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 headquarters.
But W. has always identified with the boys in the executive suite. Soit's no surprise that the pension-reform bill passed by the Republican-controlledHouse in April is more conservative than compassionate. Liberals had expectedthat the Enron scandal would lead to more worker protections, but thebetter-prepared House conservatives seized the opportunity to make it even easierfor 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 thefirst battle of a wider, longer-term conflict that will determine whether Americanworkers get to spend their golden years in secure retirement or working under theGolden Arches until they drop.
According to the standard metaphor, retirement in America is a stool restingon three financial legs: Social Security, employee-pension plans, and individualsavings. For more than a decade now, the political debate has been diverted byWall Street's campaign for a privatization "fix" for Social Security -- the one legof the stool that is not broken.
Meanwhile, the employee-pension leg is splintered and collapsing. With theexception of government employers and large unionized companies, the traditionaldefined-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 showedus that in matters of retirement the fortunes of top managers are typicallydistinct from, and often in conflict with, those of the ordinary workers. As in somany other companies, management transformed the 401(k) into a source of demandfor Enron stock, which fueled its spectacular price rise. A large portion ofEnron's contribution to its workers' 401(k)s came, in fact, in the form ofcompany shares, which workers could not sell until they were at least 50 yearsold. The rising stock price, in turn, enabled Enron's management to keepborrowing fresh cash to hide the firm's faltering revenues. Inevitably the bubblehad to burst, and top executives, who understood the company's finances and whosestock was generally not subject to restrictions on selling, could bailout -- leaving the workers' 401(k)s chock-full of virtually worthless stock.
Like so many new economy companies, Enron's executives created a corporateculture that celebrated the enterprise as one big family; in return for unflaggingloyalty, Upstairs would always take care of Downstairs. However sincere -- iffleeting -- those sentiments might have been on the part of some of Enron'smanagers, the 401(k) system created another fundamental divide between workersand their bosses: The 401(k) pitted these two groups against each other in themarket for Enron stock. In order to maximize their capital gains before the priceof their Enron shares went south, the top executives needed willing buyers tobear the brunt of the anticipated losses. The workers, whose faith in the companywas based on false numbers and phony forecasts, were fair game for theirsupervisors. Any paternalism stopped where the stock market began.
To add insult to injury, the people at the very top of the Enron pyramid alsogot guaranteed pensions. Ex-CEO Ken Lay, for example, receives $457,000 a yearfor life.
The heart of any 401(k) reform must lie in reducing the natural advantages ofthe executives, who have what every market player wants: inside information. Thismeans giving the worker-investor more information, more equal treatment, and amore diverse portfolio in order to reduce the ability of the company managers tomanipulate 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 bypermitting them to sell individual shares of stock after holding them for threeyears. 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 realpenalties for executives who violate the rules.
At the same time, the house bill rigs the playing field in favor of the bossin two other big ways. First, it guts the current law that requires some minimalequity in the plans for higher- and lower-paid workers. Currently, for example, aplan that covers 100 percent of those making $90,000 or more has to offer asimilar plan to at least 70 percent of those making less. Given that the federalgovernment 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 billeliminates such conditions, letting companies set up whatever distribution ofcoverage and benefits they please. It leaves it to the secretary of the Treasuryto 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 "willhelp small business[es] to offer plans by giving them just a little relief fromthe rules." But small business is already exempt from many of the reportingrequirements. Indeed, because the secretary of the Treasury would determine what"fair" means, and because small businesses typically don't have the resources tohire Washington lawyers to argue their cases before federal agencies, thevagueness of the language probably makes it even more risky for mom-and-popbusinesses to devise their own 401(k)s.
Second, under the guise of assisting workers in picking the best stocks, theGOP bill would allow company managers to use pension-plan funds to contract withoutside investment advisers who have a financial interest in steering the workertoward particular investments -- including the company's own stock. As MartinSullivan 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 bigfinancial and insurance firms that sell employee-benefits packages. These corporatelobbies have been trying to get rid of pension restrictions ever since thecurrent law was passed in 1986, and in the post-Enron demand for reform, they sawtheir chance.
The House bill passed 255-to-163. Some 46 center-right Democrats voted for theGOP plan; only two Republicans voted against it.
The curtain now goes up in the Senate, where the Health, Education, Labor andPensions Committee, chaired by Ted Kennedy of Massachusetts, has reported out abill that actually increases pension protections. Unlike the House bill, it doesnot erode fairness requirements and prohibits companies from hiring investmentadvisers with conflicts of interest.
In addition, the Kennedy bill restricts the accumulation of company stock in a401(k) either to shares received as part of the company's contribution to the401(k) or to those bought by employees as one of the plan's investmentoptions -- but not both. If the company also offers a defined-benefit plan, norestrictions apply. A simpler, stronger proposal by Senators Barbara Boxer ofCalifornia and Jon Corzine of New Jersey, limiting company stock to 20 percent of401(k)s, could not get enough support, even though the law limits the level ofcompany shares in a defined-budget plan to 10 percent.
Kennedy's bill also requires more disclosure to workers, mandates employeeeducation on the benefits of diversification, and makes employer abuses a violationof federal law. The most innovative and far-reaching provision of the Kennedybill would require that workers be represented on the boards of trustees thatoversee a given company's plan.
As in the House, however, Democratic conservatives are a drag on the party'sability to challenge the Republican bill and expose its phony populism. SenatorMax Baucus, chairman of the Senate Finance Committee, which has jointjurisdiction with Kennedy's panel, wants a bill somewhere "in between" theKennedy and the House versions. Given the scarcity of issues around whichDemocrats can rally against Republicans in the November election, watering downthe Kennedy bill would remove yet another arrow from the Democrats' quiver.
Beyond November, Democrats need to plunge into the larger issueof retirement security in an increasingly insecure economy. Thus far it's theRepublicans who have staked out a clear position: transforming Social Securityinto something as shaky as Enron's retirement plans. After 20 years, the bestconservative minds still have not come up with a privatization plan that will notrequire major cuts in benefits and/or very large tax increases to go along withthe increases in risk. The fact that an overwhelming majority of Republicans donot 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 ondefending Social Security -- which is smart short-term politics. But saving SocialSecurity, necessary though it be, does not solve the fundamental problem: thatlarge numbers of American workers will not have enough retirement assets tosupport 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 withdefined-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 29over 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 forretirement. Among households headed by a 47-to-64-year-old worker, however, theshare that has any pension coverage rises -- to 73.7 percent in 1998, up from 70.2percent in 1983. But at this rate of growth, economist Christian Wellercalculates, 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 stockmarket boom of the 1990s would have stuffed the retirement accounts of thetypical American worker. But in a recent study for the Economic Policy Institute,New York University economist Edward Wolff reports that in 1998, 19 percent ofhouseholds 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 50percent of their pre-retirement income once they'd left the workforce rose to 43percent 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 onvoluntary, employer-based savings as opposed to universal guaranteed benefits -- isclearly not working. Unfortunately, the absence of a progressive response to thislarger issue allows the right's relentless campaign to privatize Social Securityto define the issue. The right has transformed the problem of inadequateretirement security into the problem of Social Security's modest returns relativeto 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 thanthe private stock-market funds. And they point out that Social Security wasalways intended to be just one leg of the retirement stool. All of which istrue -- but the brutal fact remains that for so many working people, SocialSecurity is virtually all they have.
Unless Democrats have a plan to deal with that problem, it may be only amatter of time before the Republican assault on Social Security breaks through.Starting next year, the age of eligibility for regular Social Security benefitsbegins its upward march toward 67 at the pace of two months per year. Polls showthat most young Americans don't know that they will have to wait two more yearsto receive full benefits. And even though this plan was put into law by acommission headed by conservative Alan Greenspan during the Reaganadministration, you can bet what's left in your 401(k) that the Republican rightwill point to this rising-age threshold as more evidence that workers can'ttrust the government to deliver on its Social Security commitments.
Fortunately, there are proposals upon which to build a progressive retirementsecurity agenda. These include Bill Clinton's 1999 plan for a voluntary nationaldefined-contribution program in which the government would subsidize the savingsof low-income workers; Congressman Dick Gephardt of Missouri's proposal to mandatethat all employers offer some kind of pension coverage; and economist TeresaGhilarducci's suggestion for creating incentives for multi-employer defined-benefitplans. What is needed now is a strong signal from the Democratic Party leadershipthat it will not only defend Social Security but also build support for a broadersolution -- setting the stage for a serious, and winnable, debate on retirementsecurity in the 2004 election.
One key question is whether and how to return to the principle of definedbenefits. Over the years, liberals have bought into the conservative claim thatdefined benefits are a relic in this age of deregulated markets and globalcompetition. But the basic principles underlying defined-benefit plans are the sameas those underlying annuities, which insurance companies are still selling inthis new economy. We should strive to create a national system of defined benefitsthat is mobile and does not penalize workers who go in and out of the laborforce.
The political battle over pensions will be fought over broad themes, beyondthe often mind-numbing complexity of pension finance. To succeed, Democratstherefore must redefine the central issue: In this immensely rich nation, there isno reason why millions of Americans who spend their working lives waiting ontables, loading and unloading trucks, or glued to computer screens should havetheir retirements depend on whether they were lucky enough to outsmart the insidetraders in the stock-market casino.
If Ken Lay and George W. Bush can have a defined-benefit plan, why can't we all?
