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Treasury and IRS Agree; Pension Freezing is Legal!

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First things first, the Pension Rights Center defines pension freezing as:

“When a company freezes its pension plan, some or all of the employees covered by the plan, stop earning some or all the benefits from the point of the freeze moving forward. Which employees, and which benefits, depends on the details of the specific situation. Companies have great latitude to change their pension plans. However, they cannot take away any benefit that employees have already earned up to the point of the freeze.”

There has been a constant battle over freezing some older workers pension benefits since IBM ran afoul of its senior workers in 1999. That fight may be over as the U.S. Treasury has now issued a ruling that determined that no foul is committed when employers give pension options that delays what is known as “wearaway” (the effects of a freeze), but doesn’t eliminate it.

Like most complex rulings on tax and benefit laws, the jargon and rhetoric could lull an insomniac to sleep. So let’s cut to the quick and shed some light on the subject in the form of plain English language.

The employers (primarily large corporations) want to save money on the pension plans in order to pay higher salaries to the CEO and greater dividends to stockholders. The employee’s on the other hand want to be paid what they thought was promised, and therein lays the problem. The employee’s lost.

Karen Friedman, a policy director at the Pension Rights Center said, "These companies that traditionally did right by workers have given a green light to other companies. This opened the floodgates. It became permissible." Director Friedman has compiled a list of more than 75 companies freezing pensions in the wake of the IBM and Verizon moves.

"Companies are getting out of the pension business. They are backing out of promises to workers," she added.

From the employers standpoint, the original pensions have become too much to bear with people living longer and costs rising. They feel justified in freezing the plans as a matter of fiscal responsibility. 

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The law governing pensions also says that pension benefits for executives cannot be more than four times the wage of an average worker. So then would not freezing pensions have an equal negative effect on executives?

There is more than one way to compromise the worker. Compensation for chief executive officers has risen from 40 times an average worker's pay in the 1970s to 367 times average in the years between 2000 and 2006. With pay like this, who needs a pension?

IBM froze its pension plan in early January 2006, yet the retirement for the CEO at age 65, will be greater than $10,000 per day!

So did King George bring these dastardly deeds to bear? Well, not really, even George deserves that the real facts be reported.

In August of 2006, President Bush signed new rules to prod companies into shoring up their pension plans with a tough message for corporate America: "Set aside enough money now."

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He further stated, “Americans who spend a lifetime working hard should be confident that their pensions will be there when they retire. Some businesses are not putting away the cash they need to fund the pensions they promised to their workers."

But as we see, the laws on the books that regulate pensions were left to interpretation, and this latest ruling allowed pensions to freeze and corporate executives to bask in the warm glow of profits.

 

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Mike Folkerth is the author of "The Biggest Lie Ever Believed" and is not your run-of-the-mill author of finance and economics. The former real estate broker, developer, private real estate fund manager, auctioneer, Alaskan bush pilot, (more...)
 

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