2. “THE MOST GLORIOUS STORY OF FAILURE IN THE BUSINESS”: THE STUDEBAKER-PACKARD CORPORATION AND THE ORIGINS OF ERISA
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By many accounts, the road to ERISA began in December 1963, when the Studebaker Corporation shut down its auto production plant in South Bend, Indiana.1 When Studebaker closed the facility, the pension plan for hourly workers did not have enough funds to meet its obligations. Retirees and retirement-eligible employees received their full pension, but the plan defaulted on its obligations to younger workers. Some received a cash payment worth a fraction of the pension they expected, while others got nothing at all.The shutdown was a catalyst of the nascent campaign for pension reform. The plight of employees at Studebaker provided a vivid symbol of the hazards reformers hoped to redress.They invoked“the infamous Studebaker case” repeatedly in the decade before Congress passed ERISA.2 This chapter explains how Studebaker came to play its role in the political history of ERISA.The narrative focuses on two questions:Why was the Studebaker pension plan underfunded? And why did the shutdown become a “focusing event” for pension reform?3 Neither question is as simple as it seems.Some observers have claimed that the Studebaker pension plan failed because company officials misused plan funds. Congressman John Dent (D, Penn.) suggested in 1970 that the plan had invested in Studebaker stock,and a recent history of Studebaker avers “that the company had redirected its pension funds toward new acquisitions.”4 In fact, nothing of the sort occurred . The underfunded status of the Studebaker plan was a foreseeable consequence of the basic principles of pension funding. For reasons explained below, Studebaker and the United Auto Workers union agreed to plan terms that exposed younger workers to the risk that the plan would default . This default risk materialized when Studebaker closed the plant in South Bend. Likewise, Studebaker’s role as a catalyst for reform is not as simple as it 51 2 “The Most Glorious Story of Failure in the Business” The Studebaker-Packard Corporation and the Origins of ERISA 52 / ”The Most Glorious Story of Failure” appears to be. While it is not uncommon for calamitous events to trigger legislation, not every calamity becomes a catalyst for legislative reform. A calamity is more likely to draw attention to a social problem when people interested in the problem are prepared to take advantage of the opportunity the calamity presents.5 This is what happened in the Studebaker case. The UAW recognized default risk as a problem years before the shutdown in South Bend. In 1958, the Studebaker-Packard Corporation terminated a pension plan the UAW had negotiated for employees of the Packard Motor Car Company. The Packard plan was underfunded and defaulted on its obligations . The UAW responded by devising a legislative remedy to protect workers from default—a proposal for “pension reinsurance” that is a precursor to the termination insurance program created by Title IV of ERISA. The Studebaker shutdown gave union leaders an opportunity to push default risk and “pension reinsurance” onto the policy-making agenda. The success of this exercise in agenda-setting indelibly linked the Studebaker shutdown to the cause of pension reform. In the words of a Senate staffer, Studebaker became “the most glorious story of failure in the business.”6 negotiating retirement security and insecurity When a union negotiates a pension plan,it has to balance benefit levels,cost, and risk. To pay pensions, a firm must divert money that might be paid as wages.The size of the financial commitment depends on a variety of factors, including the level of pension benefits and the requirements an employee must meet to receive a pension.The UAW and other CIO unions bargained for relatively generous pensions because liberal benefits protected older workers and facilitated retirements that increased job security for younger employees. To hold down costs, these unions agreed to strict qualifications for benefit entitlement. When Studebaker, Packard, and other independent automakers that operated in the shadow of General Motors, Ford, and Chrysler ran into financial problems in the mid 1950s, it became apparent that this balancing of benefits,costs,and risks left younger employees at risk of forfeiting their pension. The Studebaker Corporation and the Packard Motor Car Company created pension plans for their production employees during the CIO“pension stampede” recounted in chapter 1.7 Officials at UAW Local 5 in South Bend began discussing pensions soon after the announcement in September 1949 that Ford would create a retirement plan.8 The precedent set by Ford made it clear...


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