Bolstering Retirement Security

Pension Funds Are Not Broke but Will Be Unless Wall Street Deception Is Confronted

Writing in In These Times, the economist Doug Henwood and journalist Lisa Featherstone argue that many of the arguments of the right-wing anti-pension crowd are correct. Existing pension plans in the United States are broke. ⁷ The solution, they argue, is to take the energy that is being directed at defending them and channel it into a “universal basic retirement income,” meaning an expansion of Social Security. In response, economist Max Sawicky argues that pensions are not destitute and that shifting focus away from the defense of private pensions will not—because of present power imbalances—bring an expansion of Social Security. ⁸ Instead, it will leave existing benefits naked to aggression from the anti-pension crowd.

Henwood and Featherstone are wrong about pension plans being broke, and it is dangerous for those authors to fall in behind the Hoover Institute argument as they do in their piece. ⁹ Defined benefit pension funds, such as the large public plans, run on three sources of money—contributions from public-sector employers, contributions from employees, and investment returns. Public pension funds can be permanent, allowing for future adjustments if needed, assuming the political will is present. Think about CalSTRS, which has more than $200 billion in assets. One assumes that California will always be there, its citizens will always need teachers, and teachers will always need to retire. So, the idea that payments, as with Social Security, can come from current teachers to fund retirement for fellow teachers and so on is not stupid.

. . . [T]he pension crisis will require . . . defending present pension promises as well as Social Security while a comprehensive solution gains momentum.

Part of the In These Times debate is about accounting theory. This Actual Money v. Actuarial Money dispute makes eyes roll and, like many financial and accounting problems, is more art than science. Pension fund trustees have been misled by Wall Street into believing that the least important source of money for pensions, from investments, can counterbalance insufficient contributions from employers and employees. Henwood and Featherstone are dead-on about the misrepresentations concerning high expected rates of return. The higher the predicted future return for investments, the less money that needs to come from workers and employers—an alluring proposition. Most funds have pegged this return figure much higher than it should be, assuring that the funds will become steadily more underfunded in the cruel light of financial reality. ¹⁰

Sawicky mistakenly downplays the problematic investing of pension fund assets. Investment consultants introduce investment asset managers to pension trustees, and those asset managers commonly proceed to sell the trustees opaque, fee-laden investments with inflated predictions of returns from hedge funds and private equity, which are known as “alternative investments.” Accounting rules allow funds to use the estimated returns of these “alternative investments” in compiling an actual rate of return. These estimated returns are generally calculated by those selling them, juicing up the return numbers, leading to funds and their trustees embracing future hope over present reality. ¹¹

Pension Fund Activism—Savior or Distraction?

At the same time, the question of the use of the assets in pension funds is raised in The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon. Written by Boston University law professor David Webber, it features clever efforts by committed labor activists to leverage pension fund assets to gain power for workers. Despite wrongly calling pension fund activism “labor’s last best weapon,” Webber cogently argues that these strategies should be and legally can be used to greater effect, going forward.

Advocates for labor have noted the inherent potential of pension fund activism for years. Three decades ago, Jeremy Rifkin and Randy Barber wrote The North Will Rise Again, a book that marked the beginning of labor’s consideration of the nascent power in these labor-affiliated funds. Writing in 1978, as the economic decline of the unionized Midwest was young, Rifkin and Barber argued that labor’s capital could and should play a central role in protecting the interests of workers and a just society. “[T]he question is whether they [workers and the labor movement] will continue to allow their own capital to be used against them, or whether they will assert direct control over these funds in order to save their jobs and their communities.” ¹² Nearly twenty-five years later, in 2001, Leo Gerard, president of the United Steelworkers, wrote that labor’s efforts had “not altered financial market operations in any significant way. All too often, investments made with our savings yield short-term gains at the expense of working Americans and their families.” ¹³ Unfortunately, Gerard’s point is still valid today.

In response to Webber’s book, the influential Marxist journal, Jacobin, quickly published a counter by Bob Farkas, condemning pension fund “activism” as a mirage. For Farkas, pension fund activism “has diverted unions from investing in the single enduring and indispensable source of working-class power: deep organizing to build workers’ collective capacities for struggle.” Echoing the Henwood/Featherstone/Sawicky argument, Farkas focuses on where to center labor’s energies. He condemns corporate campaigns from labor in general, seeing the use of workers’ capital as just one form of this strategy.

The SEIU exhibited extraordinary ingenuity in their [capital strategy] campaigns [,but] the trade-off was that the SEIU was forced to protect helpful investment advisors . . .

Farkas is right as to what pension fund activism has done to some unions. Taking pension fund activism seriously, the most active union in this area, the Service Employees International Union (SEIU), built up a large Capital Strategies department. Many Capital Strategies activists in other unions apprenticed there. The SEIU exhibited extraordinary ingenuity in their campaigns. In the Houston janitors’ strike of 2012, local leaders credited part of their victory to efforts of investment consultants who advised California pension funds to pressure real-estate investors, who in turn leaned on building management to settle with the striking janitors. Other such successes occurred under the radar. But the trade-off was that the SEIU was forced to protect helpful investment advisors, when the advisors benefited from dodgy investment practices or their poor investment advice cost funds money for beneficiaries. For example, union staff worked to protect a favored investment consultant who was sued in 2012 for leading the Los Angeles County Retirement System into a multimillion-dollar loss on “securities lending,” a practice in which investors aid “short-sellers” who bet that certain stocks will go down. ¹⁴

For good or bad, pension fund activism by unions is receding due to the financial impacts on unions of Janus v. AFSCME. ¹⁵ In nearly every union active in this area attrition is occurring, and the SEIU Capital Strategies department essentially has been disbanded. One exception is the North American Building Trades Union (NABTU), which is aggressively pushing for union-friendly “Responsible Contractor Policies” at worksites and is shining a light on investment consultants who falsely claim to be union friendly. NABTU has compiled a “scorecard” on consultants used by their affiliated funds, giving grades on the support of consultants for attention to fees and conflicts and labor-friendly investments. Two of the largest consultants to labor-affiliated funds, Wilshire Associates and Mercer, currently have failing grades.

Situating the Problem

The current hegemony of the corporation shades the entire pension landscape. The fissuring of the workforce and a legal regime that increasingly absolves corporations of responsibility for those who labor for them have made employees’ efforts to extract pensions from employers all the more difficult. ¹⁶ Corporate fealty to short-term market returns has fetishized shareholder primacy, to the exclusion of workers, communities, and the state. ¹⁷

Pension plans do have problems, which the right constantly proclaims. Public funds have been gamed by high-priced employees, like doctors and administrators who work for states. Through methods such as “spiking,” a way to increase the salaries in final years before retirement on which monthly pension payments are based, wealthy employees increase their retirement take. This greedy scenario provides justification for anti-pension views. Like most Koch-like efforts to influence the political process, the anti-pension crowd is clever. The Arnold Foundation, which finances thinkers and marketers to undermine defined benefit pensions, puts money into California’s Secure Choice program to influence it. Secure Choice is one of a number of attempts to provide a “hybrid” pension for employees of small employers. In contrast to 401(k) plans, these efforts are meant to reduce administrative burdens for employers and reduce risk for employees through common investment management. To add to this ugly parade, workers’ pensions are already being set up for blame as a steady stream of opinion pieces from the Hoover Institution and anti-pension media claim that pensions will be America’s “Next Financial Crisis.” ¹⁸

. . . [T]eacher-affiliated pension funds have paid fees to financiers like Dan Loeb, which have then been recycled into anti-teacher and anti-benefit efforts.

The corruption rampant in finance has been especially destructive to pensions. Criminal corruption, as seen in the Madoff scandal, is easily identified when found, though often cleverly concealed. But a more harmful type of corruption exists, “institutional corruption.” ¹⁹ Systemic institutional corruption claims a positive purpose but instead functions, within existing law, against the activity it is meant to support. The most obvious example is lobbying and government. In finance, institutional corruption enables the fees charged by investment managers to be used against workers. Today, one quarter of the $3 trillion of public retirement systems’ assets are in opaque “alternatives,” which often squeeze profits by foregoing pension promises and cutting jobs. More than $10 billion a year in fees is paid from these—a 30 percent jump over the prior decade. As the American Federation of Teachers has shown, teacher-affiliated pension funds have paid fees to financiers like Dan Loeb, which have then been recycled into anti-teacher and anti-benefit efforts. ²⁰ To add insult to injury, these fee-laden investments usually do not perform well for their clients. ²¹ Yet, money continues to pour into these kinds of investments, exacerbating current disasters such as the investor stranglehold on the rebuilding of Puerto Rico, thirty thousand layoffs at Toys R Us, and the decimation of journalism at the The Denver Post, to name just a few.

Finally, the inability to recognize the contradiction of pension beneficiaries as workers and also as “shareholders” feeds progressive confusion. The interests of workers at a company who wish for long-term job security and the shareholders in the company who are looking for short-term returns are essentially irreconcilable. Labor-affiliated trustees are caught in the middle. ²² This intellectual disconnect is exploited by Wall Street service providers who feast off resulting confusion. For example, SEIU-affiliated entities invested in Bain Capital alternative investments with their members’ pensions, at the same time the unions organized protests against the firm during the 2012 presidential campaign outside the company offices where the Republican nominee Mitt Romney worked.

What Is to Be Done?

Present pension funds must be defended. The payments they make to retired American workers are a necessity to keep many families from falling into poverty. Some retirees, such as those in the Teamsters union, are beginning to organize. Pensions were an issue in the heroic actions of teachers in Kentucky and other states. In the United Kingdom, in early 2018, a move by administrators to eliminate the defined benefit plan for university instructors was met by a successful strike lasting fourteen teaching days. Pension fights can build solidarity, linking young and old. This “intergenerational equity” is at the core of defined benefit funds and Social Security, as contributions of younger workers are used to pay for the benefits of older workers. As all workers age, this solidarity cycle continues.

Henwood and Featherstone are right that the time is ripe for a movement to expand Social Security. If now is the time to consider important ideas to implement when politics turns around, there can be no better demand. Phony “bipartisan” efforts must be challenged. One such idea comes from a union-favored pension expert, Teresa Ghilarducci. Working with Tony James, a senior Blackstone honcho whose company would benefit from a move away from Social Security, Ghilarducci has proposed “Guaranteed Retirement Accounts,” a “bi-partisan” solution based on “personal responsibility.” ²³ Her proposal contains a mandatory “add-on” to Social Security in which private managers invest matching money from workers and their employers, becoming available for withdrawal in retirement. Arguing that it is impossible politically to improve Social Security, she rejects the idea of its expansion, saying it would “likely [just] focus on lifting up the poorest and oldest elderly.” Unlike Social Security, these “guaranteed” accounts would be “actual cash,” which “means real, high-performing investments that can close the retirement savings gap without adding to the deficit.” Not surprisingly, given Blackstone’s participation, the plan would likely result in large fees for Wall Street and reliance on the failed Modern Portfolio Strategy.

Instead, private and public pensions should invest overwhelmingly in Index Funds. An Index Fund is a pooled structure, such as a mutual fund, which tracks an overall market in the financial firmament, such as the S&P 500. This strategy ties fund returns to the overall health of society, a crucial alignment of interests. The only exception should be investments that produce good job creation. ²⁴ Given current practice, this is a radical suggestion, but it is time for common sense to rule over false financial alchemy. ²⁵ There are examples, especially in smaller funds, of courageous trustees doing just this; the large Nevada public employee fund successfully follows the index fund strategy. ²⁶

There is no reason why beneficiaries should not be allowed to democratically decide whether they want their pensions to be invested in guns, coal, or tobacco . . .

Finally, when confronted with difficult questions about which investments to include or exclude, pension plan beneficiaries should be permitted to exercise a voice in some aspects of pension fund management. There is no reason why beneficiaries should not be allowed to democratically decide whether they want their pensions to be invested in guns, coal, or tobacco, for example. Beneficiary democracy would be messy but could be a vehicle for pro-worker, sustainable investment decision-making. Out of the pension struggles in the United Kingdom, some are considering “democratizing” pensions. ²⁷

Pension issues are embedded in current struggles against precariousness, injustice, and inequality. In the United States, the priority must be to defend existing pensions and expand Social Security. To be successful, this strategy requires honesty regarding the current problems and renouncing the strategies that have let Wall Street off the hook. Workers’ capital can be used as a weapon for labor, though not in place of worker solidarity and action. In this crucial area of human well-being, unions, even in their weakened state, are in the position to lead, as this struggle must be a collective one.