Who Gets to Retire?

On the day television beamed around the world images of
tearful Enron employees stunned at the looting of their 401(k)s by the company's
top brass, pension reform became a top congressional priority. As the scandal
rippled across corporate America, even George W. Bush could sense the smoldering
class resentment. "What's fair on the top floor should be fair on the shop floor,"
he proclaimed, distancing himself from his old pals at Enron's Houston

But W. has always identified with the boys in the executive suite. So
it's no surprise that the pension-reform bill passed by the Republican-controlled
House in April is more conservative than compassionate. Liberals had expected
that the Enron scandal would lead to more worker protections, but the
better-prepared House conservatives seized the opportunity to make it even easier
for CEOs to use their employees' pension funds to line their own pockets. Still,
if the Democrats in the Senate are willing to push back, we could soon see the
first battle of a wider, longer-term conflict that will determine whether American
workers get to spend their golden years in secure retirement or working under the
Golden Arches until they drop.

According to the standard metaphor, retirement in America is a stool resting
on three financial legs: Social Security, employee-pension plans, and individual
savings. For more than a decade now, the political debate has been diverted by
Wall Street's campaign for a privatization "fix" for Social Security -- the one leg
of the stool that is not broken.

Meanwhile, the employee-pension leg is splintered and collapsing. With the
exception of government employers and large unionized companies, the traditional
defined-benefit pension has morphed into the famous 401(k), which is not a
pension at all, but a personal savings plan to which the employer makes a defined
contribution. The result has been to shift the risk that there might not
be enough to retire on to the employee from the employer.

The Enron debacle revealed just how much of a risk that is. First, it showed
us that in matters of retirement the fortunes of top managers are typically
distinct from, and often in conflict with, those of the ordinary workers. As in so
many other companies, management transformed the 401(k) into a source of demand
for Enron stock, which fueled its spectacular price rise. A large portion of
Enron's contribution to its workers' 401(k)s came, in fact, in the form of
company shares, which workers could not sell until they were at least 50 years
old. The rising stock price, in turn, enabled Enron's management to keep
borrowing fresh cash to hide the firm's faltering revenues. Inevitably the bubble
had to burst, and top executives, who understood the company's finances and whose
stock was generally not subject to restrictions on selling, could bail
out -- leaving the workers' 401(k)s chock-full of virtually worthless stock.

Like so many new economy companies, Enron's executives created a corporate
culture that celebrated the enterprise as one big family; in return for unflagging
loyalty, Upstairs would always take care of Downstairs. However sincere -- if
fleeting -- those sentiments might have been on the part of some of Enron's
managers, the 401(k) system created another fundamental divide between workers
and their bosses: The 401(k) pitted these two groups against each other in the
market for Enron stock. In order to maximize their capital gains before the price
of their Enron shares went south, the top executives needed willing buyers to
bear the brunt of the anticipated losses. The workers, whose faith in the company
was based on false numbers and phony forecasts, were fair game for their
supervisors. Any paternalism stopped where the stock market began.

To add insult to injury, the people at the very top of the Enron pyramid also
got guaranteed pensions. Ex-CEO Ken Lay, for example, receives $457,000 a year
for life.

The heart of any 401(k) reform must lie in reducing the natural advantages of
the executives, who have what every market player wants: inside information. This
means giving the worker-investor more information, more equal treatment, and a
more diverse portfolio in order to reduce the ability of the company managers to
manipulate the 401(k).

The net effect of the House "reform" bill, however, is to make things worse.
It does make a perfunctory bow toward the interests of worker-investors by
permitting them to sell individual shares of stock after holding them for three
years. But it puts no limits on the level of company-owned stock in workers'
401(k)s, does not mandate the sharing of information, and fails to provide real
penalties for executives who violate the rules.

At the same time, the house bill rigs the playing field in favor of the boss
in two other big ways. First, it guts the current law that requires some minimal
equity in the plans for higher- and lower-paid workers. Currently, for example, a
plan that covers 100 percent of those making $90,000 or more has to offer a
similar plan to at least 70 percent of those making less. Given that the federal
government is providing more than $50 billion a year in tax breaks to 401(k)s,
one would think Congress should insist on some equity. The Republican bill
eliminates such conditions, letting companies set up whatever distribution of
coverage and benefits they please. It leaves it to the secretary of the Treasury
to judge, on the basis of undefined criteria, whether a company's plan is "fair."

Democratic Congressman Pete Stark of California calls this position sheer
"claptrappy." Republican Congressman Rob Portman of Ohio counters that it "will
help small business[es] to offer plans by giving them just a little relief from
the rules." But small business is already exempt from many of the reporting
requirements. Indeed, because the secretary of the Treasury would determine what
"fair" means, and because small businesses typically don't have the resources to
hire Washington lawyers to argue their cases before federal agencies, the
vagueness of the language probably makes it even more risky for mom-and-pop
businesses to devise their own 401(k)s.

Second, under the guise of assisting workers in picking the best stocks, the
GOP bill would allow company managers to use pension-plan funds to contract with
outside investment advisers who have a financial interest in steering the worker
toward particular investments -- including the company's own stock. As Martin
Sullivan of the newsletter Tax Notes observes, "Because it is usually in
the self-interest of employers to encourage employees to purchase company stock,
the interests of employees seeking investment advice are diametrically opposed to
the employers providing it."

For these very reasons, the chief backers of the House bill were the U.S.
Chamber of Commerce, the National Association of Manufacturers, and the big
financial and insurance firms that sell employee-benefits packages. These corporate
lobbies have been trying to get rid of pension restrictions ever since the
current law was passed in 1986, and in the post-Enron demand for reform, they saw
their chance.

The House bill passed 255-to-163. Some 46 center-right Democrats voted for the
GOP plan; only two Republicans voted against it.

The curtain now goes up in the Senate, where the Health, Education, Labor and
Pensions Committee, chaired by Ted Kennedy of Massachusetts, has reported out a
bill that actually increases pension protections. Unlike the House bill, it does
not erode fairness requirements and prohibits companies from hiring investment
advisers with conflicts of interest.

In addition, the Kennedy bill restricts the accumulation of company stock in a
401(k) either to shares received as part of the company's contribution to the
401(k) or to those bought by employees as one of the plan's investment
options -- but not both. If the company also offers a defined-benefit plan, no
restrictions apply. A simpler, stronger proposal by Senators Barbara Boxer of
California and Jon Corzine of New Jersey, limiting company stock to 20 percent of
401(k)s, could not get enough support, even though the law limits the level of
company shares in a defined-budget plan to 10 percent.

Kennedy's bill also requires more disclosure to workers, mandates employee
education on the benefits of diversification, and makes employer abuses a violation
of federal law. The most innovative and far-reaching provision of the Kennedy
bill would require that workers be represented on the boards of trustees that
oversee a given company's plan.

As in the House, however, Democratic conservatives are a drag on the party's
ability to challenge the Republican bill and expose its phony populism. Senator
Max Baucus, chairman of the Senate Finance Committee, which has joint
jurisdiction with Kennedy's panel, wants a bill somewhere "in between" the
Kennedy and the House versions. Given the scarcity of issues around which
Democrats can rally against Republicans in the November election, watering down
the Kennedy bill would remove yet another arrow from the Democrats' quiver.

Beyond November, Democrats need to plunge into the larger issue
of retirement security in an increasingly insecure economy. Thus far it's the
Republicans who have staked out a clear position: transforming Social Security
into something as shaky as Enron's retirement plans. After 20 years, the best
conservative minds still have not come up with a privatization plan that will not
require major cuts in benefits and/or very large tax increases to go along with
the increases in risk. The fact that an overwhelming majority of Republicans do
not want to bring any privatization plan to a vote before November suggests that,
at least for now, Democrats have the advantage.

For their part, Democrats have concentrated almost entirely on
defending Social Security -- which is smart short-term politics. But saving Social
Security, necessary though it be, does not solve the fundamental problem: that
large numbers of American workers will not have enough retirement assets to
support a minimally decent standard of living in their old age.

Fewer than half of all private-sector workers today have any sort of pension-
or savings-plan coverage on the job. Among those who do, the percentage with
defined-benefit plans has dropped to 29 percent in 1999 from 71 percent in 1975.
The share of those with defined-contribution plans has risen to 65 percent from 29
over that time span. And of those, half have less than $20,000 in their accounts.

Young single workers, of course, are notoriously uninterested in saving for
retirement. Among households headed by a 47-to-64-year-old worker, however, the
share that has any pension coverage rises -- to 73.7 percent in 1998, up from 70.2
percent in 1983. But at this rate of growth, economist Christian Weller
calculates, we will reach complete coverage of all workers in 113 years.

One might think that the combination of a shift to 401(k)s and the stock
market boom of the 1990s would have stuffed the retirement accounts of the
typical American worker. But in a recent study for the Economic Policy Institute,
New York University economist Edward Wolff reports that in 1998, 19 percent of
households headed by a person 47 to 64 were headed for poverty when they retire,
up from 17 percent in 1989. The share of those who would be unable to maintain 50
percent of their pre-retirement income once they'd left the workforce rose to 43
percent from 30 percent. While the average value of the 401(k) rose, the
benefits were concentrated in those households with a net worth of more than $1
million. Those with less saw their accumulated retirement wealth decline by 11
percent. For the typical working family, Wolff concludes, "In terms of retirement
investment, what should have been the best of times turns into something closer
to the worst of times."

The great experiment represented by the 401(k)s -- basing retirement security on
voluntary, employer-based savings as opposed to universal guaranteed benefits -- is
clearly not working. Unfortunately, the absence of a progressive response to this
larger issue allows the right's relentless campaign to privatize Social Security
to define the issue. The right has transformed the problem of inadequate
retirement security into the problem of Social Security's modest returns relative
to the higher -- if greatly exaggerated -- long-run returns from the stock market.
Democrats correctly reply that Social Security is primarily a safety net,
includes disability and other insurance benefits, and is more efficiently run than
the private stock-market funds. And they point out that Social Security was
always intended to be just one leg of the retirement stool. All of which is
true -- but the brutal fact remains that for so many working people, Social
Security is virtually all they have.

Unless Democrats have a plan to deal with that problem, it may be only a
matter of time before the Republican assault on Social Security breaks through.
Starting next year, the age of eligibility for regular Social Security benefits
begins its upward march toward 67 at the pace of two months per year. Polls show
that most young Americans don't know that they will have to wait two more years
to receive full benefits. And even though this plan was put into law by a
commission headed by conservative Alan Greenspan during the Reagan
administration, you can bet what's left in your 401(k) that the Republican right
will point to this rising-age threshold as more evidence that workers can't
trust the government to deliver on its Social Security commitments.

Fortunately, there are proposals upon which to build a progressive retirement
security agenda. These include Bill Clinton's 1999 plan for a voluntary national
defined-contribution program in which the government would subsidize the savings
of low-income workers; Congressman Dick Gephardt of Missouri's proposal to mandate
that all employers offer some kind of pension coverage; and economist Teresa
Ghilarducci's suggestion for creating incentives for multi-employer defined-benefit
plans. What is needed now is a strong signal from the Democratic Party leadership
that it will not only defend Social Security but also build support for a broader
solution -- setting the stage for a serious, and winnable, debate on retirement
security in the 2004 election.

One key question is whether and how to return to the principle of defined
benefits. Over the years, liberals have bought into the conservative claim that
defined benefits are a relic in this age of deregulated markets and global
competition. But the basic principles underlying defined-benefit plans are the same
as those underlying annuities, which insurance companies are still selling in
this new economy. We should strive to create a national system of defined benefits
that is mobile and does not penalize workers who go in and out of the labor

The political battle over pensions will be fought over broad themes, beyond
the often mind-numbing complexity of pension finance. To succeed, Democrats
therefore must redefine the central issue: In this immensely rich nation, there is
no reason why millions of Americans who spend their working lives waiting on
tables, loading and unloading trucks, or glued to computer screens should have
their retirements depend on whether they were lucky enough to outsmart the inside
traders in the stock-market casino.

If Ken Lay and George W. Bush can have a defined-benefit plan, why can't we all?

You may also like