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.
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.