Stealth War on Defined Benefit Plans?

(posted 10/23/2011) - As with many things that occur over decades there is room for reasonable people to disagree. However, from my personal experiences and hearsay from friends and acquaintances I do give Mark Sumner's article on how defined benefit retirement plans have been strategically sabotaged (click here) some credence.

I doubt that the collective actions to gut pension trusts which have been taken across literally hundreds of executive board rooms over the last few decades were planned with the Machiavellian care that Sumner argues in his article.

Instead I believe the genesis of the migration from Defined Benefit Retiremeent plans to 401K / IRA type plans originated with a small group of financial and business strategists advising power players in the financial markets. These folks likely knew the long term effects of their strategy would be an enrichment for rentier style capitalism at the expense of retirees.

Once K-street lobbyists successfully pitched the idea and the political environment was aligned (federal regulation changes) the winds of retirement planning change swept through corporate board rooms all over the country. The talking points used to justify these changes were probably little understood by many who espoused them (unlike those who actually created the new model).

I've copied the article by Mark Sumner which appeared 10/23/2011 in theDailyKos here:

Sun Tzu breaks The Art of War into 13 chapters. There are sections on maneuvering an army in hostile terrain, advice on maintaining supply lines, and instructions on using incendiary weapons against massed forces. However, if you pick up the text expecting to find nothing but battles, you'll be disappointed. Most of the Art of War is actually concerned with defeating your opponent without firing a shot. It's exactly that property that has made the book so attractive to readers and applicable to many disciplines over the last 14 centuries.

For Sun Tzu, real victory comes when you defeat your enemies without risking your own resources in battle. Best of all, it comes when you destroy your opposition without even letting them realize they've been defeated. Such a victory may seem unlikely, but there's one example that most of us lived through, a massive defeat that many Americans still don't want to acknowledge.

Three decades ago, most workers in corporations could look forward to retiring under the terms of a defined benefit pension plan - a plan that guaranteed these workers a steady and secure payment in retirement. The money that most workers got in retirement was not great, often around half of what they had made toward the end of their working years, but it was sufficient that most workers could look forward to a life after the workplace without fear of losing what they had built for themselves and their families. Even when the amount wasn't enough to live a life of luxury, it was a known quantity at a known date, allowing workers to plan for how they would get by.

However, starting in mid-1980s, corporations presented their workers with another option. Individual Retirement Accounts were touted not as a way to get to a frugal retirement with a small nest-egg, but a way to become genuinely wealthy. Workers were given literature, charts, and lectures showing that while pensions would leave them with barely enough to get by, retirement accounts would make them millionaires. The promise was that workers, especially those then in their 20s and 30s, would build up so much wealth that their pension would become an afterthought. Companies would even help this along by contributing significant matching funds to the accounts.

Which was a good thing, since within a few years the retirement funds became less and less optional. Complaining that defined benefit pensions were a huge and unsustainable burden, one corporation after another phased out their pension plans. A third of them were gone by 2000. Another third in the last decade. If that had happened with no option, there might have been some serious debate over the truth behind the corporate statements. There might even have been some serious unrest. But companies didn't march into their workers and say "hey, you get nothing." Instead they pointed at the retirement accounts, IRAs and 401(k) plans, as a bridge to a golden retirement.

As it turns out, companies might as well have been selling the Brooklyn Bridge. Many workers were given literature that told them to expect rates of return of 8% or more, and were invited to plan their retirements around the resulting values, but the long-term prospect for small investors in the stock market has never reached those levels. It wasn't just a matter of buying into a stock-based system right before a market collapse. Even in good times, small investors haven't come close to the promises that were made in many plans.

Instead of magically growing piles of cash, workers were exposed to funds that took large bites from their investments in the form of loads and fees. Retiring workers found that weren't able to wait for recovery when the market was down, but had to take their money when it was needed. Workers who lost their jobs found that fines and taxes made those retirement accounts very shaky bridges to cross periods of unemployment, and that eating into the account at age 40 or 50 or 60 left them unable to reach reasonable levels in their account no matter what their contribution rate. The paucity of regulations around those matching funds promised by companies, allowed the percentage that corporations kicked in to move steadily downward after workers had been transitioned away from pensions, often with little notification and no information on how this change would affect workers' long-term results.

Retirement funds greatly shifted the funding burden of plans away from corporations and onto the shoulders of workers. In essence, being moved to a 401(k) plan wasn't just a change in your retirement outlook, it was a fat cut in pay. Even when workers invested as they were told, the resulting funds didn't come close providing the promised bounty. Workers who are now beginning to retire into lives defined by retirement accounts are finding that they have only around a quarter of what they need - and less than half of what they might have made under defined benefit plans. A total of 60% of American households are now dependent for their retirement on 401(k) plans, and many of those households are looking toward the kind of impoverished retirements that were rare in America for the last half century.

When Americans today say that they don't think their children will face the kind of prospects they've enjoyed, it's not just because they can see so many people in their 20s currently out of work; it's because they know they won't be able to help. As much talk as there has been about the "sandwich generation," many baby boomers have been cushioned by parents who had pensions and retiree health care plans. Those young workers now struggling to get their start in America are doing so at the same time their parents are facing retirement without enough money to fend for themselves, much less give a leg up to their kids.

As Ellen Schultz documents in her excellent though infuriating book Retirement Heist, this didn't have to happen. What put the pension funds in trouble wasn't an "overly generous" model or competitive pressure. Companies weren't going broke because of promises made to unions. They weren't weighed down by obligations to retirees who were living longer. It was the corporations who poisoned the pension system, and they did it on purpose.

By absolutely no coincidence, just as retirement accounts were becoming available, many large corporations stopped making the necessary payments to keep retirement funds solvent. Others didn't stop there, but also loaded up the funds with enormous promised pensions to executives. When corporations began to report shortfalls in funds and to present staggering numbers to show that they could never meet the demands of their plans, it wasn't because of bad calculations or the business environment. It was simply sabotage. They weighted the plans with deliberate debt, then they told American workers that if they kept following the same path toward the retirement they expected, it would lead to disaster. However, if you would only turn around and cross this bridge...

Separating the American worker from defined benefit plans and forcing them to directly participate in the markets not only allowed the corporations to raid the pension plans for executive bonuses and to mark down their future payments to workers. It forced every worker to become a stock market gambler. It forced factory workers to compete with professional investors. It set the stage for deregulation of the market, for destruction of Glass-Steagall, for creation of weakly regulated derivative markets, all of which could be defended as offering the flexibility the market needed to make money for those those would had not choice but trust that market for their future.

It definitely generated an "ownership society," only the ownership was of workers, by markets. It turned a reasonable retirement into a carrot that could always be held out of reach and provided leverage for the most outrageous fiscal maneuvering.

The reason that the right is so intent on attacking the pension plans of government workers is not because those benefits are unreasonable, or because they represent an excessive reward for a lifetime of work. Benefits given to government workers are attacked because corporate America has already sold the nation on the idea that giving people a safe and secure retirement can't be done. Government workers are in the way of the story. They have to be crushed to show that expecting a bare modicum of respect and fair treatment is unreasonable.

And the reason that the right is so intent on convincing America that Social Security is in trouble is they want to sell us another bridge. They want to take the last piece of ground that's not currently in their control. They want to make sure there is nowhere to stand, no ragged bit of safety, no shred of dignity, not theirs to control.

Conservatives have been working themselves into a lather of mock-horror at the idea of "class warfare," but it's not the start of the war that concerns them; it's the end. If we'll only lie down just a little while longer, it'll all be over.