Abstract
In the summer of 2018, the New York Times ran a relatively flat story about the steep rise in bankruptcies among the elderly. The piece rose quickly to the top of the Times’ most-read list. Stories of older people shamefully filing for Chapter 11 seemed to break Americans’ hearts and expose their own persistent fears about their financial futures.
Michael McCarthy’s 2017 book Dismantling Solidarity: Capitalist Politics and American Pensions Since the New Deal shows the making of economic insecurity for the old. McCarthy, an assistant professor of sociology at Marquette University, describes how the U.S. old-age insurance system shifted from a solidaristic system to a market system. He embeds the development of our advance-funded pension system in the United States within an analysis of market capitalism. The book explores the difference between the solidaristic and market systems, and the forces that eroded America’s retirement income insurance system as it shifted from one to the other. America’s retirement system was transformed with the changing dynamics of political class conflict over the postwar period, McCarthy argues: Each crisis of capitalist accumulation or intensification of class struggle worked itself out through the institution of the pension, which the American state deployed to manage and control social conflicts and sustain corporate profitability.
McCarthy’s book is a good resource for thinking about the welfare state. He builds on the concept of “decommodification,” developed by Swedish sociologist Gøsta Esping-Andersen; the idea that the function of the welfare state is to remove market logic from whole areas of social life. For McCarthy, a fundamental mechanism to allow individuals to live independently of market participation, and not to need to work—the definition of decommodification—is the pension. Of course, to secure a pension, as with many forms of social insurance, one has to work first in order to have some time decommodified later.
Most retirement economists were not surprised by the bankruptcy story in the Times—financial insecurity of older people is on the rise. We have predicted a shortfall in American workers’ ability to maintain their lifestyles when they retire since Social Security started to cut benefits in 1984 and employers moved away from occupational pensions. Almost 45 percent of middle-class workers will be de facto poor adults when they reach age 65. This downward mobility is unprecedented in the United States and it means boomers and Gen Xers will be relatively worse off than their parents or grandparents in retirement.
How did the United States regress to this point? The forty-year experiment with voluntary, commercial, individual accounts, which were intended to add retirement wealth to Social Security and pensions, has not succeeded. The book’s story of long-term trends and structural forces reminds us this loss is not just the fallout from the 2008 financial crash but a consequence of the government’s persistent weakening of unions. Also central was the 1978 tax law reform to allow employers to set aside tax-favored contributions in 401(k) plans for executives. At the time, no experts anticipated that defined contribution—do-it-yourself plans—would eclipse the traditional, defined-benefit pension.
McCarthy dives into the archives of the American labor movement to explain how the American labor movement oversaw, resisted, co-opted, and struggled with the financialization of retirement security in the United States. The path that led to a market-based social insurance system consisted of three major marketizing episodes since World War II. First came the growth of occupational pensions in response to the stagnation of Social Security replacement rates; second, the accumulation of financial assets into pooled defined-benefit pension funds; and third, a fundamental shift away from pooled accounts to 401(k)-type plans after the 1990s.
The tax-subsidized layer of voluntary pension plans—employers can choose to sponsor them or not—is part of the fabric of our hidden welfare state. Early on, such plans received favorable tax treatment, because this labor cost does not add to wage or price inflation. During World War II and the Korean War, such benefits gave employers a way to make concessions to labor without infringing on federal anti-inflation imperatives. Today, the federal government spends $120 billion annually on tax deductions for defined-contribution plans, and states spend another $20 billion.
Demonstrating his political sociology of the welfare state—how social policy is a tool for policymakers in a capitalist society to contain conflict and sustain profits—McCarthy tells the story of federal mediation of wartime and postwar labor struggles. For example, when President Harry Truman intervened in a coal strike by seizing the mines, part of the resulting settlement included the parties negotiating an employer advance-funded pension plan. This agreement complemented the anti-inflation policies of the state during the war—which created massive labor demand and drove a cycle of wage-push inflation. Such agreements for fringe benefits and pensions spread to collective bargaining in other industries.
Over the next forty years there was considerable debate over how pension funds would be invested, and how promises in the plan would be backed up by money and good governance. These debates resulted in the Employee Retirement Income Security Act of 1974 (ERISA), signed by President Gerald Ford. ERISA responded to capitalist concerns that labor’s accumulated pension wealth could be a weapon for workers in class conflict. It mandated diversified portfolios, pushing pensions into equities markets. Ever since, the investment of “labor’s capital” (as I called it in my 1984 book of the same name) has been a locus of debate about risk-adjusted returns and social investment. This period saw increases in the regulatory cost of pensions at the same time that labor unions grew weaker and could no longer expand traditional employer-based social insurance programs, such as the defined-benefit system. Under defined-benefit systems, the financial, market, and longevity risks had been borne by the employer and not the worker. By the mid 1980s, the 401(k) revolution had begun, shifting risk downward.
Chapter 3 covers the period from World War II to the passage of ERISA and offers an important untold story of how labor aggressively used its political and collective bargaining power to secure employer pensions. Unions’ focus on employee benefits at the workplace cannot be explained by “business unionism” alone, because the tax law favored payment in employee benefits rather than cash—employers and workers much preferred tax-favored compensation. The labor movement covered only 35 percent of all workers in the United States in 1954 at its peak penetration into the labor market. This fascinating chapter describes the growth of collective-bargaining of fringe or employee benefits and is also a rich and well-researched study of the differences between the American Federation of Labor (AFL) and the Congress of Industrial Organizations (CIO). The AFL needed to protect the craft of its members and founded employer and union pension and health funds as well as union and management-controlled apprenticeship programs. The CIO, on the other hand, sought to organize vast numbers of relatively unskilled workers and help unionized employers form oligopolies—an industrial organization structure that allows for rent-sharing and research and development. Pensions played a part in each strategy, creating longer-term relationships and contracts within the craft, in the case of the AFL, and with the employer, in case of the CIO. The unionized working class overall, however, was far more likely to have an employer pension by 1960 than the nonunion employees. This included the lowest-paid Ladies Garment Workers and the relatively secure auto workers alike.
McCarthy concludes chapter 3 arguing policy makers played a central role developing private pensions by allowing the Social Security system to stagnate. I take issue with McCarthy here. The Social Security system expanded greatly from 1940 to 1983 and transformed access to retirement from a welfare and charity proposition to an earned right. Rather, it was in 1983 that Congress added to the gradual erosion of retirement security by raising the “full retirement age” to 67. Contrary to the official justification provided, raising full retirement age from 65 to 67 over a period of forty years was not a jobs program for old people. Rather, raising retirement age is a bureaucratic method for cutting benefits. People can collect Social Security at age 62, and for every year they wait until 70 they get an average 6.34 percent increase, a credit for delaying collecting a benefit. This credit for delay is the most generous and aggressive in the world. The result is that the meaningful “full retirement age” is age 70. After age 70, Social Security benefits will not increase. But raising the “full retirement age” from 65 to age 67 reduced Social Security benefits collected at all ages by more than 11 percent. This change, along with an increase in Medicare premiums and the rising cost of health care, was enough to cause financial fragility among retirees—on top of the erosion of the voluntary pension system that McCarthy documents.
The significance of Social Security’s erosion only became fully clear, however, as the struggle for pensions unfolded. Chapter 4 weaves a fascinating story of the conflicts over control of union pension plans. Some pensions were jointly controlled directly by labor and through Taft-Hartley plans; others included portable plans that cover workers moving from job to job and were indirectly influenced through collective-bargaining at big private companies. Here McCarthy makes a useful comparison between the direct control of pension funds enjoyed by Canadian labor and the indirect governance exercised by American unions. He observes that the most important development in the investment of labor’s capital was the theoretical work by finance economists in developing modern portfolio theory. Under this theory, if an investment goes bad but was an appropriate investment in a diverse portfolio, then the trustees aimed correctly to minimize risk for the highest return. Therefore, risky assets became essential investment holdings. In 1955, private pensions controlled only 2.3 percent of total equity holdings on par with insurance companies. But by 1997 pensions held 24 percent of all equities and by 2018 the share is about 80 percent—if we include mutual funds.
One might think—as some once did—that this ownership share would give labor economic and political strength against employers. However, labor’s capital has proven a weak political weapon. Due to the uniform regulation of trust law, it doesn’t really matter whether or not pension funds are influenced by unions. Almost all trust funds were invested pretty much the same way. In my own forty-year career starting in graduate school, I trained pension fund trustees and served as an ERISA trustee. Fundamentally, there was no appetite in the law or among labor leaders and union members to sacrifice the risk-adjusted returns of their pensions in order to provide help to others in the working class—for example, by supporting an organizing drive at a workplace of which the pension fund is a part owner. Unions and their members instead want—and legally must seek—the best investments for their financial future.
McCarthy concludes with a consideration of what policy makers might be able to do given the tragic rise in fragility of America’s older population. Tens of millions of boomers and Gen Xers will now retire into a system in which they’ll do worse than their parents or grandchildren. Insufficient pensions will create a political and humanitarian crisis. McCarthy does not propose specific programs but instead calls for collective action to shore up retirement security along solidaristic lines—which appears to mean social insurance programs rather than individual accounts.
Still, the story of struggles over pensions is more than just a question of class power; there is an actual need for technical solutions that are just and egalitarian. McCarthy describes the postwar American system as marketized, and I don’t dispute that. But Social Security’s erosion and the labor movement’s efforts to build a complementary, advance-funded system are not the reasons for the degradation of retirement. In fact, no country has provided a stable social security system based solely on a pay-as-you-go system. A funded layer on top of a social security system is a basic element of a stable mixed system.
We see this clearly when we compare national replacement rates for old-age insurance systems (see Table 1). American Social Security’s replacement rate is a bit below Germany’s for high-income workers but higher than Germany’s and close to Sweden’s for low-income workers. Also, the Dutch and Americans, for example, have large pools of finance capital backing up pensions. The Spanish, Greek, and Italian systems tried solely pay-as-you-go, but they have moved away from it as their aging populations caused tax rates to rise to politically unsustainable levels. The pension replacement rate for the Dutch worker is more than 100 percent for low-income workers. A stingy state system doesn’t mean a country won’t have adequate pensions. Likewise, across the United States and other similar nations, retirees get just shy of one-fifth of their retirement income from capital sources. We are not an outlier in these respects. The United States is an outlier in the level of poverty produced; more than one out of five elderly are poor.
United States has Highest Elder Poverty Rates and Low Replacement Rates.
Source: Author’s calculations from the Organisation for Economic Co-operation and Development (OECD), Pensions at a Glance (various years).
The U.S. case differs not because of our social security system but because we departed from the rest of the world with our do-it-yourself 401(k) and individual retirement systems. Additionally, occupational pensions are virtually required in European nations. In the United States the system is voluntary, which means for more than forty years only about half of the working population has been covered.
What, given this history and these national comparisons, can be done to avert the crisis of elder finances? Within McCarthy’s political sociology framework, we get a clear view of policy-makers’ motives: They preserve capitalist accumulation, because when the economy does well they are able to keep their positions of political power.
There will be crisis and change. Our highly market-based, fragile retirement income secu-rity system is clearly entering a turbulent period. But we are not impotent with regard to what happens to retirement, McCarthy writes, if workers and, by extension, older superannuated workers, act collectively and “militantly” to spur policy makers into action. The system was constructed through political means, for political reasons—to stabilize the process of working-class formation. It is, of necessity, vulnerable to the same. “We are not locked into a path of marketization. But only large-scale collective action can get us off it to begin to build a system that ensures that our retired can live financially comfortable and stable lives (p. 173).”