correct decisions. The premise of working for a little less so you have retirement bennies is a misnomer, as these same individuals received wages overvalued in their day. No wonder the companies have lost out. So often these wages/bennies make prices so high that it becomes easier and cheaper to reinvent the wheel overseas, or from a new start-up company that has no residual payout.

    Call it a lucky draw of straws, or cynically passive to trust someone else to take care of me, I will keep plugging away at my 6-days a week work schedule; and planning on retiring soon; years prior to SS kicking in...

  • Report this Comment On July 13, 2009, at 9:53 PM, sciencedave wrote:

    That's right. Do not expect unrealistic benefits to continue. How many companies continue to pay out overvalued wages and benefits they cannot afford?...lets see.. the airlines, the military contractors.... the banks, and the auto companies...should I go on.The list is endless. They all expect the PBGC to pay out when they go bust. The PBGC has been too generous as it is...that why so many companies would rather suffer the unsustainable wage and benefit contracts, eventually go bankrupt and then let the PBGC pick up the tab at the governments expense (and ultimately the taxpayer). It is a pension and benefit bubble similar to the housing bubble and the internet bubble.

  • Report this Comment On July 14, 2009, at 12:31 AM, HawkVA wrote:

    If these companies had recognized a more realistic estimate of their promises (including medical) as liabilities in the period promised, they would not be in this mess - and we tax payors would not have yet another burden.

    But, then earnings (and cash flow) would have suffered and management may not have realized as extravagent bonuses.

    Also, it will be interesting to see how states & muni's deal with their pension promises. Is CA going to pay all retirees with IOU's. Working for the gub-ment no longer seems as safe as it used to - about time!!

    Seems that few retirees will be helping retail sales anytime soon.

  • Report this Comment On July 14, 2009, at 10:27 AM, watchdogg wrote:

    Blue collar workers are basically honest people, unionized or not. Unfortunately, corporate America is not. The system allows corporations to violate legal contracts with impunity. If they file for bankruptcy, creditors get paid first; hourly employees are also creditors but they get whatever crumbs may be left. Dedicated employees uphold their end of the deal only to find the companies renege when they are sixty years old. The courts take care of the bankers and the executives, who fly on out of town with their golden parachutes deployed. God forbid they would ever have to sell their personal airplanes! Meanwhile, the machinists who made all those profits for the companies in the 60s, 70s, and 80s can't even afford to get sick. Corporate America is a perverse culture, and it has it's values upside down.

  • Report this Comment On July 15, 2009, at 12:51 AM, thisislabor wrote:

    hey truth isnt stupid.... nm. i am not even going to try with you

  • Report this Comment On July 15, 2009, at 1:06 AM, thisislabor wrote:

    you know I hate to state an obvious but why was it that when unions mostly ruled this country we were primarily a producer and exporter of world goods. and now that we are no longer an union ran country we are not?

    it's sad sorta I use to be in a union and people there have pride in their work. and pride makes you produce so much more, with so much better quality. I now work around people who are working non-union and they are so much more lazy non-self-directing people. not only did the unions build this country, they built world renowned products that the whole rest of the world demanded. if only marketing majors and finance majors and business majors were forced to join unions and adhere to the same quality of working standards our current business atmosphere in the US would be rediculously strong. there would be no recession at least for large cap companies.

    not only am I a day laborer I am also a tax preparer. and I can tell you that if you have never seen the effects of union work versus non-union work... you just don't get it.

    one thing I don't understand about the UAW though, why the would they trust THEIR money to the company to cut them a check. sorry that is not how most unions operate. most of them get their money out of the company upfront today, and run their own union operated pension funds.

    UA Local 469 right here, thankyou very much, I like pipefitting, and I like preparing taxes. I can do both jobs as needed, it is paying for my college education which I am still... slowly... working on.

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