The Politics of Pensions

By Kevin D. Williamson

Tuesday, March 09, 2021

 

A real-estate developer asked a consultant what he could do to make a planned building more durable. How durable? Durable enough to still be standing centuries from now, or even a millennium hence — a tall order considering that the average life expectancy of a new commercial building in the United States is measured not in centuries but in mere decades, and not very many of those. But there are things you can do to make critical components last a very long time: For example, you could cover the roof in gold, which, thanks to its remarkably nonreactive nature, isn’t much bothered by atmospheric chemicals, ultraviolet light, or moisture.

 

It’s good stuff, gold. But you do not see very many gold-roofed buildings around the world, and those you do see tend to be built or patronized by men bearing such titles as emperor or maharaja. Gold is expensive, of course, but even after the initial construction costs, gold imposes other long-term commitments: Thieves steal the roofs off churches for the copper, and gold would provide a much stronger lure; a gold-roofed building is going to cost more in taxes and insurance; in the event of physical damage to the roof (say, from an asteroid or a World According to Garp–type mishap) repairs are going to require more gold, and will be more expensive than fixing shingles would be. You don’t build a gold-roofed building to flip it. You need a pretty long-term point of view to put up a golden roof, which is why you mostly see them commissioned by religious leaders and heads of dynasties.

 

People who take a less magnificent view of the world are not so inclined to such grand gestures: If the Sistine Chapel were a Presbyterian sanctuary, Michelangelo would have been ordered to put up wood paneling.

 

Instead of buildings that look like the Golden Temple in Amritsar, Americans tend to put up a lot of commercial buildings that look like Home Depots and Walmarts, often employing what is known as “tilt-wall” construction, which is faster and more economical than other kinds of construction but which also produces buildings that are likely to require work in a relatively short period of time. It may sound shoddy, but it is in many cases the intelligent choice: We build according to our known needs rather than according to unknown needs, and it is very difficult to say what commercial life will look like ten years from now (consider the radical shift in the retail environment in the past year) much less 100 years from now. We could put up buildings designed to last 500 years, but we could not say with any confidence that these buildings would be genuinely useful, no matter how durable they are. I live in a 100-year-old house that has required many renovations over the years, not because it was built incompetently but because it was built reasonably well during the Harding administration, when there was no air-conditioning.

 

I trust the application to the ridiculously named “American Rescue Plan” is perfectly obvious.

 

No?

 

The so-called American Rescue Plan, which would be more accurately called the Democrats Looting the National Fisc to Pay Off Demanding Constituencies and Grease Every Squeaky Wheel to the Left of Mitt Romney (DLNFPODCGESWLMR) Act, contains a few nickels and dimes for coronavirus vaccinations and billions upon billions of dollars to bail sundry labor bosses and financial managers out of the most recent episode of financial trouble associated with union pension plans, a decades-long parade of organized crime and disorganized incompetence brought to you by the Teamsters, the mafia, Wall Street, and the most ruthless mob of them all: the U.S. government.

 

This is straight-up piracy, but it is also more than that. Like their public-sector counterparts, these union-run multi-employer plans are in trouble not because of the coronavirus epidemic or some other unforeseeable circumstance but simply because they have promised extraordinarily generous benefits and failed to put aside money to pay for them. Under pressure from previous underfunding, the managers of these pensions (a committee that has over the years included everyone from Goldman Sachs to Labor Department regulators) have sought out riskier and riskier investments, hoping to achieve higher returns and help them close the gap. That has — contain your jactitations of shock and alarm! — not always worked out as intended. (The thing about risk is, it’s risky.) In effect, they took their money to the casino, came up short, and now are using their political clout with the Biden administration and congressional Democrats to demand that somebody else — you taxpaying suckers — make good on their losses.

 

Democrats in Congress — and, especially, those who hope to one day become president — take their orders from the union goons because while the American labor movement represents relatively few private-sector workers, it can end any given Democrat’s career in elected office pretty easily. (See: California, hilariously incompetent misgovernance of.)  And, increasingly, the labor movement is dominated by public-sector employees rather than private-sector ones, public-school teachers and police rather than factory workers and truck drivers. These public-sector workers are naturally comfortable with the forced transfer of wealth from the public at large to rapacious and highly organized political constituencies — that is their business model.

 

But the piracy is only the beginning of the problem. The larger problem is that both public-sector and private-sector actors are making plans for golden-roofed palaces in a mobile-home world.

 

One of the difficulties faced by some of these pensions is that most of the large employers that were expected to pay into them no longer do so, many of them having ceased to exist. As Elliot Blair Smith put it in a 2016 MarketWatch write-up of the sorry history of the Central States pension fund: “Only three of the plan’s 50 largest employers from 1980 still pay into the plan. And for each active employee, it has 5.2 retired or inactive participants.”

 

If corporations did nothing but grow and stack up profits, then this would be a pretty good system. But that isn’t how things actually work.

 

In spite of the sci-fi trope of immortal, galaxy-spanning corporations, the modern business firm is in fact a relatively vulnerable and short-lived thing. In the middle of the 20th century, a big corporation might be expected to stay in business for the better part of a century; today, the average big corporation will not live long enough to legally order a beer. McKinsey has estimated that three-fourths of the companies listed in the S&P 500 in 2017 will disappear within ten years. This is an inconvenient thing for people who expect to be taken care of for all of their adult lifetimes by a single employer, but it is the result of improved business practices rather than defective ones. As businesses become more focused on their core competencies and learn to adapt more quickly to changes in the market, they become ever more temporary partnerships among different kinds of capital: physical, financial, and human.

 

In the old days, big corporations thought of themselves as being as permanent a part of national life as the Washington Monument or the Department of Defense: U.S. Steel really thought of itself as the U.S. steel company, an assumption that was reflected in everything from its magnificent corporate headquarters to its grand business plans. U.S. Steel, which was once so dominant a player that on Wall Street it was called, simply and reverently, “The Corporation,” has gone through a number of reorganizations and evolutions, and remains in our time as the world’s . . . 27th-largest steel producer. Its former headquarters in Manhattan is best known today as the apartment building where Dominique Strauss-Kahn served his house arrest.

 

Things change.

 

A defined-benefit employer-based pension plan may have made sense when retirements typically lasted maybe ten years (a man born in the United States in 1950 had a life expectancy of 65 years and change) and corporations lasted 100 years. In our time, retirements may last 40 years, while big businesses often vanish before they are old enough to drive. (Corporations are teen-agers, my friend.) Policies that bind retirement benefits, health care, and the like to employers are based on faulty assumptions about the real position of corporations and the long-term relationship between businesses and employees. Some conservative policy proposals are oriented toward delinking Americans’ long-term economic interests (retirement, health care) from their employers, ideas that have proved much more popular among think-tanker personnel than voters.

 

Writing in the New York Times, Paul Krugman complains that Americans are cursed with too many choices, including choices about how to prepare for retirement. Faith in individual choice, he writes, is a product of right-wing ideology. “The spread of this ideology has turned America into a land where many aspects of life that used to be just part of the background now require potentially fateful decisions. You don’t get a company pension, you have to decide how to invest your 401(k).” Professor Krugman seems to me to be a man who very much values his position, so he does not even whisper the name “Charles Murray,” but he does make a pretty forthright case for wider corporate and political paternalism to relieve the “cognitive burden” (a term Professor Krugman does use) on the poor and the middle class, who are unprepared to carry the load. Professor Krugman is plain in his conclusion: that “in America we probably have more choices than we should.” I do wonder if he has thought about how this ought to apply to things like choosing political representatives, but the more immediate question is: If Americans are to be relieved of the burden imposed by these choices, who is to be empowered to make such choices on behalf of those who are not packing the gear to hack it, cognitively speaking?

 

In the golden age of American progressivism, the reformers and managers were for the most part forthright corporatists, meaning that they sought to work out a mutually acceptable modus vivendi between business owners, workers, and government in pursuit of what they believed, sometimes sincerely, to be the “public interest.” (“Corporatism” is the old name for “stakeholder capitalism,” abandoned because Oberlin graduates shudder at the word “corporation” and because of the term’s association with 20th-century fascism.) And so rather than have the state provide cash benefits to low-income workers — and account for those benefits on both the taxing and spending side of the ledger — the government simply orders employers to pay them more (or, more precisely, forbade them to pay them less than a certain minimum), and, over the years and in a piecemeal fashion, the state has added things such as health insurance and retirement benefits to the mix. This may continue to work reasonably well for short-term benefits that workers rely on during their active working years, but it is a poor strategy to stake your long-term security in retirement on a company that is, statistically speaking, unlikely to survive as long as you do.

 

As the Biden bailouts show, these employer pension plans have a way of becoming government pension plans. The workers aren’t to blame — they signed up for certain pensions and expect to receive them — and many of the employers aren’t around to blame, either. The unions bear some responsibility, but the real problem is that all the incentives encourage everybody to make big promises now and put aside the money to meet them . . . someday, in the Keynesian long-term when all who were at the table when the deal was done have gone on to their eternal reward.

 

Which leaves us with bailouts.

 

The U.S. government has been in the pension business for a long time, and it is even worse at it than the Teamsters are. The unfunded liability of Social Security (meaning the amount of money the system would need to have right now to secure its long-term solvency) is $38 trillion. The unfunded liability for Medicare adds another $53 trillion to the burden. For perspective, the unfunded liabilities for those two programs — by themselves — add up to about three times the total value of the S&P 500. The U.S. Pension Benefit Guarantee Corporation, a privately funded, government-managed insurance scheme that pays out promised benefits for certain insolvent pensions, has liabilities that exceed its assets by tens of billions of dollars — better than tens of trillions, but still a poor position.

 

And so our choices look like this: (1) We can make long-term bets on increasingly short-lived corporations; (2) we can make long-term bets on the U.S. government, the mendacity and financial irresponsibility of which are among the most redundantly documented facts of modern financial life; (3) we can, with the tut-tutting disapproval of Professor Krugman, encourage those poor cognitively burdened Americans out there in the dank and wooly wilds of the real America to take principal responsibility for their own households.

 

Or we could try to come up with policies that reflect the real limitations on what can be expected of employers, that account for the indiscipline of the U.S. government, and that are well-suited to the habits and lives of a people who spend an awful lot of money on lottery tickets and currently are suffering an emotional convulsion over the content of Dr. Seuss books. Which is to say, we could come up with policies that work in a country where the corporate headquarters are not roofed in gold.

 

That would probably mean replacing defined-benefit plans with defined-contribution plans and then applying to these the paternalism that Professor Krugman argues for, mandating substantial retirement savings and giving workers fewer choices about how much to save, how to invest it, and how to spend it in retirement. The politics of that are going to be pretty hairy, so expect to hear a lot of homilies about greed and the horrors of unregulated capitalism as practiced by . . .  the Department of Labor.

 

Maybe we could outsource this mess to the Swiss.