Let's be frank. There are contracts and then there are contracts. Those retention bonus contracts held by American International Group executives in its financial products division were apparently inviolate. No matter how many smart lawyers Treasury Secretary Tim Geithner consulted, the contracts were bulletproof, and a default could lead to punitive damages.
Then there are the kind of employment contracts that most of the rest of us have. They're not explicitly spelled out in a sign-on-the-dotted-line kind of way, and there are certainly many fewer zeros, but they are promises made in exchange for one's labor nonetheless. The difference is that these "contracts" are eminently fluid and disposable.
Here's the employment contract we all had in mind when joining the work force: Work hard, be loyal and in exchange you can expect job security, steady income gains, health insurance and a dignified retirement.
But those ideas are so nostalgic today as to be naive.
In the last 10 years worker productivity increases have not translated into corresponding wage growth, jobs are less secure, and employer-sponsored health benefits have steadily eroded. As for a pension, what's that?
Actually, the defined-benefit pension is one of the only employment promises that employers of nonunionized work places are legally obligated to keep. Federal law is supposed to protect pension rights and guarantee that pensions are adequately funded.
For the dwindling number of private sector employees who still enjoy one, that's a comforting thought. Too bad it's not true.
Do you hear that sawing sound? That's what federal bankruptcy courts are doing to the three-legged stool of retirement, as companies divest themselves of the "legacy costs" of their defined-benefit pension plans.
Our government wouldn't let AIG go bankrupt, bolstering it with $182.5 billion in bailout money. That protected those million-dollar retention bonuses. But workaday people have not been so lucky.
In industries from steel to airlines and even auto parts, companies have used federal bankruptcy law as a tool to keep operating while walking away from retirement promises made to people who gave their entire working lives to the enterprise.
Fran Hawthorne documented the trend in her 2008 book Pension Dumping. She says that companies think there is no cost in doing this to retirees, but it's "killing morale."
United Airlines is among the biggest, nastiest system-gamers so far. In 2005 a bankruptcy judge approved United Airline's plan to terminate its pension plan, affecting about 120,000 current and former employees.
The Pension Benefit Guaranty Corp., the federal program that insures private pensions, took over United's liabilities. But due to federal limits, airline employees had their pensions reduced by $2 billion.
Then United paid its creditors, emerged from bankruptcy and CEO Glenn Tilton rewarded himself with multimillions of dollars in compensation, including pension benefits.
This ability to fleece employees while others walk away with a nice payday is essentially part of the law.
Harvard Law professor Elizabeth Warren told the PBS series Frontline that the bankruptcy code, adopted in 1978, allows companies to give certain creditors promises that "lock up all the assets of the business so that if the company ultimately fails … the sophisticated guys will walk out with everything, and the employees and pensioners will be left with nothing."
Warren says that in Mexico, when a company goes bankrupt, obligations to employees and retirees get first priority. And, she says, more countries follow the Mexico model than the U.S. model, choosing to protect workers over banks and other secured creditors.
Sounds good to me.
Now that we have a Democratic Congress and president let's see some new protections passed. A measure that would give workers some pension rights in bankruptcy court was introduced by Democrats in Congress in 2007 but died. Illinois Sen. Dick Durbin, a true friend to workers, will try again this year.
AIG executives got millions of dollars for promising to stick around for another year or so. Well, defined-benefit pensions are retention bonuses for average people, only they gain value over the long haul of a career. They should be untouchable too.