Pension Crisis

There’s been so much bad news recently about pensions, it makes me kind of glad I never had one. Working in technology companies that are pretty much all out of business, it’s just as well I have my 401K. And while we hear all this happy talk about company’s “offering” 401Ks, I’ll bet that most of the funding that goes into them is from individual - not from company - contributions, so we're pretty much on our own. In one company I worked for, the max 401K donation was $100. And that wasn’t an annual figure. That was a one-shot “incentive.” (That company did have a quarterly stock purchase program, where you could buy shares at a 15% discount and do a turnaround jumper to get rid of them – which you really had to dump fast. The last of my discounted shares ended up a tax write-off.)

I understand, of course, why companies are moving to 401Ks. What firm wants to get trapped in some defined benefits pay-out hell, which is at its most hellacious in companies that have downsized? Pension costs can cripple the ability of American business to compete effectively, especially in an economy driven by race-to-the-bottom pricing. (I get it, I get it.)

An undercurrent of much of the discussion around pension plans is that somehow it’s the irresponsible, greedy workers (worse yet: they’re sometimes unionized) who are at the root of the current crisis.

For a better understanding of the US pension crisis, people should take a look at an excellent New Yorker article by the estimable Malcolm Gladwell. The article deals with the pure demographics of how pensions work, and shows that in a company with fewer workers – which may well be the result of higher productivity – the burden on current workers can indeed be too great. Gladwell also writes at length about something called the “dependency ratio” – i.e., how many workers - across an entire national economy - there are supporting non-workers (retirees and children).

But what I found most interesting was his discussion of how America’s pension crisis came into being.

In the uncertain nineteen-forties, in the wake of the Depression and the war, workers wanted security, and in 1949 the head of the Toledo, Ohio, local of the United Auto Workers, Richard Gosser, came up with a proposal. The workers of Toledo needed pensions. But, he said, the pension plan should be regional, spread across the many small auto-parts makers, electrical-appliance manufacturers, and plastics shops in the Toledo area. That way, if workers switched jobs they could take their pension credits with them, and if a company went bankrupt its workers’ retirement would be safe. Every company in the area, Gosser proposed, should pay ten cents an hour, per worker, into a centralized fund.

The business owners of Toledo reacted immediately. “They were terrified,” says Jennifer Klein, a labor historian at Yale University, who has written about the Toledo case. “They organized a trade association to stop the plan. In the business press, they actually said, ‘This idea might be efficient and rational. But it’s too dangerous.’ Some of the larger employers stepped forward and said, ‘We’ll offer you a company pension. Forget about that whole other idea.’ They took on the costs of setting up an individual company pension, at great expense, in order to head off what they saw as too much organized power for workers in the region.”

A year later, the same issue came up in Detroit. The president of General Motors at the time was Charles E. Wilson…was in contract talks with Walter Reuther, the national president of the U.A.W. The two men had already agreed on a cost-of-living allowance. Now Wilson went one step further, and, for the first time, offered every G.M. employee health-care benefits and a pension. Reuther had his doubts… His inclination was to fight for changes that benefitted every worker, not just those lucky enough to be employed by General Motors. In the nineteen-thirties, unions had launched a number of health-care plans, many of which cut across individual company and industry lines. In the nineteen-forties, they argued for expanding Social Security. In 1945, when President Truman first proposed national health insurance, they cheered. In 1947, when Ford offered its workers a pension, the union voted it down. The labor movement believed that the safest and most efficient way to provide insurance against ill health or old age was to spread the costs and risks of benefits over the biggest and most diverse group possible. Walter Reuther, as Nelson Lichtenstein argues in his definitive biography, believed that risk ought to be broadly collectivized. Charlie Wilson, on the other hand, felt the way the business leaders of Toledo did: that collectivization was a threat to the free market and to the autonomy of business owners. In his view, companies themselves ought to assume the risks of providing insurance.

America’s private pension system is now in crisis…This crisis is sometimes portrayed as the result of corporate America’s excessive generosity in making promises to its workers. But when it comes to retirement, health, disability, and unemployment benefits there is nothing exceptional about the United States: it is average among industrialized countries—more generous than Australia, Canada, Ireland, and Italy, just behind Finland and the United Kingdom, and on a par with the Netherlands and Denmark. The difference is that in most countries the government, or large groups of companies, provides pensions and health insurance. The United States, by contrast, has over the past fifty years followed the lead of Charlie Wilson and the bosses of Toledo and made individual companies responsible for the care of their retirees. It is this fact, as much as any other, that explains the current crisis. In 1950, Charlie Wilson was wrong, and Walter Reuther was right.

Anyway, Solidarity Forever and go read Malcolm Gladwell.