Pensions in Peril

Traditional pensions, both public and private, are an endangered species. We must wage a bold battle to save them.

By Clyde Weiss

Across the country, there's a growing and ruthless corporate attack on pensions, which is taking the security out of retirement for millions of American workers. Increasingly, corporations — with familiar names like IBM, United Airlines and Verizon Communications — have either terminated or "frozen" their private-sector pension plans, leaving hundreds of thousands of workers with reduced pensions or none at all.

New hires are especially at risk. The attack on this traditional and basic form of retirement security — long fundamental to the social contract between employer and employee — is now spreading to state and local governments.

Workers are fighting back to preserve their pensions, and in some instances they're winning. Exhibit A: California Gov. Arnold Schwarzenegger (R) was pressured by members of AFSCME and other progressive organizations to drop his support for a ballot initiative that would have prevented public employees hired after 2007 from participating in the Golden State's pension system. (See article on California) That came on the heels of an even bigger win — the defeat of the Bush plan to privatize Social Security.

The failure of conservative ideologues in California didn't stop them from trying elsewhere. President Bush even stepped into the fray last year, sending his director of intergovernmental affairs to Alaska to personally lobby wavering GOP lawmakers to change the state's pension-based retirement system. Now, as a result of a bill signed by Gov. Frank Murkowski (R), public employees and teachers hired after this July will be barred from participating in a pension plan. Instead, they will only be allowed to contribute to a 401(k)-style savings account. Similar efforts are under way in several other states (see state listing).

FALSE CLAIMS. When the ideologues concluded that they could not dismantle Social Security, they turned their efforts to unraveling public pensions. Their goal: to weaken the public sector and our unions. Their strategy: to scare and misinform taxpayers and government leaders (see Myths). They claim, for instance, that public employees' pensions cost taxpayers too much. That's simply not true. Taxpayers, through state or local governments, contribute less than 15 percent of the cost of maintaining such systems. For example, in California, about 75 percent of the cost of the state pension plan comes from investment earnings, while 12 percent is contributed by the employees and 13 percent by the state.

Opponents also charge that some pension systems are in trouble — and should thus be discarded — because they're under-funded. While some are, the average large public-pension plan is nearly 90 percent funded, according to benefits consultant Watson Wyatt Worldwide. States with significant pension shortfalls have themselves to blame: Elected officials chose not to contribute to them, allowing temporary stock market gains to mask their fiscal irresponsibility.

Many pension funds are still suffering from the billions in losses they sustained from Enron, WorldCom and other corporate scandals. But pension experts say most state and local governments can afford to make up the funding shortfall. Like mortgages, pension funds can be made whole as states make payments over time to finance them.

Traditional pensions, also called defined benefit (DB) plans, are actually a more efficient way for taxpayers to pay for retirement benefits than 401(k)-type (defined contribution or DC) savings alternatives. What's the difference? It's simple: With a DC plan, the question is how much goes into the plan; with a DB, it's how much comes out — that is, gets paid to the retired worker.

The fees for managing these privatized plans are five to 10 times higher than traditional pensions. So DC plans provide less security and are not as efficient. Also, the earnings of DC plans are, on average, about 4 percent lower. Thus, Nebraska, which had the oldest DC arrangement in the country, converted back to a defined-benefit pension program about three years ago. Many retiring Nebraska public employees had so little money in their DC accounts that the state was forced to pay them welfare benefits!

The thought of having to depend on a private investment account for one's retirement scares Los Angeles Superior Court clerk Cher Mason, chief steward of Local 575 (Council 36). During last year's fight against Schwarzenegger's plan, she visited "as many people as possible, face to face, to urge them to vote no." Explaining her fear, she says: "It would definitely be a lot riskier for me — and would make me extremely nervous — because you hear in the news about companies merging or filing for bankruptcy. People who know how to invest are on the phone with their brokers immediately. But I'm sitting in my living room going, 'What the heck do I do now?' I have no clue. I have faith, however, in how my pension board is investing my money."

WINNERS & LOSERS. There are only two real winners in a privatized retirement system: Wall Street firms that stand to reap billions in windfall management fees; and right-wing ideologues who gain power by weakening the investment clout of public pension boards. These boards (see related article) exercise a vital function: to use their investments to encourage companies to operate in ways that protect all investors from Enron-type scandals.

Public pension boards have led the effort to encourage "good corporate governance," says Keith Brainard, research director for the National Association of State Retirement Administrators — including AFSCME's own Pension Plan. That's why ultra-conservative opponents want to cut off new sources of money for them. "As the assets within the funds' control decline, so does their ability to influence corporate behavior."

Ideologues are upfront about their intentions. A key player behind Schwarzenegger's now-derailed pension ballot initiative, Jon Coupal, president of the Howard Jarvis Taxpayers Association, said the group's motivation for pushing the initiative was to prevent California's public pension board from "straying into corporate governance." Bluntest of all about his desire to weaken public pension boards is Grover Norquist, the reactionary leader of the pro-Bush group Americans for Tax Reform: "We want to take that power and destroy it."

This movement to do away with retirement security for the American worker must be stopped. Since one quarter of public employees aren't covered by Social Security, a traditional pension is all they can count on to guarantee their retirement!

The fight to preserve pensions everywhere is critical to the 6 million retired state and local public employees who rely on them today, as well as the more than 14 million public workers who are counting on those benefits being there when they retire. That's why President McEntee is helping to establish a national coalition to protect pensions and lead the fight on behalf of all public employees. It's a fight that AFSCME members — who participate in public pension plans that hold retirement assets worth some $1.5 trillion — must win.

Related Stories:

AFSCME: Shareholder Watchdog 
Myths & Facts 
A Bright Spot: No Termination Here 
Your Retirement at Risk: State Battlegrounds 
Serving To Protect Your Pensions