The prophet of pensions
Recently, i heard three European journalists express astonishment at the primitive state of America’s social safety net. “Do you have private pensions?” they asked. The system is unraveling, I explained. “Healthcare?” Some folks get it, some don’t. “Public pensions?” Vastly underfunded.
When I mentioned that Hillary Rodham Clinton and Barack Obama are touting innovative ideas for government savings plans, in the form of a national 401(k) -- the journalists harrumphed. Holland and Switzerland have had such plans for years.
Why is the United States so far behind? The answer to this question goes back nearly a century, to the fiery Walter Reuther, the head of the United Auto Workers, and to a tragic missed opportunity by American business and government.
Reuther was the son of a German-born Social Democrat who passionately believed that the United States should adopt a system of social protections similar to those in Europe. The serious-minded, redheaded son swallowed his father’s passion whole.
In 1927, 20-year-old Reuther got a job at the Ford Motor Co. just as the automaker was taking the Model T off the line and laying off thousands of workers. Soon, the Depression set in, and thousands of autoworkers lost their jobs. As he watched what was happening, Reuther realized that factory workers needed a measure of job security, some kind of unemployment insurance and healthcare (he had suffered the loss of a toe in an industrial accident). He began to meet with conspiring unionists.
In 1932, he either quit Ford or was fired for being an agitator -- the record is unclear. With opportunities for new work scant, he decided to set off, with his brother, Victor, on a fabulous world tour. They had in mind not museums and palaces but ordinary factories. The brothers hoped to sample working conditions of the world.
Their ship landed in Hamburg, Germany, in 1933, just as the Reichstag fire was sealing the Nazis’ control over the Reuthers’ ancestral homeland. Next, they traveled to Austria and Holland and eventually secured visas for the Soviet Union, where they obtained work in the giant Gorky auto factory. In Gorky, as Victor wrote home, they saw socialism “taken down from the books and shelves and put into actual application.” Then they boarded a train for the Far East, to China and Japan. After 32 months, the brothers returned, vowing to secure for Americans the best of what they had seen overseas. To Walter Reuther, this meant worker security.
By the end of World War II, Reuther had squeezed out communist rivals and become the head of the UAW. He wanted a full pension for his workers (Social Security even in those days offered a pretty meager retirement benefit) as well as a healthcare plan and a wage for the rank-and-file that would be guaranteed even when the economy was slack.
While Reuther bargained over these benefits with the employers in Detroit, his real aim was to secure them for workers in perpetuity from the federal government in Washington. Like other labor leaders of that era, he was imbued with a genuine feeling of class solidarity; he thought of himself as an advocate for all working people, not just those in the UAW. Therefore, he argued that pensions and healthcare were properly the responsibility of the state.
In the late 1940s, Reuther urged the automakers to go to Washington and “fight with us” for government benefits. This would take the companies off the hook, provide workers with more security and spread the goodies to all citizens.
Under pressure from Reuther and others, President Truman proposed government healthcare in 1947 and, for a brief moment, the U.S. seemed to be heading toward a version of the welfare state similar to those in European democracies. Harry Becker, a top UAW official, warned that either Congress would deliver social insurance or unions would demand it “across the collective-bargaining table.”
But big business, including the auto industry, which was led by reactionary General Motors Chief Executive Alfred Sloan, was hostile to the very idea of government benefits. Anything with a hint of collectivism in those dawning Cold War years was suspect.
Most of all, business resisted the demand for European-style universal benefits, which it equated with a dangerous, creeping statism. Business Week warned, in writing about the issue, that “British socialism seems a closer threat than Russian communism.”
As the Cold War got underway, the political moment for a universal scheme passed. Well-organized unions were left to bargain for their own pensions and healthcare (which the UAW got in spades) while less-powerful workers got skimpier benefits or nothing.
The United States thus developed a patchwork system of benefits that only two houses of Congress, 50 state legislatures and millions of individual companies could have “planned.” Today, Reuther’s dream of a national pension system is in shambles; fewer than one in five private-sector workers are covered.
And the industries that did provide pensions, such as autos, airlines and steel, were devastated by the burden. Steve Miller, the former chief executive of Delphi, the auto parts company that had been a part of GM and that Miller took into bankruptcy, told me that Reuther was right -- Detroit should have fought with the union for public benefits, not against them.
It’s too late for that now. With the baby boom generation set to retire (this year, for the first time, boomers are drawing Social Security checks), half of all Americans have private retirement savings worth less than $31,000. Public pensions provided by state and local governments are lavish, but states have failed to properly fund them. The states are hundreds of billions of dollars in the hole on pensions and face a similar, as yet uncounted, liability on healthcare. This is why governors, including New Jersey’s Jon Corzine, are contemplating extreme measures, such as selling the fabled New Jersey Turnpike. The real estate slump is sure to make the local budgetary squeeze much worse.
The federal government is unlikely to offer a helping hand. Washington is already faced with the intractable burden of rising Social Security and Medicare costs as the population ages. If nothing is done, by 2040, the two programs will eat up roughly three-quarters of the federal budget.
Of the remaining presidential candidates, only Barack Obama has been so bold as to propose (tentatively) a tax increase to pay for Social Security benefits; no candidate has suggested how the U.S. might pay for burgeoning Medicare expenses, which are by far the bigger problem. Michael Leavitt, the secretary of Health and Human Services, said on April 29 that the program is “drifting toward disaster.”
But once the Democrats pick a candidate, these issues could emerge as a sleeper. John McCain has refused to rule out cutting Social Security benefits; that could make for a ripe debating moment. The Democrats say they will protect the program but don’t fully account for how they would do so.
With the safety net fraying, Americans are deeply worried. For 60 years, politicians have either deferred the dream of security or promised benefits without funding them. Management guru Peter Drucker predicted in 1950 that unfunded pensions would turn out to be a “mirage.” Workers at many failed companies later learned this the hard way. As Reuther knew, the government would have been a better guarantor.
The baby boomers have had a way of grabbing the country’s attention to each of their life passages. Just as a spotlight shone on draft-card burnings in the late ‘60s and early ‘70s and soccer moms in the ‘90s, so the difficulties of retirement will become the problem du jour. Then, perhaps, America will confront the inseparable issues of just benefits and sound funding. This time, the opportunity should not be missed.
Roger Lowenstein is a contributing writer to the New York Times Magazine. His new book, “While America Aged,” was published this month.