Why Private Pensions Failed

It is practically impossible to get a job with a pension these days, except in government.
It is practically impossible to get a job with a pension these days, except in government. While the government can print money willy-nilly to meet its obligations, private corporations do not have the same luxury. Chances are, any private companies that still maintain pensions only do so because the government is its primary client or they are part of an unavoidable oligarchy, like utility companies, that have a captive market and can control prices.

The establishment of pensions marked a level of enlightenment between business, labor and government. The New Deal really was new and fairer for everyone. In the run up to The Great Depression, the Roaring 20's were marked with many excesses of greed, including child labor. Reform brought abuses to an end, and moral reasoning and long-term thinking became policy.

Now we have a minimum wage that does not meet a minimum cost-of-living, much less retirement. Social Security is too little to offer true security. Corporations have divested themselves from responsibility to their employees and instead encourage them to invest using 401K's on Wall Street. The same bubbles that spawned the Great Depression are now encouraged. We see all the hallmarks of the previous depression: fantastic gains and losses on Wall Street, businesses collapsing, banks insolvent, savings evaporated and jobs scarce.

Our economy is only kept afloat because of the National Debt. It is a bizarre thing to need more water to keep from drowning. If the Tea Party succeeds in preventing raising the debt ceiling, the economic collapse would be hard and swift. While they mean well, their approach is fiscally irresponsible, and their rejection of the Social Contract is morally irresponsible. Yet, their critique is not without merit. The national debt is growing so rapidly that even public pensions are endangered. A 'separate but equal' retirement system for public employees is unjust, but it is a symptom of the problem, not the cause. Inflation is accelerating faster than incomes. Everyone is struggling with the cost-of-living. What happened?

The answer lies in the destructive nature of capitalism and the 'race to the bottom.' Competition may make businesses more creative and efficient, but it also makes them heartless in the desperation to survive. Compassion and empathy are no match against the laws of mathematics. Highly profitable corporations are unable to make long-term commitments and remain competitive in a dysfunctional marketplace.

A simple example of the forces at play can be found in the airline industry. When air travel began, people would dress formally and were greeted with a large staff, meals, and amenities like playing cards. Like every new industry, it was enjoying a boom and it was great for both the vendor and the client. Employees were offered pensions, and as the business' success continued, retirees were paid from the current operating budget. When you purchased an airline ticket, you would in effect be paying for two employees, the one working and the one retired.

Social Security works the same way. The money paid in today by laborers is not 'saved,' it is immediately disbursed to the current retirees, with the expectation that when today's laborers retire, the next generation will do the same for them. That is why a reduction in population growth marks a serious problem. When all the baby-boomers retire, remaining workers will be supporting a greater number than before. This is a massive whammy for the next generation: inflation, more retirees to supplant, beginning their working years in education debt (no GI Bill for them), plush pensions for public employees, and more regulations, security and technology to purchase. When combined with a manufacturing ethos that embraces planned obsolescence, the next generation will exhaust themselves filling the landfills and the graveyards. People are living longer, extending the fiscal burden longer, too. The fear of Social Security not being sustainable is valid, just as private pensions have proven to be unsustainable.

The airline that pays one working and one retired employee struggles against the same math, and is quickly at a competitive disadvantage. The biggest expense in most operations is labor. When a new airline begins to operate, they can offer cheaper prices. New employees are not promised a pension, just a wage. Therefore, the new airline can sell each ticket for less than the old airline. Or, the new airline can sell at the same price but enjoy more profit, which can be spent on advertising, etc. Either way, the young airline has an advantage, even if young people do not. The new airline will probably combine the approaches: cheaper prices, more advertising and enjoy more profits. The newer airlines can also offer 'no frills,' further depressing the ticket price. If the old airline matches prices, it will be unable to support the retirees. If it fails to offer lower prices, it will lose customers. Either way, matching advertising is an additional expense. If they reduce the frills to constrain expenses, they have less justification for their premium pricing. For the older airline, carrying retirees is a losing proposition. The company will not be able to survive.

The end result is that the new airline can be more profitable and be offering less and charging less simultaneously. This would be applauded in most business schools as shrewd and successful management of a start-up. Economists would fete it as the brilliance of competition. It would not be viewed as a race to the bottom! Eventually, another airline will show up and do to the new airline what was done to the old airline. Workers will be paid less, vendors squeezed more, processes will be automated, etc. Capitalism is so efficient that people begin to have no value whatsoever, but everything is done in their name. They are just fodder for the demand of whatever the business provides. A decreasing population creates a concurrent problem for an economy based on consumption. Managers can only focus on their numbers, and not on the needs of society. The only approach left for the old airlines is to cater to the wealthy or collapse. Shedding its obligations to retirees is a last gasp measure. A common interim step is to allow new hires with less benefits. There are many attempts to soften the landing in the race to the bottom. Unfortunately, none of them will work.

When the airline industry started, it was egalitarian. As in other areas of American life, we see more and more 'separate but equal' institutional structure. Airline pricing now makes no sense whatsoever, with major price differences in different seats on the same plane. Under the guise of competition and bargains, there are man-made mathematical forces at work, and they all bode ill.

As pensions became increasingly unworkable, the government required that pensions be funded separately from operating budgets. That way, even though the original business would collapse, the pension of that business would endure. I have family members that worked for Western Electric that still draw a pension, even though Western Electric is long gone. We see the same approach in regard to public pensions. The retirement apparatus is a quasi-independent agency, although if the managers screw up, the taxpayer is expected to bail them out. These now tax-exempt taxpayer funded hoards are invested in Wall Street, the original source of economic collapse and the Great Depression. We have in effect made the disease into the cure, and the symptoms of the disease are now returning, as they must.

The New Deal was a valiant attempt to create a better, kinder capitalism. It failed. The choice before us is not to return to Wall Street, as the GOP would have us do. Nor is it to preserve public pensions and Social Security, as the Democratic party would have us do. No, the challenge before us is to abandon both approaches. Repeating failure makes no sense. The first step in solving a problem is admitting that what you are doing is failing.

People have been getting old as long as people have been getting born. Our fiscal house is one of structural disorder. Small attempts at maintaining the status quo will not be viable. Separate but equal systems are neither sustainable nor honorable. We need a universal retirement system and the courage to admit that capitalism and the free market are a race to the bottom. Reform is long overdue, and the next New Deal needs to be better thought out than the last one.
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