The financial crisis has spawned a library of books seeking to explain its causes, and many others on the related subject of the workings of the financial system. The pile of books by my bed, usually confined to fiction, has expanded to include some of these tomes (although as bedtime reading they are not ideal).
Some were entertaining, some mind-bending, and one or two just shocking. Definitely in the last category is Retirement heist: how companies plunder and profit from the nest eggs of American workers, by Ellen Schultz. The title says it all really: the book explains in detail the practices US companies have used to undermine the pension and health benefits accruing to their employees in order to boost earnings and share prices, and to help fund the growing burden of executive liabilities.
Even when pension plans were mostly well funded back in the 1990s, companies began cutting benefits, Ms Schultz reports. Accounting rules translated these cuts to future pension benefits into immediate profits for shareholders. The cuts were achieved mostly by moving to cash balance pension schemes “which for many older workers was no different from freezing their pensions”. The changes were sold to employees as improvements or modernisations, but communicated to shareholders as cost-saving measures.
The changes often coincided with a jump in executive pay. An academic study quoted by Ms Schultz found average incentive compensation for chief executives jumped to about four times salary in the year of a pension cut, from about three times the year before.
The practice is ongoing: the book opens with a discussion of the move by General Electric a year ago to close its pension plan to new employees to reduce costs. There were significant costs, but they were attached to the executive pension scheme, which with $4.4bn of obligations had drained $573m from company coffers over the previous three years, says Ms Schultz. The scheme covering the workers “had enough money to cover all the current and future retirees”, and GE had not contributed to it since 1987. Moreover, “it had contributed billions of dollars to the company’s bottom line over the past decade and a half”.
This is page-turning stuff but the most striking revelation for me was about companies buying life insurance on their employees. The contracts provide a tax-free payout to the company when the insured employee dies (even if they long since left employment), but the main benefit, according to Ms Schultz, is the tax and accounting treatment of these investment-linked contracts and the returns they generate, which enables them to be used to boost profits and help offset the costs of deferred compensation for executives.
Banks are the biggest buyers of life insurance on workers, she says, and it is estimated that “over the coming decades, banks will receive more than $400bn in death benefits as their retirees and former employees die”.
The life insurance industry in the US does not like to talk about this, Ms Schultz reports, and there are few disclosure requirements for companies or insurers. This is despite life insurance on employees accounting for “an estimated one-third of all sales of cash-value life insurance”.
Overall, the book suggests company executives, aided and abetted by consultants, lawyers and accountants, have transferred wealth from workers to shareholders and their own pockets. Drawing on social security data, Ms Schultz finds that “by 2008, executives were receiving more than one-third of all pay at US companies – more than $2.1tn of the $6.4tn total compensation”.
Perhaps the most interesting aspect of this tale is that Ms Schultz has been telling it for years in the pages of the Wall Street Journal, where she is a reporter. Yet it has occasioned little debate and no obvious reform. Instead there is much wailing about unaffordable pension and health benefits bringing companies to their knees. If Ms Schultz’s analysis is correct, it seems the costs of executive compensation schemes are the more likely culprit.
Equally shocking but similarly little discussed is the effect of tax havens on the global economy, detailed by Nicholas Shaxson in his book Treasure islands: tax havens and the men who stole the world. The book is wide-ranging and deeply depressing, explaining how and why tax havens developed and the uses to which they are put. It notes quite astonishing points, including that “US banks can knowingly receive the proceeds of a wide range of foreign crimes, such as handling stolen property generated offshore”.
These books should be on everyone’s bookshelves. They offer a better understanding than many others of why the rewards from our much-vaunted capitalist system seem to be accruing to fewer and fewer people.