The state of the American retirement system is not good. Pension funds are constantly being whittled away, workers who are lucky enough to have funds increasingly receive 401(k) plans that are subject to the wild fluctuations of the market, and free-market vultures continue to circle around the social security system — a terrifying prospect in a country where 45 percent of households don’t have any retirement savings at all.
How did we get to this situation? To find out, Jacobin‘s Micah Uetricht spoke with Mike McCarthy, the author of Dismantling Solidarity: Capitalist Politics and American Pensions Since the New Deal. At a public event in Chicago, they discussed unions’ role in the development of the welfare state, to the successful efforts to keep control of pension fund investments out of unions’ hands, and the decline in an already meager retirement system.
What is the current state of US pensions?
Let’s start with the financial meltdown in 2008–9. From October 2007 to October 2008, the US stock market lost approximately 37.5 percent of its value. As those stocks plummeted, much of the retirement savings that were invested in stocks, primarily through plans like 401(k)s, lost their value as well. In total, 401(k) plan and individual retirement account (IRA) losses in the United States were huge, about $2.5 trillion; while the total worldwide losses were well over $5 trillion.
As the crisis unfolded, many older workers were forced to confront a double disadvantage: they were at risk of losing their jobs, and they were at risk of losing their retirement savings. Those going into retirement that year, either because they were fired or because of a long-standing plan, saw a large chunk of the savings that were meant to sustain them and their families in retirement simply vanish overnight.
We have now heard from politicians that the problems of marketized retirement in 2008 basically corrected themselves. Within a few years of the fallout, once the stock market began to recover, the Obama administration offered up a rosy picture about retirement funds and pensions getting the money back that they lost. And indeed, by the middle of 2012, retirement account balances were well over $9 trillion, largely making up the value lost during the downturn.
Most think that retirement plans have recovered. But they really haven’t.
The asset recovery doesn’t really tell the whole story. While 401(k)s have regained some of the losses, they’re about five years behind where they should be in actuarial terms. In other words, on average these savings plans lost about five years of growth. All things being equal, workers are now going to have to work five years longer to make up for that, which will likely mean people further delaying retirement in the future.
But averages themselves can also be misleading. One important study of workers nearing retirement age found that while most plans did recover, a whopping 45 percent of workers saw further declines in the assets of their retirement plans between 2009 and 2011.
We have a real crisis on our hands, and at its root is the fact that we have subjected workers’ retirement security to the whims of volatile financial markets. In 2015, the Government Accountability Office found that more than half of all American workers approaching retirement have no savings whatsoever.
So why are pensions important? Because what are we going to do after we work? We need to pay our rent, pay for our food, pay for the clothes on our backs, pay for our other obligations. Pensions and social security have been the main means of doing that, but we’ve moved toward a system where people are very much dependent on capitalist markets to determine how well they’re going to live after they retire.
Even during our non-working adult life, that period when we are supposedly freed from work, capitalist markets dictate how well we will live. If we keep on going down this path, we’re going be in a system where people are fully reliant on their own thrift. That’s going to lead to a lot more poverty in old age and the impulse to work until we die.
Your book is about pensions, but it’s also about the eccentricities of the American welfare state. What makes the American welfare state different from Europe or other rich countries?
Let me answer that question by first talking about pensions. In the United States, on average, people get 45 percent of their retirement savings through a private, occupational pension plan, whereas the OECD average is less than 20 percent. So, even in a policy area where the United States does have a large public program, Social Security, there is still a much greater reliance on employer-provided pensions there than there is in other advanced capitalist countries.
This is actually true about the American welfare state in general. Most Americans get their social benefits through their job, whether that’s health care, dental care, sometimes child care, or eye care. Relative to workers in other rich capitalist countries, Americans are much more dependent on where they work for the social benefits and services necessary for life above and beyond the wage.
This puts a lot more risk onto workers’ shoulders to come up with the things they need in life. If they lose their jobs, not only do they lose their income, they lose other things that they and their families depend on — as in the case of health care, sometimes it is a matter of life and death. This is all because in America, the market is the mechanism through which many social services are distributed to our citizens. They are goods, not rights. There’s no guarantee to health care, just as there’s no guarantee to a livable retirement income.
That’s a core characteristic of the American welfare state when we put it into comparative terms, and old-age security is consistent with that more general story.
Saying that you rely on your job means that you have to maintain your employment to get these basic goods, which means that, unless you have a union — and even if you do in many cases — you are subject to the tyranny of your boss, who has totally unchecked rights to keep you on the job or fire you at his or her whim. All of these benefits are attached to that; it produces incredible precarity for workers at all times.
There are a lot important implications of having a welfare system that’s primarily private.
Social services tend to be offered on a voluntary basis. Firms don’t have to offer their employees a pension; health care is dicey. So as a worker, you’re dependent on the firm’s willingness to give you those things, and in many cases they can stop if they want.
As part and parcel of this, access to a welfare benefit in the United States is dependent not just on a firm’s willingness to offer it, but also on their ability to pay for it. Firms can face real financing constraints, not all companies are flush with cash. In periods like the Great Depression and the Great Recession, we saw firms in large numbers cut their programs for their workers. And even now, with respect to the Affordable Care Act, many small businesses facing the financial constraints of the health-care mandate have been unwilling to hire more workers.
This has important social implications. One is that the benefits of systems that are more private tend to be regressively distributed, so people who have better jobs get better benefits, and people that need the benefits the most end up working at places that don’t offer them.
In other words, privatized welfare states will tend to deepen inequalities. In doing so it redistributes risk onto poorer and working people. The people that are in the greatest need of benefits if they lose money are the ones that are at the greatest risk of being thrown into a desperate situation like not having health care.
And while private benefits are certainly better than no benefits at all for individual workers, on a societal level their very establishment begins to preclude the possibility of a system on which benefits are distributed on a universal, egalitarian basis.
Everyone wants a better health-care plan through their employer with lower co-pays and deductibles, and nearly everyone prefers a defined-benefit retirement plan to a defined-contribution one. And they should. But private employer-provided benefits are also contradictory, in that they can deepen inequalities, further commodify labor, and create institutional barriers to the installment of more public systems.
But we can also over-emphasize the private versus public distinction when we think about welfare states. What my book shows is that actually, the most important characteristic about welfare benefits is not so much whether they are private or public, but rather the degree to which they are governed and organized through market mechanisms or more solidaristic principles based on universal access and egalitarian distribution. In the book, I show that even within the private pension system, since the New Deal period, retirement income has become more marketized over time. We can see the same thing in other areas like health care.
Where exactly did the social welfare system, both the one we have here and the strong systems in Europe, come from? What were the forces that led to their establishment?
In the New Deal period, there was a real promise for what was called cradle-to-grave security, the idea that people would have something provided for them throughout their whole lives so they wouldn’t have to live in poverty. Franklin Delano Roosevelt famously called this the “freedom from want” that he said everyone should enjoy equally. Of course, that was a totally unrealized promise.
Our public retirement system, as part of Social Security, replaces about 40 percent of workers’ income if you’re an average income earner. If you make more, it replaces less; if you make less, it replaces a little more. That leaves a pretty large gap that needs to be filled by some other source of retirement income if people hope to maintain their standards of living. Private pensions filled that gap.
Why did America go down this road after World War II, while other advanced capitalist countries embraced more robust public programs? Because organized labor was strong in America, but not strong enough.
If you look at the development of the welfare states in Europe after World War II, you find labor and socialist parties programmatically oriented around a social-democratic vision for those societies. With labor not just being one constituent group in those parties among many, but the most important group, they pushed these agendas and actually saw them won despite the initial opposition from capitalists.
In the United States, the Congress of Industrial Organizations was a junior partner in the Northern Democratic-New Deal coalition after the war. The American Federation of Labor did not formerly attach itself to the Democratic Party at the national level until its endorsement of Adlai Stevenson in 1952. After the end of the war in 1945, unions were able to make gains because there was some support from New Deal Democrats for private pensions. But they weren’t strong enough within that coalition or strong enough socially to actually make public gains, like happened overseas.
Labor was strong in the United States, but not actually strong enough. They were strong enough to get Truman and his allies to intervene in postwar strikes in support of private pensions, but they weren’t strong enough to change the character of the Democratic Party.
You use this phrase throughout the book, “balance of class forces.” Can you define that? It’s essential to talking about how workers win anything.
The balance of class forces is a term used to describe the character of class struggle in any given time or context. Labor and business are going to have different degrees of organizational power, with each party’s ability to organize around their interests and win dependent on how much power they have relative to the other.
That gets determined through a variety of institutions and settings. It happens in the voting booth and in the ability of groups to mobilize voters around their aims and message; it happens on the shop floor, where workers and management can organize around their interests in opposition to each other; it happens between organized interest groups in politics in the form of lobbying; and it happens in the streets where people can be mobilized to disrupt and agitate for certain interests. The balance of class forces is broad because it incorporates a lot of different tactics and forms or organization and political leverage around a deeply fundamental question — which side has the advantage, labor or capital?
You can see in the development of private pensions that class power and class struggle was actually key.
After World War II, the major industrial unions in the United States pushed pretty hard to expand the Social Security system in significant ways. There was a bill called the Wagner-Murray-Dingle bill that would have created a universal health-care system, and it would have greatly expanded public pensions — not just covering people that were left out, like farm workers, home-care workers — mostly black and Latino occupations that were excluded from the Social Security Act, but it also would have made the program much more generous.
This bill got killed; it didn’t have enough support, not just among Republicans and Southern Democrats but among Northern Democrats, too. Roosevelt himself, in a shift to the right of his so-called “freedom from want,” refused to back it. Other plans that both of the labor federations supported, like the Townsend Plan, similarly failed to gain political traction. Supported in the streets but not in Congress. Lacking the capacity to shape legislation in the halls of politics, unions were forced to turn to collective bargaining to try to win fringe benefits as an alternative.
After World War II, there’s a major strike wave — the biggest in history to that point. But capital is actually perfectly happy to let workers go on strike. In many of these strikes, firms just let stock and equipment sit idle because of the drastic drop in the demands for their goods after the war. Plus, they had large numbers of returning soldiers that they could run as replacement workers, so they weren’t really threatened by the strikes.
But during this period, politicians were terrified. They saw this as something that could potentially undermine efforts to establish economic connections in war-torn Europe and war-torn Japan, to move American products into those areas to create new sources of profit for the United States. This is a very important recurring theme in my book: politicians at their most fundamental are responding to the structural imperative to promote capitalist growth. How they do that depends on the balance of class forces.
Truman and his allies had a major conference called the President’s Labor-Management Conference in 1945 where he brought together all the key labor leaders, like those in the AFL and the CIO, and the major leaders of the different business associations, like the National Association of Manufacturers, the Chamber of Commerce, and several others.
It’s important to recognize that Truman and other politicians faced a dilemma which they called the “reconversion problem.” The dilemma was, how would the state help the economy transition from a wartime context where labor-management relations and possible unrest were managed with wartime agencies and institutions, like the National War Labor Board, to a postwar situation where those agencies would be dissolved?
The President’s Labor-Management Conference was their attempt at a voluntary solution. Truman opened up the conference with a speech saying, “The whole world now needs the produce of our mills and factories — everything stands ready and primed for a great future.” A possible breakdown in production signaled the possibility of nothing short of a crisis for the American state.
But labor and management found each other at loggerheads, and were not able to work out a deal for a production plans that would be unmarred by industrial conflict. Management was simply unwilling to concede on issues of corporate power, shop-floor management, and wages and fringe benefits.
Over the next few years, the strike wave unfolded. But the state’s effort at a voluntary solution to labor-management problems always explicitly shadowed its willingness to use force if necessary to increase industrial output.
At the close of the failed conference, Truman noted, “In such industries, when labor and management cannot compose their differences, the public through the federal government has a duty to speak and act.” Which is exactly what the state did. Truman intervened in these strikes, sometimes literally seizing industries, sometimes seizing plants, and in doing so he and his administration forced the hand of management to negotiate with labor over fringe benefits.
In one of the strikes, in steel, the National Labor Review Board made a key decision that said that employers had to negotiate over fringe benefits — not that they had to provide them, just that they had to be willing to talk about it. And that decision was basically given a rubber stamp by the Supreme Court in 1949. This was the event that helped to spread private pensions to many workers through collective bargaining. And by the end of 1949, the most staunch, anti-pension business association, the National Association of Manufacturers, says bargaining over these things is now a fact.
Let’s get back to your original question: where does the balance of class forces come into it? We have to ask ourselves, why is it that Truman intervened in the way that he did during the strike wave? After all, Republicans and Southern Democrats were arguing that the state should have simply crushed labor.
We should not misunderstand his motivations. Truman just wanted to promote the expansion of American capitalism to be able to take those opportunities abroad for new sources of profits for American firms. So why did he intervene in support of labor? In short, because labor was a significant constituency within the Northern Democratic Party. Through the CIO Political Action Committee they turned out huge numbers to vote for Northern Democrats. C. Wright Mills went as far as to call the CIO an “appendage of the Democrats.” Northern Democrats needed those votes.
This is the important point, the CIO’s role in the New Deal coalition gave labor a certain advantage in policy-making. But it was also a point of weakness. It was precisely their junior-partner standing within the party that didn’t allow them to radically shape the party’s politics and program — and in turn move America’s welfare state away from the market.
Can you talk a little more about the beginnings of this system? Some of those strikes, where the government seized factories, were over the employer refusing to give people pensions. This was after labor had tried to win a universal pension system, as well as health care and more.
Some unions, like the United Auto Workers (UAW) under Walter Reuther for instance, pushed hard for private pensions as a strategic maneuver. Reuther and many other unionists believed that pushing for fringe benefits was a way to get employers and their associations to support expansions in social security.
The logic is straightforward: if the large, unionized firms believe that their unions are going to force them to offer fringe benefits wouldn’t it be better to socialize that cost and even the competitive playing field against other firms that weren’t offering them by expanding the public system instead? This is what a more universal system does. Everybody has to pay for that, and so it equalizes competition a little bit within and across sectors of the economy.
It actually turned out not to be true. Labor underestimated capital’s own commitment to capitalism — even when this came with a market disadvantage. After pressuring firms to adopt private pensions, they were still hostile to expanding social security on ideological terms. Just as we see with things like health care today, which makes up a significant operating cost for many firms. Even though it was more cost effective for companies that had big pensions and health-care plans to have a universal plan, they still fought bitterly against it as a form of socialism.
Maybe they understand that if the average American worker had access to free universal health care or to a pension system, it would increase their power as workers to make other demands on capital. Because they wouldn’t have to worry about losing their health care or pension plan, workers would be empowered to fight for other things.
The public provisioning of the necessities of life decommodifies labor. It basically makes it so that workers are not as reliant on what they can get out of the market for their own survival. That’s a fundamental feature of what welfare does and a key justification for why socialists should support it. It decouples our lifestyle and our standards of living from our income. As welfare is eroded, those two things are re-coupled. How well we do on the market becomes the determinant of how well we do in all sorts of different areas of our lives. Firms have a strong preference for this, because it makes workers more exploitable.
After the universal pension system fails, you get these private pensions, and all of sudden, labor’s enemies realize unions are going to soon have billions of dollars at their disposal to do what they want with.
Robert Byrd, a West Virginia senator, said that if unions controlled their pension funds, “labor unions would become so powerful that no organized government would be able to deal with them.” They would become the most powerful working-class force on the planet, at least in terms of the amount of money they controlled.
Pension funds went from about $25 billion in assets in 1952 to having about $11 trillion in 2007, right before the crisis. As soon as unions won these plans, politicians had the foresight to see that they could actually become weapons; they could control finance in ways that could strengthen the unions to a point the government can’t contain them.
Look at who controls stocks — in the 1950s, right before this explosion of private pensions, it was individuals, it was families, like the Rockefellers, the Du Ponts, and the Morgans. Individuals and their families controlled about 93 percent of total stock in the United States back then. Today, it’s institutional investors, representing mutual funds and pension funds.
By the 1970s, pension funds controlled 25 percent of all American corporate equities. I want that to sink in: 25 percent of all American stocks were controlled by pension funds, which were essentially the deferred wages of workers.
When these got set up, politicians knew that these institutions could be could used for all sorts of things. And unions knew that, too.
In the immediate postwar period, John L. Lewis from the United Mine Workers made a huge effort to not just win pension funds but also to control them. The Steelworkers tried to control their funds. The UAW also tried to control their funds. I go into a lot of detail about how labor has tried to control financial flows through their pension funds in the book.
But from the beginning, their efforts to control these funds were undermined and sabotaged through politics. A key piece of legislation is the Taft-Hartley Act, which did all sorts of anti-labor things, like outlawing secondary boycotts, making union members sign non-communist affidavits, banned closed shops, and so on. One of the things that’s not much discussed, however, is how Taft-Hartley regulated pension funds.
Taft-Hartley makes it so that the board that governs the fund — that decides how the money is invested — had to be filled with at least 50 percent employer representatives. In many of the plants, this basically kept unions from controlling the funds. And it kept them from being able to decide where the money went.
Why does this matter? It matters because the pension fund money was financialized and moved into the stock market in ways that actually hurt workers.
Oftentimes we talk about financialization as being something that started in the 1980s. During that period we can see a real trend in the data on corporate profits that show firms are turning more and more to speculation on Wall Street as a means to gain additional profits. But actually, pension funds are really where financialization begins. The movement of these funds out of the bond markets, out of more secure investments, into the stock markets happens much earlier in the 1950s and 1960s. And it is collectively bargained retirement funds that are the first to be financialized in this way.
How does this end up hurting workers? Union funds start to get invested in anti-union companies, companies that have a greater and growing proportion of their operations overseas, in places where they have highly exploitative labor regimes. They start to get invested in precisely the same companies that are the reason why labor is in such dire straits right now.
This has contributed to a race to the bottom in labor standards not only in the United States, but in less developed countries too, where those exploitative firms have been even more rewarded in the financial markets.
Because labor has not been able to control their funds, their funds have been used to finance their own destruction — and indeed the degradation of the global environment; ecological standards in fund management have never been a real condition of investment.
The strange and ironic twist is that the whole reason they’ve been investing like that is because they’ve been chasing rates of return. This is part of the law, too — investing rules for fiduciaries are laid out most clearly in the Employee Retirement Income Security Act of 1974. One of the key requirements of investing is you have to invest where you think you’re going to get the highest rate of return — social and other non-financial considerations cannot supplant that.
If fracking is hot, then your fiduciary responsibility is to invest in fracking companies.
Exactly. But even on that front, union funds have underperformed in the stock market, their investments have brought a lower rate of return than the standard indexes on the stock market like the Down Jones Industrial Average or the S&P 500. Today, despite chasing risk for returns, many unions’ funds are actually financially falling apart.
So these funds have both contributed to anti-union standards but also have not even been sound sources of retirement investment for the workers who have a direct share in them. They have failed both the stakeholders and the shareholders.
You mention Quebec as a counterexample in the book. These kinds of restrictive laws didn’t exist there, so workers started to use that money to ameliorate the effects of deindustrialization.
In the early eighties, there was a growing movement for independence in Quebec. As part of their effort to repatriate Francophone Quebec and separate from the rest of Canada, the Fédération des trailailleurs et traivailleuses du Québec (FTQ), created what are called labor-sponsored investment funds. These are union-controlled pools of financial assets. The FTQ used these funds to invest in small- and medium-sized companies in Quebec to keep money there. It was a nationalistic approach to fund investment, which ended up creating a significant amount of jobs for the province — despite the fact that Quebec’s effort at independence went unrealized.
There were actually similar efforts in the United States as well. During the runup to the election between Carter and Reagan, one of Carter’s plans, which the AFL-CIO got behind, was this idea of “reindustrialization,” which in retrospect was Keynesianism’s dying gasp.
As part of a broader plan, Carter proposed having an Economic Revitalization Board, on which AFL-CIO Lane Kirkland would serve as a chairman, that would direct pension fund investments into areas undergoing severe economic decline like Detroit and Buffalo by guaranteeing a minimum rate of return for participating pension funds. Their idea was that government could use these pension funds to invest in those very same places that were in economic decline because firms were chasing profits in cheaper labor both in the US South and overseas.
The aim was, in Carter’s words, “to help revitalize American industry in areas most affected by economic dislocations or by industrial bottlenecks.”
There was a lot of support for this, even within the mainstream of the Democratic Party. Governor Jerry Brown of California wanted to “redirect the vast pension funds of this nation to more socially responsible objectives.” Of course, Reagan’s alternative of creating “enterprise zones” won. And today, Detroit is what it is.
We could live in a very different world if unions had been able to wrest control of their own money from these capitalists. But instead, Wall Street is getting rich through West Virginia coalminers’ and Pennsylvania steelworkers’ and Chicago teachers’ pension funds. The average workers, whose standard of living is going down further and further — their money gets pooled, and these money managers get to use the workers’ money to continue to screw them.
And money managers are the .01 percent. Those are the guys — and they’re all guys — that are making millions of dollars a year.
Your book has a whole chapter on 401(k)s and how they represent a neoliberalization of retirement funds that, as you mentioned, puts the onus on the worker: if you have a 401(k), then it’s up to you to manage it smartly.
Unlike a pension, where you’re guaranteed a certain return, your payout from the 401(k) depends on the fluctuations of the market.
And of course, an additional sad irony that researchers have discovered here is that these fund’s investments may actually contribute to financial instability as well — not just be subject to them. Many pensions were pretty heavily invested in sub-prime mortgages, which of course crashed the whole market.
Right. And if you retired in June 2008, then sorry — you lose, for no fault of your own. You’ve been investing all your money with these money managers, who then take the money and crash the economy. But you can’t even retire.
What is the state of retirement funds now?
40 percent of American workers have a pension. 60 percent don’t have any at all. Of that 40 percent, 70 percent have a 401(k). The traditional pension plans won after World War II by unions are fast becoming a thing of the past. And what this means is that we’re moving toward a system in which our retirement security, the actual quality of our life once we stop working, is more and more dependent on us to figure out. There has been a slow but steady marketization of retirement security since the New Deal. That’s what this story comes down to: the guarantee that we will have something when we retire becomes weaker and weaker.
Employers and employers’ associations have been trying ever since the establishment of Social Security to move to a system that is fully dependent on your own individual thrift. I’m not exaggerating; this isn’t a Marxist conspiracy theory. There’s document after document in the business archives where not just individual businessmen but their actual associations say, “We want to move to a system of individual thrift.” 401(k)s are one important step towards that.
So when we think about the state of retirement, right now we’re moving more and more toward what capital wants, which is to not have any social support through social security. In short, to more completely commodify workers and their labor.
They want that because it makes us more exploitable. When we go to work, we’re more dependent on them. Businesses love dependent workers, because you can do whatever you want to them. You can boss them around, you can pay them poverty wages, you don’t need to provide benefits, and you can work them in unsafe conditions. From the capitalist’s perspective, that’s good for business. It’s not good for business when people say, “I have savings. I don’t need to work here. I’m retiring early.” That’s not good. Desperate workers make happy managers.
That’s where we’re going. We’re moving toward that pre–New Deal model of individual thrift where we have increased rates of old-age poverty and people forced to continue working well into their so-called golden years.
There is a ray of sunshine, though. Where were we prior to the New Deal? About 10 percent of working people in the United States were in a union. Today, about 10 percent of working people in the United States are in a union — it’s more or less the same. Prior to the New Deal there wasn’t a significant presence of organized labor. But despite that, there was a major upsurge of ordinary poor and working people that forced the hand of government to create this amazing thing that we have called Social Security.
Even though we’re in a situation where we’re returning to that past age, there are lessons from that past about how to get out of it. And they point squarely to disrupting work and politics, fighting for a better system through organizing for poor and working people. It’s only a lost cause if ordinary people sit on the sidelines and watch it happen.