US Pensions: Capitalist Disaster

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.

Top Federal Payroll, Income, and Corporate Tax Rates, 1962-2003

Payroll, Income, and Corporate Taxes as a Share of Total Federal Revenues, 1962-2003

Change in Top Federal Tax Rates on Wealth and Work since 1980
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 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).