FYI: viewpoints

The Social Meaning of Pensions

by Michael Perelman

Pensions offer a wonderful example of the perverse phenomenon of the corporate sector winning support by taking actions that harm individuals.  Between 1979 and 1997, the share of employees with defined benefit plans -- i.e., plans that promise a specific level of support -- fell from 87 percent to 50 percent (Mishel, Bernstein, and Boushey 2003, p. 247).  Under defined benefit plans, employers bear the responsibility to provide the promised pensions -- a responsibility that they were more than happy to shed.

Today, about 85 percent of private pension contributions are for defined contribution plans in which individuals decide how much to contribute, how to invest their assets in the plan, and how and when to withdraw money from the plan (Poterba, Venti, and Wise 2001).  The level of support that the plan provides for individual workers depends upon their success in investing.  These plans appeal to employers because they shift the risk onto the employee.

Some workers were less resistant to changing to defined contribution plans because, prior to 2000, the stock market was doing so well.  In fact, money from defined pension funds was a major factor in fueling the stock market bubble of the late 1990s.

Rather than keeping their promises to workers, corporations were using their pension funds as cash cows, pretending that overly optimistic estimates of investment returns in the future would be sufficient to cover promised pension benefits.  This tactic let corporations divert billions from their pension plans, adding to their profits.  For example, by 1999, General Electric's pension plan was adding more than $1 billion to its profit statement (Schultz 1999).  As profit rose, so did the stock market.

The resulting appreciation of stock prices helped to give the illusion of funding the defined benefit plans, meaning that corporations could avoid putting more money into their pension plans.  This mutual reinforcement came to an end with the collapse of the stock market bubble in 2000.  Many firms were ill-prepared to adequately fund their pensions, accelerating the transition to the defined contribution plans.

One might expect that the disappearance of defined benefit plans might create attitudes less favorable to corporations.  After all, defined contribution plans make employees bear the risks of economic setbacks.  In fact, workers who depend on defined contribution plans on average retire two years later than those who enjoy defined benefit plans (Friedberg and Webb forthcoming).

Conservatives relish defined contribution plans, believing that reliance on defined contributions will make the political landscape more conservative.  Two economists from the Federal Reserve Bank of Dallas investigated how these changes in pensions have affected domestic politics in the United States.  They found that the mutual fund revolution has accompanied an increased Republican share of the popular vote in elections for the House of Representatives.  They concluded that further legislation to make social security dependent on the stock market will reinforce people's feeling of dependence upon corporate success (Duca and Saving 2001).

Largely because of these changes in pension plans, the number of individuals directly or indirectly owning corporate stock has soared.  As a result, about thirty million individuals became stockholders in the 1990s.  Today, more than half of the families in the United States own stocks (Aizcorbe, Kennickell, and Moore 2003).  In the new environment, no longer blessed with a relatively secure financial future, many workers are left to plan for their future as isolated individuals.  Indeed, people whose retirement now depends increasingly on their holdings of stocks are more likely to identify their fate with corporate profits -- even though the corporate lust for profits is typically responsible for their insecure financial situation.  In the words of Michael Mandel, economics editor of Business Week: "In the high-risk society, workers, businesses, and communities must start thinking like investors in the financial markets" (Mandel 1996, p. 8).

Pensions and Individualism

Why then did employers voluntarily offer defined benefit programs in the first place?  The answer is that corporate power was not as strong at the time these plans began to proliferate.  Unions then were able to muster considerable power.  Defined benefit pensions offered a means to make workers see that their financial security would depend on the health of the corporate employer.  Inducing workers to identify with the employer seemed to offer a mechanism to reduce workers' solidarity.  In the process, workers might even be more inclined to see themselves as individuals.

In 1950, Charles Wilson, the head of General Motors, set the standard for the new defined benefit pension system for the United Automobile Workers (UAW).  Peter Drucker, the dean of modern business gurus, recognized the subtle corporate calculus that lay behind this system.  Drucker claimed, probably not without reason:

Wilson's proposal aimed at making the pension system the business of the private sector.  And the UAW -- in common with most American unions -- was in those years deeply committed to governmental social security.  Wilson's proposal gave the union no role whatever in administering the General Motors pension fund.  Instead, the company was to be responsible for the fund, which would be entrusted to professional "asset managers." (Drucker 1976, p. 5)

According to Drucker:

The union leadership was greatly concerned lest a company-financed and company-managed private pension plan . . . would open up a conflict within the union membership between older workers, interested in the largest possible pension payments, and younger workers, interested primarily in the cash in their weekly pay envelope.  Above all, the union realized that one of the main reasons behind Wilson's proposal was a desire to blunt union militancy by making visible the workers' take in company profits and company success. (Drucker 1976, pp. 5-6)

Under defined benefit plans, workers were justifiably concerned that their employer remain solvent, but since these employers tended to be powerful corporations, the risk of failure seemed relatively small.  Workers were shocked then in 1963 when Studebaker terminated its employee pension plan, leaving more than 4,000 auto workers at its automobile plant in South Bend, Indiana with little or none of their promised pension plan benefits.  A little more than a decade later in 1974, Congress passed the Employee Retirement Income Security Act (ERISA), to partially guarantee workers' benefits in private pension plans.  The current maximum is about $3,600 a month for those older than 65 at the time of the takeover, and less for those who are younger.

A wave of corporate bankruptcies left the government's Pension Benefit Guaranty Corporation with the obligation to provide partial coverage to so many workers that the agency accumulated a deficit of $22.7 billion at the end of fiscal year 2005.  Eliminating this deficit will add an additional cost to the defined benefit plans, leading them to become still more rare.

Past bankruptcies are not the only problem for the defined benefit plans.  Financial manipulations, together with a general weakening of the U.S. economy, left private employer pension plans $400 billion short of assets needed to keep promises that they had made (McKinnon 2003).  At the time of this writing, leading politicians are promoting legislation to limit employers' responsibility to keep such funds financially healthy.

So, if Drucker is correct, then the defined benefit pension plan was originally designed to make union members identify with their employer, undermining workers' solidarity.  As workers became more disposable and jobs more temporary, such identification was no longer needed.  In addition, workers no longer exercise nearly as much power as they did in the early postwar period, reducing the need to placate the labor force.  So, now, such pensions are being terminated, in part with the intent of making workers identify more with business in general rather than with a particular employer.

This individualism, unfortunately, will weaken society and further promote the corporate agenda.

References

Aizcorbe, Ana M. Arthur B. Kennickell, and Kevin B. Moore. 2003. "Recent Changes in U.S. Family Finances: Evidence from the 1998 and 2001 Survey of Consumer Finances." Federal Reserve Bulletin (January): pp. 1-32.

Drucker, Peter F. 1976. The Unseen Revolution: How Pension Fund Socialism Came to America (NY: Harper and Row).

Dubin, Jeffrey and Geoffrey Rothwell. 1990. "Subsidy to Nuclear Power Through Price-Anderson Liability Limit." Contemporary Economic Policy, Vol. 8 (July): pp. 73-79.

Duca, John V. and Jason Saving. 2001. "The Political Economy of the Mutual Fund Revolution: How Falling Mutual Fund Costs Have Affected Congressional Elections." Federal Reserve Bank of Dallas, unpub. (June).

Friedberg, Leora and Anthony Webb. forthcoming. "Retirement and the Evolution of Pension Structure." Journal of Human Resources.

Mandel, Michael J. 1996. The High Risk Society: Peril and Promise in the New Economy (NY: Random House).

Mckinnon, John D. 2003. "Warning of Pension-Plan Shortfall Raises Pressure for Financial Fix." Wall Street Journal (5 September): p. A 1.

Mishel, Lawrence, Jared Bernstein, and Heather Boushey. 2003. The State of Working America 2002-03 (Ithaca: Cornell University Press).

Poterba, James M., Steven F. Venti, and David A. Wise. 2001. "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro and Micro Evidence."

Schultz, Ellen E. 1999. "Companies Reap A Gain Off Fat Pension Plans." Wall Street Journal (15 June).

Michael Perelman is professor of economics at California State University at Chico, and the author of fifteen books, including Steal This Idea: Intellectual Property Rights and the Corporate Confiscation of Creativity and The Perverse Economy: The Impact of Markets on People and the Environment. His forthcoming books include Railroading Economics: The Creation of the Free Market Mythology (Monthly Review Press). This essay was adapted from Manufacturing Discontent: The Trap of Individualism in Corporate Society, just published by Pluto Press.

http://mrzine.monthlyreview.org/wolff191205.html

 

US Pensions: Capitalist Disaster

by Rick Wolff

The US pension systems for workers are now widespread disasters.  Many corporations and many cities and states lack the money to pay all the benefits they have promised and legally owe to present and future retirees.  Estimates of the shortfall range around $450 billion in the private sector plus at least another $300 billion in the public sector.  Retired workers with lost or reduced pensions suffer extra strain on family and household finances.  Millions now working expect pension reductions will be added to the overwork and over-indebtedness that burden them.  Not only for them does disaster loom; reduced pensions will directly undercut an economy that has become increasingly dependent on consumer expenditures.

The issue is, at bottom, remarkably simple.  Private corporations initially established pensions to enhance profits.  They aimed to reduce the costs of employee turnover by offering pensions to workers who stayed until retirement.  In bargaining with unions, many corporations offered workers less in wage increases and more in pension "improvements."  After all, pensions not only reduced labor turnover costs immediately, but they would only cost the corporations later when workers retired.  Unions often accepted labor contracts with less wage gains in exchange for pensions promising security for retirement years.  Of course, once pensions were established, corporations sought to shift their costs to workers.  Pensions arose in and because of the endless struggle among employers and workers over wages and profits.  Pension benefits altered over the years as that struggle continued under changed conditions.  And, today, the same struggle confronts workers with the prospect of employers ending pensions altogether.

Particularly after World War 2, pensions were won by many unions whose members' memories of the Great Depression made pensions very attractive.  Several large corporations agreed to establish them (notably Ford and General Motors), but often reluctantly and only if they got wage "concessions" in return.  However, once pensions were established, corporations discovered many ways to "underfund" them (the polite word for not setting aside enough money to pay for the promised pensions or mismanaging investments made with that money).  When this became a public issue (especially after Studebaker's 1963 collapse deprived its workers of their pensions), the response was neither strict controls over corporations nor strict punishments for their mismanagement of pension-funding.  Instead, in 1974, Congress passed the Employment Retirement Income Security Act (ERISA) that established little real control while setting up the Pension Benefit Guarantee Corporation (PBGC).  The PBGC is a government insurance company that is supposed to pay promised pensions when corporations fail to provide enough money for them.

It should come as no surprise that ERISA was full of carefully crafted loopholes that allowed more, not less, corporate underfunding of pensions -- nicely documented in Roger Lowenstein's "The End of Pensions" in the New York Times (30 October 2005).  So, today, corporations have underfunded their pensions by hundreds of billions.  Therefore, their workers will suffer reduced support in their retirement or else Washington will have to shift billions to the PBGC so it can pay pensions for the corporations.  If such billions are taken from other programs, workers will likely suffer reduced social services.  If such billions come from higher taxes, we need to remember who will actually pay most of such extra taxes.  The fact is that US corporations have steadily shifted most of their federal tax burdens onto US households, and that wealthy households have likewise shifted much of their federal income tax burden onto middle and lower income households.

SOURCE: Chuck Collins, Chris Hartman, Karen Kraut, and Gloribell Mota, "Shifty Tax Cuts: How They Move the Tax Burden off the Rich and onto Everyone Else," United for a Fair Economy, (20 April 2004)

Since the Bush regime leaders (and their Democratic counterparts) refuse to demand pension reparations from corporations, the private-sector pension disaster presents this choice: (1) cut pension benefits and thereby condemn private-sector retirees to financial difficulty, poverty, or becoming burdens on their families after a lifetime of labor; or (2) give the vast majority of already stressed households reduced federal programs and/or new tax bills.  The corporations win either way; and the working class loses either way.  Sound familiar?

Nor is the situation much different for government employees working for states, cities, and towns.  There, politicians have offered public employees relatively generous pension benefits in exchange for their votes.  Such deals benefit politicians in two ways. First, they can avoid tax increases now because the costs of pension benefits happen in the future when they hope to be in higher political positions.  Second, because of remarkably loose accounting rules, politicians could do just what the corporate executives did, namely underfund the pensions for public employees.  To pay for the legally mandated public pensions, eventually the states, cities, and towns will have to raise taxes or cut their spending on other public programs and services.  Given the politicians' fears of taxing corporations or the wealthy or of cutting state programs benefiting them, the costs of the public pension disaster will also fall on workers.

First results of the unfolding disaster are already here.  Fearing that a desperate population might eventually demand that they actually pay for promised pensions, corporations are ending pensions, often by not offering them to new employees.  In 1980, roughly 40 per cent of private-sector jobs had pension benefits; today less than 20 per cent do.  Major US corporations with unfunded pension obligations (including, for example, Delta Airlines, Delphi Corporation, Bethlehem Steel, and Northwest Airlines) have increasingly used bankruptcy laws to avoid them (i.e., shift them onto the PBGC).  Other companies face situations not so different from that of Ford Motor Company whose unfunded pension obligations as of December 31, 2003, totaled $11, 689, 000, 000, while the total value of Ford Motor Company on that date was $89,000,000 less than that (Bernard Condon, "The Coming Pension Crisis," Forbes Magazine, 12 August 2004).  Yet the PBGC cannot pay for present -- let alone anticipated future -- failures by private corporations to pay their pension obligations.  The PBGC already has a deficit exceeding $30 billion.  Without the money it needs to pay for the pensions it insured, the PBGC will now likely add new demands on federal tax revenues.

In the public sector, Alaska has responded to unfunded pension obligations to its employees by deciding to offer future public employees there no pensions at all.  Michigan made similar moves, and other states may follow their examples.  The immense scope of underfunded pension obligations to municipal employees is only beginning to be measured and understood -- to the terror of local politicians and local economies.

The neo-liberal age we are declining through displays many new policies, programs, and laws pursued without regard to their future social burdens.  These include, alongside the pension disasters, transforming the US from the world's major creditor into its major debtor, despoiling the environment, working families taking on historically unprecedented levels of personal debt, increasing the US trade deficit, and cutting public services.  Promoted as "components of an ownership society" or "efficiency-driven" or "required to compete in the world economy," what these policies and programs share is the short-run boost they provide to corporate profits and political careers.  The watchword of this age seems to be "grab it all now; who knows or cares what deluge may follow."  Thus, to cite yet another example, the underfunding of pensions is small compared to the underfunding of private sector retirees' health plans (see the December 19, 2005 Business Week story: "America's Other Pension Problem").

Pensions have represented important hopes, expectations, and investments for millions of workers.  In the endless struggles between those who produce the profits and those who receive and disperse them, corporate and political leaders "managed" pension programs into disastrous dead ends.  Should we expect anything different from new laws, new accounting rules, and new policies for the PBGC so long as those endless struggles continue?  Solving the pension disaster requires something altogether different.  If the producers of profits were themselves to appropriate and disperse the profits -- if workers were collectively their own bosses -- then we might realistically expect pensions to adequately serve their intended beneficiaries.

Rick Wolff is Professor of Economics at University of Massachusetts at Amherst. He is the author of many books and articles, including (with Stephen Resnick) Class Theory and History: Capitalism and Communism in the U.S.S.R. (Routledge, 2002).