Connecting History

Connecting History logo


Milestones logo

Hot off the Press

Book Reviews logo

History Talk

History Talk logo

Ducking Out on Retiree Benefits

by Jennifer Klein on Nov 27, 2005

Jennifer Klein

With the passage of a Senate bill shoring up private pension plans, public attention is finally turning to “legacy costs” — what Wall Street bankers and corporate executives call long-promised retiree benefits. And not a minute too soon. After a decade of underfunding their pension plans, flagship American corporations have now been ducking behind the closed doors of bankruptcy court to dispose of employee pensions.

It’s time to ask: whose legacy is it, anyway?

General Motors owes $89 billion in health insurance and pension benefits to current and future retirees. The bankruptcy of its supplier Delphi adds another $6 billion to the tab. United Airlines, with the help of bankruptcy court, defaulted on its pension plans and handed them over to the government at cut rate.

The word on Wall Street is that unless workers accept big cuts in their benefits, these corporations will be broken up. That’s the wrong response and the wrong solution.

Legacy costs are a political, not a corporate, problem. The right solution is to pool the risk for workers and employers through cooperative, shared, funded and mandated supplements to Social Security pensions.

Corporate management has long attempted to treat welfare benefits as a private realm of managerial prerogative, sealed off from public discussion and political challenges. Yet all debates about Social Security take for granted that Americans rely on a mix of public and private pensions. Like it or not, company pensions are part of public policy.

This struggle between private benefits and social responsibility has deep roots. Since the 1890s, American firms have instituted a range of private welfare schemes, particularly in periods of labor upheaval and social reform. Before the Great Depression and New Deal, large employers made gestures toward employee old-age security, but these were mainly posturing.

Among companies claiming to offer pensions, 84 percent did not actually set money aside to fund these obligations. They also attached strings. AT&T, for instance, reserved the right to revoke a retiree’s pension benefits at any time for acts or statements it deemed “prejudicial to the interests of the company.” Fewer than 2 percent of American workers retired in the 1920s with any income support from their employers. After the Depression hit, Congress passed the Social Security Act in 1935 because legislators finally realized that businesses were too unstable to provide long-term security. Risk, the Congress decided, needed to be pooled across the whole society.

The government’s new role did not sit well with business, which feared the expansion of federal power into its relations with employees. To counter that possibility, companies after World War II sponsored new private pensions and insurance benefits. In 1950, General Motors took on health and pension obligations in an unprecedented 5-year contract known as the Treaty of Detroit. By extending promises for old-age security to employees, America’s largest companies headed off political solutions such as national health insurance and more progressive public pensions. Outflanked, liberals and unions eventually accepted the system of employer-provided benefits.

As a result, public policy consistently deferred to, indeed subsidized, the private system, even though plenty of gaps in coverage remained. Tax exemptions for contributions to pension plans and pensions trusts amounted to an annual $50 billion subsidy by the end of the century.

In 1979, when the private pension system had reached its peak, covering half the American work force, business leaders turned to the new 401(k) plans, ushered in by the Revenue Act of 1978. This shifted a large slice of the pension burden back onto the shoulders of employees. After the act’s passage, the IRS approved the use of employee salary reductions as a source of retirement plan contributions without any additional employer contribution. With that, employers had the ideal mechanism to cut their contributions to retirement plans.

Now as in the 1920s, neither private employers nor personal savings can ensure that Americans will live decently in old age. Today’s workers actually pay more for their retirement plans and get less retirement security than twenty years ago. Private savings are declining as Americans face increasing medical and personal debt. Employer-sponsored pension income from the private sector accounts for only 20 percent of the income of today’s retirees over 65.

As more companies dump their traditional plans on the government’s Pension Benefit Guarantee Corporation, pensioners stand to lose 20 to 50 percent of the value of their long-promised pensions. Since the PBGC itself had a $23 billion deficit last year, the public may soon face the unpleasant social costs of employers’ evasions. That’s why Congress has suddenly jumped into action.

Delphi’s bankruptcy and the increasingly uncertain future of GM signal that pensions have become expendable. As with the welfare capitalism of the 1890s, corporate executives want to turn questions of social distribution into private managerial issues insulated from public oversight. But the fate of General Motors’ debt to its employees is not a private matter to be decided behind closed doors by aggressive stockholders, slash-and-burn executives, or judges.

We need policies that emphasize social pooling of risk, not Wall Street’s prescription of employee pay cuts and benefits roll-backs. Social Security is still the one sure deal. Unlike profit-seeking corporations, the government does not get liquidated by its shareholders.

Jennifer Klein, a member of the Yale faculty, is a writer for the History News Service and the author of "For All These Rights: Business, Labor, and the Shaping of America's Public-Private Welfare State" (2004).