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    Highlights—October 9, 2004
  • Alliance@IBM: IBM Pension Lawsuit Frequently Asked Questions. Editor's note: Extensive coverage of the Cooper v. IBM lawsuit is available in last week's edition of these highlights.

  • Stephen R. Bruce, Attorney for Plaintiffs: AT&T Pension Plan Class Action Lawsuit about cash balance pension conversions: Engers v. AT&T Managment Pension Plan. Excerpt: We are in the final stages of writing briefs for the U.S. District Court in New Jersey in this case. A final reply brief is due October 7th. We expect to post the briefs on behalf of the class on this website at that time. An oral argument may be scheduled in Newark at a later date. When it is scheduled, we will post notice so class members can attend. Many class members have asked about the impact of the partial settlement of the IBM class action which was announced on September 29, 2004. After a settlement, a "fairness" hearing occurs in which class members are presented with details of the settlement and given the opportunity to comment. It will be some months before this happens, but we anticipate that the partial settlement will not have any unfavorable impacts on the AT&T class action and that it may be beneficial. You should also know that the Engers v. AT&T class action does not just involve the age discrimination claim that is at the center of the IBM case. We are also presenting claims that AT&T...

  • Wall Street Journal: Cash-Balance Conversions Spread, by Ellen Schultz. Companies Keep Adopting Controversial Pension Plan Despite Lawsuits, Criticism. Excerpts: Companies are still moving to convert their pension plans to a new type of plan that means less money for many workers, despite continued legal uncertainty. Last week, International Business Machines Corp. agreed to pay $300 million to settle part of a lawsuit brought by angry employees who said the company's so-called cash-balance plan illegally shortchanged thousands of them. IBM also said it will appeal a federal court's conclusion that the cash-balance plan discriminates against older workers, and agreed -- before it even files an appeal -- that if it loses, it will pay $1.4 billion in additional benefits to current and former employees.

    For many employees, these pensions are far less attractive than the plans they replaced. If you're in your 40s to 60s and have been working for 10 to 20 years, a conversion to a cash-balance plan could shave 20% to 40% -- or more -- from the amount you would have received under a traditional pension. Employers commonly say that cash-balance plans combine the features of a pension with those of a 401(k). A more accurate, though less appealing, way to describe it would be to say that cash-balance plans are frozen traditional pensions. That's because when employers convert to a cash-balance plan, they freeze the old pension, which calculates the pension benefit by multiplying one's years on the job by one's average salary. The employer then calculates what this frozen pension amount would be worth if it were paid out in a lump sum of cash. This frozen pension value is called the "opening account balance."

    And your pension can be reduced even further. Many employers lowball the opening account balances, giving people an "account" worth, say, $80,000, even if their frozen pension is worth $100,000. As a result, you'd have to wait until your annual pay credits bring your "account" back up to $100,000 before you're breaking even and building any more pension. Basically, this process, called "wearaway," freezes the cash-balance pension for a period of time -- often years. Meanwhile, a new or younger employee will begin to build a pension right away under the cash-balance plan.

    Employers have been willing to endure the risk of lawsuits for a guaranteed financial reward: converting a traditional pension to a cash-balance plan reduces future pensions, and thus pension liabilities. Under accounting rules, the reversal of a liability generates accounting gains that boost income. IBM's pension, for example, has contributed more than $4 billion to income during the past five years. Even if it loses the lawsuit and has to eventually pay out $1.4 billion in additional pension benefits, IBM will nonetheless have enjoyed a yearly boost to earnings from the pension conversion. If link is broken, view Adobe Acrobat version [PDF--30 KB].

  • New York Times: 'Pension Fairness Act' Proposed To Freeze Some Executive Benefits, by Ellen Schultz. Excerpts: Companies that dump their underfunded pensions during bankruptcy would be prohibited from paying special pensions to top executives for the following five years, under a bill introduced yesterday. Sponsored by Rep. George Miller of California, the ranking Democrat on the Committee on Education and the Workforce, the bill comes in the wake of concerns that pension terminations at airline and steel companies will lead other financially troubled companies to foist their obligations onto the Pension Benefit Guaranty Corp., the quasi-public insurer that takes over failed pensions. The bill, the Pension Fairness Act, also would freeze special pension payments to executives and directors for five years following a move to convert the traditional pensions for regular employees to "cash-balance" pensions. These types of pensions essentially freeze pension growth and instead provide the equivalent of a small annual pay-based contribution, which results in significantly lower pensions for many older workers.

    Companies defend their practices, saying they need to retain top talent during times of financial crisis, and that executives are more vulnerable in bankruptcy than other workers because their pensions aren't protected by the PBGC. But the trend illustrates the growing gap in retirement security between most employees and those at the very top. As senior executives rely more on their special pensions, they have less incentive to ensure that the regular pension plan offers adequate benefits -- or is adequately funded. "In too many instances, CEOs pay themselves bonuses based on company profits that were created simply by cutting pensions. This is patently unfair," said Karen Ferguson, director of the Pension Rights Center, an employee advocacy group in Washington. She added that while the bill will not end corporate abuse of pension plans "it will at least be a step in the right direction."

  • New York Times: Pension Failures Foil 6-Figure Retirements, Too. Excerpts: The pension agency has now taken over company plans for one million workers and retirees, and has been stretched to a deficit of $9.7 billion. As more pension plans fail, some retirees worry about the security of even their insured incomes. At the same time, a growing number of companies are discontinuing their retiree medical benefits, which are not covered by government insurance, and for which companies are not required to set aside money. "For most people, the big hit is losing their health benefits," said Chris Dagg, a staff lawyer at the Mid-Atlantic Pension Counseling Project in New York City, which assists low-income pensioners. ... When government officials proposed creating the Pension Benefit Guaranty Corporation in the 1970's, corporations lobbied against it, arguing that few would require its benefits, while all companies with pension plans would have to pay its premiums. Some unions fought it, too, because they thought the funding requirements would divert money away from wages. Bill Wickert, now 72 and living in Virginia, lobbied against the proposal on behalf of Bethlehem Steel. Now he is one of its beneficiaries. "Thank goodness we lost," he said. ... Nor did Congress create any insurance coverage - or even any funding rules - for retiree medical benefits, which are often promised along with pensions. As a result, retirees whose pensions have been fully covered by the pension benefit corporation - typically lower earners who could not afford early retirement - have often lost their health benefits when their companies have gone bankrupt. (Editor's note: Or, in IBM's case, the company simply decided to cap the funding of and eventually eliminate long-promised retiree health benefits.)

  • Vault's IBM Business Consulting Services message board is a popular hangout for IBM BCS employees, including many employees acquired from PwC.

  • California Healthline: Schwarzenegger Vetoes Four Reimportation Bills, Advocates for Administration's Plan To Negotiate Drug Discounts. Excerpt: According to Frommer, Schwarzenegger's vetoes indicate that he is influenced by the pharmaceutical industry, which has contributed more than $300,000 to his campaigns since he announced his candidacy for governor, the New York Times reports. Frommer said that the governor's action on the bills after contributions from drug companies "looks like a quid pro quo". Frommer also said that CaliforniaRX would benefit only a small number of state residents and that prescription drug prices under the program would exceed those available through Canadian pharmacies. "This will continue to be an issue here and around the country. States will continue to take matters into their own hands," Frommer said. Ortiz said CaliforniaRX would be "heavily reliant on the goodness of prescription drug companies." She added, "It's clear that [Schwarzenegger's] program is nowhere near the 40% to 50% average discount that would be realized by importing drugs from Canada").

  • Baltimore Business Journal: Bush or Kerry: Whose health care plan is better for your business? While Bush's free-market approach appeals to some business owners, others favor Kerry's health safety net.

  • New York Review of Books: Bush & Kerry: A Big Divide. Excerpts: The recession that began in March 2001 ended the following November, but American businesses are still employing 900,000 fewer people than they did when Mr. Bush took office. Employment in industries other than services is down by 2.6 million. And after rising during the first year or so of the economic recovery, wages are again falling in real terms. (Despite substantial gains during the Clinton years, average weekly pay remains below what it was when Reagan took office.) Mr. Bush might honestly reply that his goal is a nation not of hamburger flippers but coupon clippers. The policies he has put in place during his first term, including sharply lower tax rates on dividends and capital gains and the phased elimination of estate taxes, are supposed to encourage Americans to save more. The policies on which he is campaigning for a second term, including tax-favored savings accounts for health care, personal accounts to replace part (and perhaps in time all) of Social Security, and further tax breaks for savings accounts of whatever purpose, have the same rationale. Mr. Bush's declared goal is the "Ownership Society."

    It is important to distinguish the goal of encouraging people to save from the effect of merely rewarding those who happen to be both willing and able to save. An often quoted quip from the French Revolution had it that France's ancien régime was fully egalitarian: in Paris both rich and poor were equally permitted to spend the night sleeping under the city's bridges. President Bush's economic program seems to aim at a comparably egalitarian America in which both rich and poor are equally encouraged to save what they earn and live off tax-free income from their savings and inheritances. The point as it bears on middle-class American families today is twofold. First, with an income stuck at just over $50,000, and with health care fees, college tuition, and other middle-class expenses rising sharply, the median American family does not feel able to put much aside. The families in the top one percent of income distribution, whom Mr. Bush's policies consistently favor, have incomes of over $1 million. It is easier to see how they can take advantage of enhanced "incentives to save"—which should be translated in their case as "rewards to be collected for saving."

    Today some Americans may regard the waste of our human resources as a cost the nation can afford. Some may not even regard human resources on a nationwide scale as a resource at all; for them the workforce is more likely to be seen as a problem, a liability. It is hard to imagine that this view represents the outlook of more than a small minority. But the direction charted by the current administration suggests that it is highly influential nonetheless. Judging from the economic proposals that the two candidates have offered, and in President Bush's case from those he has actually carried out during his first term, the fundamental economic issue of this election involves the respective roles of work and saving—of labor and capital—in the economy we seek to create. Do we value and encourage one, or the other, or both? Do we look to income earned from one, or the other, or both, to pay for what we collectively undertake as a society, whether in waging war in Iraq or providing health care or education at home? Do we distribute economic rewards to those among us who happen to be in a position to do one, or the other, or both? These questions are what our choices are really about. (Editor's note: This article is a "must read" for persons interested in understanding the differences in President Bush's and Senator Kerry's philosophical approach to economics.)

  • New York Times: Republicans Try to Dilute Provisions in Tax Bill. Excerpts: Despite widespread agreement that abusive tax shelters are costing the federal government billions of dollars a year, House Republicans are working to eliminate or dilute provisions in a new corporate tax bill aimed at cracking down on illegal shelters. The provisions, opposed by a range of business lobbyists and tax lawyers, are part of a larger battle in Congress over how hard to attack the rapidly expanding use of complex transactions that turn real-world profits into tax-world losses. ... A study prepared last year for the Internal Revenue Service estimated that abuse of tax shelters cost the federal government $12 billion to $18 billion a year. A study last week by Citizens for Tax Justice, a liberal research organization, reported that 82 of the nation's most profitable companies paid no corporate taxes in at least one of the last three years. Both the House and Senate have passed bills that would raise billions of dollars by shutting certain kinds of tax shelters. But House Republicans have balked at several provisions that the Senate passed with broad bipartisan support.

  • Economic Policy Institute: Lopsided trends in profits and wages threaten to topple growth. Excerpts: The rise in the stock market over the last year reflects spectacular growth in profits but not a generally healthy economy nor sustainable growth. Profits have never fared better, nor wage and salary income so poorly for this period of the business cycle. Since the last expansion ended in the first quarter of 2001, corporate profits in the United States have expanded by 57.5%. Meanwhile, private wage and salary income has contracted by 1.7% and total labor compensation has increased by a meager 1.5%. This imbalance is potentially bad news for the economy. Labor compensation is more likely to be converted to demand for domestic production and fuel a sustained growth spiral. In contrast, when income goes to corporate profits, a larger share is likely to be spent abroad (on imports or investments abroad) or to pay down debt. ... Total labor compensation – wage and salary income plus other labor costs – has grown just 1.5%, far below the average 8.8% gain in past business cycles. If labor compensation had grown at the average pace of the past it would be $447 billion higher. The nation’s income has grown more slowly in this cycle than in the past – 6.7% versus 8.4%, a difference of $158 billion. This recovery will not be on sound footing until a sustained growth in jobs and incomes kicks in.

  • New York Times: Growth of Jobs for Last Month Seen as Sluggish. Excerpt: Employment grew by less than 100,000 last month, the Labor Department reported yesterday, well below the level needed to keep pace with the expansion in the labor force and presenting a weak picture of the economy in the last employment report before President Bush faces the voters in his bid for re-election. Though the official unemployment rate, which is based on a different survey, remained unchanged at a relatively low 5.4 percent, that was mostly because some 200,000 people stopped looking for work.

  • Miami Herald: Social Security. Privatizing puts more at risk. Excerpt: Social Security is about to be sold to the highest bidder. Wall Street can barely wait to get its hands on the $940 billion in fees (according to one estimate) that it will collect if Social Security is converted into individual investment accounts, as President Bush's Commission on Social Security has proposed. Young workers are intrigued by the idea of diverting their payroll taxes into Wall Street accounts. Privatizers promise ownership of accounts and big investment returns. What they fail to mention are the costs -- increased retirement risks, cuts in Social Security benefits and a multitrillion-dollar increase in federal borrowing. Diverting money out of Social Security will create an even-larger solvency problem. The privatizers fill part of this funding gap by dramatically cutting Social Security benefits for younger generations. They cover the rest by borrowing more money, thereby increasing the burden on young taxpayers by trillions of dollars over the next half-century. Privatization places much of the risk of a secure retirement on the individual. Young people will not only ''own'' their accounts, but they will ''own the risk'' of retirement. Woe be to the person who retires in a falling market. From 1999 through 2002, near-retirees saw the value of their market-invested 401(k) retirement accounts drop an average of 25 percent. A decline can puts a big dent in one's projected retirement income.

  • New York Times: A Clash of Goals in Bush's Efforts on the Income Tax. Excerpts: As he campaigns for re-election, President Bush is vowing to lead a bipartisan effort to overhaul the personal income tax and make it "simpler, fairer and progrowth." Almost all experts agree that the current tax code is hideously complicated and often unfair. But they also say that accomplishing any fundamental change will be hideously difficult, in part because Mr. Bush's goals clash with one another and with some of his own initiatives. Republican and Democratic tax experts caution that making the tax code simpler would almost certainly set off a fierce political battle over the issue of fairness, because most options under discussion would shift a substantial share of the tax burden from high-income families to middle-income earners. ...

    This week, working to repair a flaw in the corporate tax system that violates global trade rules, House and Senate Republicans are negotiating a business tax bill that would add hundreds of additional special-interest tax breaks. Running more than 700 pages long, the bill includes tax favors for multinational drug companies, Alaska pipeline developers, car dealers, shopping mall developers and even oil service companies that set up foreign headquarters to escape American taxes.

    To Republicans, "most of the tax reform ideas revolve around the idea of taxing consumption," said Representative Paul Ryan, Republican of Wisconsin and a staunch proponent of a major tax overhaul. "It can be a flat tax or a sales tax or anything in between, but all of those are consumption taxes." The political obstacles, however, are enormous. An internal report by the Treasury Department in 2002, which analyzed five approaches to tax reform, concluded that either a flat income tax or a flat consumption tax would benefit higher income families at the expense of others. "John Kerry's view is that all the proposals in this area are regressive and would not advance any of the important goals of creating a tax that is simpler, fairer and progrowth,'' said Jason Furman, an economic policy adviser to Mr. Kerry's campaign. Republican tax experts acknowledge that tax reform would ignite a bitter battle over fairness.

    But most experts say it would be hard to design a consumption tax that did not shift some of the tax burden away from high-income taxpayers, because most taxable investment income goes to a very small slice of people at the very top of the income spectrum. Wealthy people typically spend a smaller share of their earnings than those with less income. Leonard E. Burman, a senior analyst at the Urban Institute, estimated that half of all stock dividends in 2000 went to the top 3.8 percent of households, those with incomes higher than $200,000 a year. Wealthy people also devote a much smaller share of their incomes to consumption - about a third for families with incomes above $200,000, compared with about 93 percent for families with incomes between $20,000 and $30,000.

  • New York Times: Negotiators Approve Big Tax Cuts for Business. Excerpts: In an act of pre-election largess, House and Senate negotiators approved a sprawling corporate tax bill on Wednesday that would shower corporations and farmers in politically sensitive states with about $145 billion worth of new tax cuts. In an attempt to get backing from Southern Democrats, Republican leaders included a $10 billion buyout for tobacco farmers, but they rejected a Senate provision to link that buyout with a requirement that cigarette companies be subject to regulation by the Food and Drug Administration. ... The big winners include General Electric, Exxon Mobil, electric utilities, movie producers and agricultural producers. Keith Ashdown, vice president for policy at Taxpayers for Common Sense, a public advocacy group in Washington, said, "This legislation is an early Christmas gift for corporate fat cats." ... Not all lawmakers were happy. "This is a disgrace," said Senator John McCain, the Arizona Republican who had backed the proposal to make tobacco products subject to F.D.A. regulation. "They have removed the linchpin in the passage of this legislation in a complete sellout to the tobacco companies."

  • New York Times commentary, by Bob Herbert: Working for a Pittance. Excerpts: Coming next week are the results of a new study that shows - here at home - how tough a time American families are having in their never-ending struggle to put food on the table and keep a roof over their heads. The White House, as deep in denial about the economy as it is about Iraq, insists that things are fine - despite the embarrassing fact that President Bush is on track to become the first president since Herbert Hoover to preside over a net loss of jobs during his four years in office. The study, jointly sponsored by the Annie E. Casey, Ford and Rockefeller Foundations, will show that 9.2 million working families in the United States - one out of every four - earn wages that are so low they are barely able to survive financially. "Our data is very solid and shows that this is a much bigger problem than most people imagine," said Brandon Roberts, one of the authors of the report, which is to be formally released on Tuesday. The report found that there are 20 million children in these low-income working families.
Coverage on H1-B and L1 Visa and Off-Shoring Issues
  • Association for Computing Machinery: ACM to Assess Global Impacts of IT Outsourcing. Excerpt: ACM has created a high-level task force of internationally-recognized computer scientists, industry leaders, economists and social scientists to examine global job migration trends resulting from outsourcing and offshoring of IT jobs. The ACM Job Migration Task Force will assess the major forces shaping the movement of IT jobs globally, with a focus on software and systems research, development and services. Its goal is to provide a more informed context for making professional career decisions, setting future educational requirements, and understanding future employment trends.

  • Computerworld: Farmshore Future. Excerpt: Kathy Brittain White has a dream. She figures if U.S. CIOs will ship programming jobs to India to save money, maybe they'll ship them to rural Arkansas instead. So White's company, Rural Sourcing, is setting up outsourcing centers in places in the U.S. where the cost of living is low -- not as low as in Bangalore, but low enough to compete with the total cost of offshoring. White also plans to get her programmers up to a high process-maturity level like those offshore programming shops.

In Politics—
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