‘It’s Pensions, Stupid!’
Pension and retirement funds in the United States are running neck and neck with the housing bubble in press speculation about the next financial implosion. Some pensioners with shrunken nest eggs already report threadbare living. Others are simply postponing retirement.
The future of the pension system is turning into a minefield. A number of U.S. corporations, including General Motors, Lockheed and United Airlines, have pension obligations well in excess of their market capitalization. Three dozen companies in the S&P; 500 achieved more than 10% of their reported corporate profits for 2001 on estimates of future gains, never realized by the stock, in their corporate pension funds, and now may have to furnish huge makeup sums. The risks are rising for chief financial officers and retirees alike.
One can hardly pick up a newspaper without reading about some company terminating, reshaping or skimming its pension fund. Or, for that matter, about some state or municipal retirement system losing hundreds of millions of dollars from the collapse of Enron and WorldCom stocks and bonds.
Washington is not pushing major new pension safeguards. In part, that’s because administration policymakers are still caught up in the 1990s bubble illusion that Social Security should be partly privatized, putting some of its revenues into the eager hands of America’s financial services industry. Given their recent record, this no longer makes sense, and some new thinking is in order. Maybe a lot of new thinking.
These facts make “Banking on Death,” Robin Blackburn’s new book on the history and future of pensions, more timely and important reading than we could have guessed a year ago. No one interested in pension finance or pension rights can afford to miss it, although several chapters, those dealing principally with Britain, need only be skimmed by American readers. The United States subject matter is dominant.
Blackburn wears two hats, one as professor of sociology at the University of Essex in Britain, the second as distinguished professor of history at the New School University in New York. This is a plus because much the same politico-financial games are going on in Britain as in the United States, save that the abuses and issues burgeoned first on that side of the Atlantic. This gives Blackburn something of a leg up on the dicey position of pensions, being what he calls “grey capital” in the homelands of Anglo-Saxon economics.
Grey capital--G-R-E-Y, the British spelling, as in Lady Jane and the tea--is not merely a state of in-between. It is a state of legal uncertainty-cum-vulnerability verging on social peril. In 2000, U.S. pension funds had $7 trillion under management, about a quarter of the value of the overall stock market. The managing and trading of them is a source of huge revenues for the major U.S. investment firms.
Let us get the definitions out of the way. The older variety of pension is “defined benefit”: defined because the eventual pension is fixed, based on the salary earned by the employee. In the United States, they accounted for $5 trillion in 2000. The newer variety is called “defined contribution.” Its ultimate payout--in a 401(k), for example--varies with contributions, the markets and the investment decision-making of the individual contributor. These plans had about $2 trillion in 2000, but their ranks are growing as corporations try to shed their old-style pension liability.
The combined totals are less now, probably substantially less, thanks to the popped stock market bubble and the attendant fraud, manipulation and deceit epidemic both in corporate America and on Wall Street. The legal problem, however, does not end with the “few bad apples” of presidential rhetoric. It is much more systemic, rising from the whole financial services orchard, its terrain, fertilizer and maintenance.
Here is Blackburn’s pithy summary: “The division of responsibility between trustees, money managers and consultants, the power of the sponsor and the limited rights of the policyholders or members all conspire that retirement funds will be ‘grey capital.’ I use this term because the property rights represented by the funds represents a grey area in terms of law and political economy--that they are also funds held to finance old age is a source of vulnerability to those whose sacrifices have established them.”
His middle 200 pages flesh out the legal and political weaknesses he sees: principally that the future entitlement of employees is a legal question mark and one that an interrelated elite of politicians and financiers would rather juggle than define. This section culminates with a chapter titled “The Global Drive to Commodify Pensions.” By this, Blackburn means the attempt by many countries to blend the existing public sector pensions with some portion of privatized saving plans for retirement. The goal is usually to duck the sort of government outlays that now seem inevitable, for example, in the U.S. Social Security program.
The private sector--the financial services folks--would thus get their eager commercial hands on an ever-increasing portion of the global retirement pot. In this part of the picture, future pensioners would lose their defined benefit and get only what the market (or the industry) leaves. Conservatives are the main drivers of this approach but hardly the only ones.
His last few chapters move on to possible public policy recommendations and politics. Blackburn argues that pension policy has already become a major national issue in Britain, France, Germany and Italy; and we can probably expect it to become one in the United States in light of the recent financial debacles.
Pension provision, he says, “has already whetted the appetite of a shark-like financial services industry, keen to sink its teeth into this abundant shoal of business.” On the other hand, opportunities for turning pension rights into firm property rights could “also encourage a more responsible pattern of social relations, one that combats inequality and unemployment.” The future key to many current political and economic problems, he says, is “It’s pensions, stupid!”
Blackburn’s solutions, some centrist, some more left-leaning, come at the reader piecemeal. But he’s certainly right about the great potential for reshaping taxes, property rights, corporate governance and federal regulation of finance that must accompany any great political debate in the 2004 or 2008 presidential elections. Some of his minor remedies simply draw on recent British legislation requiring pension funds to become more active on behalf of participants, creating pension ombudsmen and putting government price caps on the fee charges (1% a year) of the basic private funds.
However, his more sweeping proposals reflect the more advanced discussion in Britain and have a potential to be relevant on this side of the Atlantic as well. To begin with--and this idea has a sweep that resonates--he proposes, in essence, that instead of diluting their existing shares by issuing so many options to top management, corporations should also be required to dilute them on behalf of retirees. Each year, firms should be required to devote some 20% of their profits to issuing new shares to the principal national pension fund (Social Security) and to the various funds approved for secondary (private) pension investment management. Companies with solid, defined benefit pension funds already operating would be excused half of this levy, which could bring in $100 billion to $150 billion a year.
As for the secondary individual pensions in non-government hands that would be favored by tax treatment, Blackburn would ensure by law that they would be managed by vocational, regional and affinity groups along the lines of TIAA-CREF (the very successful college teachers fund), the California Public Employees Retirement System, the State of Wisconsin Investment Board, the Retirement Systems of Alabama and so on. Financial services firms, with their hidden fees and sometimes antisocial objectives, would be barred and told to find another honey pot.
As a further source of revenue, taxes could be raised on the rich, on financial transactions (the so-called Tobin tax) and on certain types of gains in the value of private property created by public outlays and investments. Blackburn also calls for related changes in corporate governance and for new attention to clarifying and defining individual property rights now only loosely associated with pensions.
Some of the book’s discussion is a little naive, especially when one remembers that the finance, insurance and real estate sector of the economy is the single biggest spender on both federal political campaigns and federal lobbying.
Still, the next few decades could see some movement in these directions. Ordinary Americans could respond to the growth in wealth polarization, scandals and the greed of recent years by taking back some of that abusive wealth via taxes, regulations and reforms in order to support the cost of pensions, education, health care and drug prescriptions. This, after all, is what British voters did during the first half of the 20th century.
