The Great Pension Robbery:
From the Private to the Public Sector

Apr 20, 2016

Over the last decade, one of the biggest attacks against the U.S. working class has been against pensions of state and local government workers. Until recently, public sector pensions had appeared to be more secure with stronger legal protections than private sector pensions, which had been decimated during previous decades.

Public pension plans had been introduced on a wide scale at about the same time as private sector pensions, during the period of economic expansion that followed World War II. They were a part of a package of fringe benefits that big employers, both public and private, offered their workforce to buy labor peace. But pensions were never the gift or the “historic gain” that employers and union officials made them out to be. Employers, both public and private, used pensions as an excuse to pay workers lower wages, holding out the promise that they would compensate the workers much later on, when they retired. In fact, for many, this promise was never fulfilled. Moreover, because pensions were organized by individual employer, whether corporate or public entity—with 3,418 different public sector pension plans alone today—it served the employer as a conservatizing influence. Those who are rewarded with the highest pension benefit are those who are “lucky enough” to stick it out at the same employer for most of their work life. And there is always the implicit threat that workers could lose most, if not all, of their hard earned pension benefits, if they dared to fight to defend their interests in strikes or job actions.

With the onset of the worsening decades-long economic crisis that began in the 1970s, the capitalist class began to slash what they paid their workforce, including retirement benefits, in order to bolster their profits. Moreover, the capitalists coveted for themselves all that money that had been building up in the pension funds that had been established to pay out pensions. Taken together, in all the different pension funds this amounts to a huge amount of money. And the capitalists have tried to put their hands on as much of this money as they could, through various means.

The Attack on Private Sector Pensions

The first big attacks against pension benefits came against private sector workers covered by traditional retirement plans. Pension benefits had been limited mainly to workers and employees who worked in the major industries, that is, already a minority of the work force. But by the early 1980s, many big companies introduced a two-tier system in order to reduce the number of workers who were covered under those plans. Those still on the job continued to get traditional pensions, that is, defined benefit plans in which the employers were responsible for providing benefit pay outs. But for new hires, employers substituted 401(k) plans, or defined contribution plans, which shifted the responsibility for saving for retirement onto the employee, that is, individual savings accounts to which companies sometimes matched part of what workers set aside.

Companies then began to eliminate any form of pensions, by contracting out much of the work to low wage companies that pay few, if any benefits. Companies also employed “independent contractors,” providing no benefits at all.

Companies then opened up a multi-pronged attack on the pensions of their top tier workers. They started by going after the benefits of nonunion workers. Since non-union workers did not have a union contract, they had only company promises of what they would get when they retired. Often companies lured employees into early retirement with the promise of lifetime health care benefits and then canceled those benefits once the employees had made an irrevocable decision to retire. In 1988, salaried workers at General Motors challenged cuts to retiree health care benefits by demonstrating that General Motors had promised them verbally and in writing that health coverage would be provided “at GM’s expense for our lifetime.” It took ten years for the case to wind its way up to the Supreme Court. In 1998 the Supreme Court let the ruling by the Sixth Circuit Court of Appeals in Cincinnati stand regarding medical care attached to pensions. The court ruled that “there is nothing inconsistent between promising lifetime benefits and reserving the right to modify those benefits.”

That meant that GM’s promises to their employees were not worth the paper they were written on. This set the legal precedent, giving companies the go-ahead to tear up pension agreements. Almost immediately, most big companies used it to end medical coverage for non-union retirees. A few years later, in 2006, such blue chip companies as Verizon, IBM, Alcoa, Coca Cola, General Motors, Du Pont, Tenneco, among many others, ended traditional pension plans completely. They froze the traditional pension benefits for non-union workers and substituted the much cheaper 401(k) type of plans. Thus, within a period of only a few years, they had shed their responsibility for funding traditional pension benefits of non-union workers altogether.

Big companies also targeted the traditional pension benefits of their unionized workforce. Retiree benefits for unionized workers were supposed to have the added protection of the union contract. But companies used bankruptcy proceedings to get around the contract. The bankruptcy courts considered the debt that companies owe to pension plans to be “unsecured,” therefore among the last in line to be paid off by the company. Invariably, the courts allowed the companies in bankruptcy to shed their employees’ pension obligations.

The steel industry was the first big industry to use the bankruptcy courts to eliminate its “legacy” pension obligations. In roughly six years from 1988 through 2003, 44 steel companies, with a total active workforce of 86,000 employees, declared bankruptcy. These included some of the largest steel companies in the country, including Bethlehem Steel, the number two producer after U.S. Steel. Most of the companies continued to operate as they had been, or they merged with other companies, or they were bought up by other companies. The biggest obvious change was the dropping of pensions and medical coverage. As a result, more than 300,000 active steel workers, retirees and surviving spouses saw their pension plans dumped. Soon after, coal companies, auto parts suppliers, and airlines also went through bankruptcy in order to dump the pensions of their unionized workforce.

When workers’ pension plans were dumped in bankruptcy, they were supposed to have another line of protection. Their pension benefits were supposed to be guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a government-run insurance company. But the guarantees provided by the PBGC, had plenty of holes. First of all, the PBGC does not cover retiree health care benefits, which retirees desperately need. Nor does it cover life insurance and death benefits that surviving spouses depend on. And it slashes survivor benefits. Moreover, PBGC also cuts the benefits of workers who retire before age 65. If they retired at age 60, for example, their pensions can be reduced by as much as 40%. As for those workers who had not yet retired, their benefits were frozen as of the date the companies went bankrupt—and therefore, greatly reduced when they eventually retired.

The companies stole the money that used to go to the workers’ pensions—or, as the New York Times politely called it “unlocked hidden value” in the companies (“Woops! There Goes Another Pension Plan,” September 18, 2005). Over the years, so many companies have used bankruptcy to dump their pension plans onto the PBGC, it has consistently run very large annual deficits, and it too is in danger of running out of money.

Other companies used the simple threat of going into bankruptcy to get the big union apparatuses, like the United Steelworkers (USWA) and the United Auto Workers (UAW), to work out agreements with companies that allowed pension benefit cuts, strong-arming the workers into ratifying the agreement, with the claim that this was better than running the risk of a bankruptcy court cutting even more, that half a loaf is better than none.

In 2005, for example, GM got the UAW to agree to cut one billion dollars in annual health care benefits for more than 750,000 workers, retirees and their families. Ford and Chrysler followed with similar cuts. GM and Chrysler went through bankruptcy anyway, in the wake of the 2007-9 economic meltdown. In bankruptcy, GM and Chrysler, working in concert with the federal government and the UAW apparatus, shed their retiree health care obligations. Ford didn’t go through bankruptcy, but made a similar deal with the UAW. As a result, retirees lost the guarantee of medical coverage for life, once promised to every worker who put in the needed years to retire or whose work injury put them onto permanent disability. In its place, the companies transferred full responsibility to the union to administer retiree medical coverage starting in 2010, with only part of the money required to do it—a so-called union-administered VEBA fund. Companies and the UAW promised workers that these funds would provide health care benefits for the next 80 years. But according to an analyst for Citigroup, the amount funded to the VEBAs, taking into account medical inflation, ranged from about 57% of what was required at GM to 46% at Ford. This shortfall has made health care benefit cuts inevitable. And soon after the independent VEBA’s were set up, retiree benefits were trimmed through copays, deductibles and higher costs for drugs, etc.

Thus, over only a few decades private sector employers have almost completely dumped their old system of retirement benefits for their workforce. Between 1979 to 2011, the companies slashed by two-thirds the part of the workforce that received traditional defined benefit pensions, taking it down from 39% to 13%, according to the Employee Benefit Research Institute. In that same period, the part of the private sector workforce with only 401(k) benefits went from 7% to 31%. Of course, corporate claims that 401(k)’s represent a reasonable alternative to traditional pension benefits are contradicted by the fact that the median amount in 401(k) accounts is a minuscule $23,000, the equivalent of one year’s pension benefit.

As for the benefits of the 13% sliver of the private sector workforce that still has traditional pension benefits, they also continue to be slashed. Most, for example, don’t carry health care benefits anymore. And various pension plans continue to reduce benefits. For example, in 2014, with the support of the Teamsters union officials, Congress passed a law that allows multi-employer pension plans, which cover 10 million unionized workers in such industries as trucking and construction, to slash pension benefits, when the plans are deemed to be supposedly “underfunded.”

The Offensive Spreads to Public Sector Pensions

Having largely gutted the pensions of the private sector workforce, the attacks spread to the 15 million state and local employees, including teachers, who still participate in traditional, defined benefit pension plans. At 12%, that’s a big part of the active workforce. There are also nine million public sector retirees.

The biggest attacks began after the financial crisis of 2008-09 broke out. Politicians and officials throughout the country have been slashing retirement pension benefits in state and local governments. A 2014 survey done by the National Association of State Retirement Administrators and the Center for State and Local Government Excellence found that 45 out of the 50 states had already cut pension benefits on average almost 8 per cent.

Moreover, 30% of all public sector employees—or six million employees—are not covered by Social Security. In most states, at least a portion of the public sector workforce doesn’t get Social Security coverage. But in Ohio, Massachusetts, Nevada, and Louisiana, the bulk of state and local wages are not covered by Social Security or Medicare. And in Colorado, Illinois, Maine, California, Alaska and Texas, more than half of state and local workers do not get Social Security or Medicare coverage. This means those state and local governments save a lot of money by not contributing to the Social Security retirement fund. Of course, they are supposed to make up the difference by contributing more toward the pension plan. But for those six million public sector employees, it means their pension is their sole retirement income. So when their pensions are cut, those workers don’t even have Social Security to fall back on.

Across the country, government workers’ pensions were supposed to be protected by legal guarantees. Years of supporting court interpretations had enshrined the view that once a public employee earns a pension, no one can take it away. But in recent years, various courts have allowed state and local governments to slash regular features of retiree pensions, such as cost-of-living allowances and health care benefits, claiming that these are supposedly not core benefits protected under the laws of the state, and therefore they are not “contractual rights.”

Municipal governments have also used bankruptcy as a tool to impose big pension benefit cuts. Federal judges allowed city governments that declared bankruptcy—including Central Falls, Rhode Island in 2011, Stockton, California in 2012 and Detroit, Michigan in 2013—to slash pensions for all current workers and retirees. In Detroit, for example, an unholy alliance made up of city officials, the emergency financial manager, the courts and the municipal unions threatened employees and retirees that the bankruptcy court might impose even bigger cuts if they did not go along with benefit cuts that included an across-the-board cut of 4.5%, the termination of the annual cost-of-living adjustments, and the termination of retiree health care benefits. In tiny Central Falls, Rhode Island, the courts imposed cuts to pension benefits of more than 50%.

The biggest chunk of the cuts have fallen on new hires, as state and local governments have followed the companies in the private sector by imposing two-tier pension benefits. States are raising the amount that new employees have to contribute to their pension plans—effectively a wage cut. They are boosting the retirement age and how many years of service new employees have to work for a full pension, and cutting how much employees will get for every year they work.

A number of states had already moved to do away with traditional, defined benefit plans completely, just as in the private sector. Back in 1996, the state of Michigan negotiated a contract with the UAW that closed the traditional pension program to new state employees, providing new workers with only 401(k) plans, in which there is no defined retirement payout. A decade later, this was followed by the state of Alaska. Now other states (Georgia, Rhode Island, Utah, Tennessee, Virginia, Kansas, Kentucky, and Louisiana) are taking steps in the same direction, introducing so-called “hybrid” plans, in which the traditional retirement plan of defined benefits begins to give way to 401(k)type plans.

The campaign to slash pensions is not just the work of rightwing Republicans, like Scott Walker in Wisconsin, Rick Snyder in Michigan and Chris Christie in New Jersey. It is a bipartisan, collective effort of the entire Democratic and Republican political establishment. For example, the California state government, which is heavily dominated by the Democratic Party at every level, passed a pension “reform” in 2013 that will cut the pension of an average new public employee by $8,400 a year after working 30 years. Over the last decade, the state of California has also more than doubled what new public sector employees have to contribute to their pension plans. Some now contribute up to 15% of their income to their pension every year.

The big public sector union apparatuses in California, like the SEIU and AFSCME, have gone along with these cuts, claiming that they are necessary to keep the big pension funds solvent. Even the Chicago teachers union, which had led a strike in 2012, at first seemed to agree to Democratic Mayor Rahm Emanuel’s demand that teachers increase what they contribute to their pension plan by 7%, in effect, a pay cut that will cost teachers on average $5,000 per year, only to pull back after the ranks of its own activist base opposed Emanuel’s demands.

The attacks have continued to spread. Having slashed private and state and local pension benefits, a new attack opened up against the last bastion of traditional pension benefits, employees of the federal government. This began in March with the proposal by the board of the Tennessee Valley Authority, a federal agency, to slash the pensions of roughly 11,000 workers and 24,000 retirees, turning many of those workers’ traditional, defined benefit pensions into 401(k)’s.

Lies to Justify the Cuts

Politicians, public officials and the news media blame these cuts on an enormous “gap” in the public pension funding system, that is, the gap between the benefits promised and the amount of money actually in the public sector pension funds. According to the Pew Charitable Trusts Research Center, the gap was close to one trillion dollars in 2013, the latest year for which data is available. Moody’s Investor Services puts the gap at two trillion dollars.

Politicians and government officials carried out a big propaganda campaign, claiming that public sector workers pensions are too expensive and that the workforce is supposedly “privileged,” because public sector workers still had traditional retirement pensions. This campaign was geared to appeal to private sector workers, most of whom no longer have traditional pension plans, as a way of saying that their high taxes were going to fund the privileged retirement benefits of public sector workers at a time when government officials at the state and local levels were slashing programs, services and jobs.

The news media added fuel to the fire by running lots of stories about retired public sector employees living it up on $100,000 a year. But in reality, those kinds of benefits are limited to department heads, senior managers, as well as top officers in the repressive apparatus, such as police, sheriffs and prison guards.

Of course, such propaganda is nothing new. A decade ago, the news media had run similar lies about union auto workers supposedly making $73 an hour, in order to justify the attacks of the auto companies against the auto workers. Such lies are used by the capitalist class, the news media and government officials to try to divide the workers against each other in order to rule them all.

In reality, the so-called “privileged” public sector retirees get very small retirement pensions. After working 30 or more years on the job, the average retirement pension in the country of public sector workers is about $25,000 per year. Even in the big industrial states, dominated by the supposedly labor-friendly Democratic Party, where there are big public sector unions, public sector pensions are low. In Illinois, for example, a typical retired state worker averages slightly more than $22,000 a year, according to financial reports from the State Employees Retirement System. The average annual pension benefit for retired teachers in Illinois is about $43,000 and for retired university staff about $29,000. In Detroit, the 23,000 city retirees and 9,000 current workers who had their benefits slashed averaged a mere $19,000 per year... before the cuts.

Follow the Money: Corporate Subsides and Tax Breaks

The real reason for the trillion dollar gap (or two trillion) in public sector pension funds is that state and local governments have paid much less money into the pension funds than what was needed to cover the benefits they promised. The state and local governments claim that they are setting aside enough money for the future retirement of their employees, money that is supposed to be part of the overall compensation package for each employee. But many don’t follow through. There have been many years, such as during the 1990s, when state and local governments paid almost no money into their pension funds. And after the financial crisis hit in 2008-09, state and local governments cut their contributions to pension funds by 80 billion dollars, according to economist Dean Baker, (“The Origins and Severity of the Public Pension Crisis,” February 2011).

Among the states that funded their pensions at the lowest levels over the last decade are Massachusetts, which has made just 27 per cent of the payments and New Jersey, which made 33 per cent, with teachers’ pensions getting just 10 per cent of the required payments.

The money that public officials and politicians promised to pay into the pension funds was instead turned over to big companies, helping them to boost profits.

How much state and local governments pay out every year in corporate subsidies and tax breaks is impossible to know, since much of it is hidden. But a study by the New York Times (“As Companies Seek Tax Deals, Governments Pay High Price,” December 1, 2012) was able to document that “states, counties and cities are giving up more than 80 billion dollars each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and bigbox retail chains.” According to the Times, the biggest recipient of these subsidies has been none other than General Motors, which had also received tens of billions of dollars from the federal government in its bailout. And, as the Times noted, Ford and Chrysler followed GM closely in receiving state and local tax breaks and subsidies.

The mark of these officials’ arrogance is that at the very moment that the city of Detroit was imposing all the cuts in pensions, the state of Michigan approved handing over 450 million dollars to the multibillionaire Ilitch family, the owners of the Detroit Red Wings, to build a new hockey arena and a real estate development in downtown Detroit. One could say that the money for the municipal workers’ retirement and health care is now being spent by the Ilitch’s for their own private profit. And on the very day in 2014 that the Democratic-dominated Illinois state legislature passed huge cuts in the public sector pension program, the legislature also passed a bill that offered 25 million dollars in tax cuts for agribusiness giant Archer Daniels Midland to subsidize the company’s move of its headquarters. The legislators didn’t even wait a day to begin to spend the money that they had stolen from public sector employees in Illinois. (The cuts to the Illinois pension program were overturned by the courts this past summer. But the Republican governor and Democratic dominated state legislature continue to work on a compromise to cut pension benefits, with an eye to getting them past the courts. )

So, of course pension funds are short of money—much of the public employees’ retirement money, not to speak of funding for social programs, education, health care and infrastructure, is now in the coffers of the biggest corporations, handed to them in the form of corporate tax breaks and subsidies.

To Enrich Wall Street Financiers

No matter how much public officials had underfunded the public pension plans, those plans still accumulated huge pots of money, which currently total three trillion dollars.

Over the decades, the capitalist class took its cut from the public sector pension funds, especially by charging fees and commissions on Wall Street financial operations. The capitalists also benefitted from the investments made by the pension funds themselves. Up until the 1980s, pension fund managers put public pension funds mainly into government and corporate bonds. They were considered safe. But safe or not, the pension money was used to finance corporate and government debt, sometimes like it was the politicians’ personal piggy bank. In some cases, it was put into investments that were highly risky. When New York City almost went bankrupt in 1975 and threatened to default on its debts, hundreds of millions of dollars was taken from the teachers’ pension fund to buttress the city’s balance sheet, at a time when no banks were willing to risk making the loan.

But beginning in the 1980s, public sector pension fund managers started pouring pension fund money into various stock markets, especially through private equity funds that used the money to help finance wave upon wave of speculative corporate takeovers and corporate buyouts. Pension funds also helped fuel the boom in both commercial and residential real estate. Pension money went into real estate investment “trusts.” Some larger pension funds bought up commercial buildings and became partners in real estate developments, enriching real estate developers, construction companies, as well as banks and investment houses.

Public pension funds also were among the first big buyers of mortgage-backed financial securities, helping to fuel the historic boom in subprime mortgages... and Wall Street profits, at the expense of working people struggling to buy a home. When the mortgage-backed securities crashed and burned during the mortgage meltdown in 2008, it was the pension funds that suffered huge losses.

Over the last couple of decades, private equity funds, hedge funds and venture capital funds have all sucked up huge amounts of public sector pension fund money, which they have thrown into speculative ventures. Between 2000 and 2012, U.S. public pension funds constituted the single biggest block of investors in private equity companies, comprising over 20% of all private equity capital. Thus, the capitalist class has used the money in pension funds for their own profit, contributing to the mushrooming financialization of the economy, that is, the gigantic and parasitic growth of the finance sector at the expense of the rest of the workforce, further enriching an increasingly parasitic capitalist class.

Big financial companies are also chewing off a much bigger chunk of the pension fund money under their control, as exposés have shown in the New York Times (“Behind Private Equity’s Curtain,” October 18, 2014) and in Rolling Stone (“Looting the Pension Funds,” September 26, 2013). Financial companies charge public pension funds an annual “management fee” of 2% on every dollar they manage. They take another 20% of the profits they claim that they make through investing the pension funds’ money. And that’s just the start. They charge more fees for such things as transactions and legal advice, monitoring a company’s progress while it is in a portfolio, and when pension funds withdraw their investments. They even charge the pension funds for the payment of legal settlements involving financial company executives, when they are sued. These financial companies bury fees inside complex financial operations with the full complicity of the officials who run the pension funds, as well as public officials themselves. In fact, more than a dozen states have carved out exemptions for hedge funds to traditional Freedom of Information Act requests, making it impossible in some cases, if not illegal, for workers to find out where their own money is going—that is, just how much of it is swallowed up by the financial sector.

Work till You Die?

The attack on retirement pensions and some kind of retirement security for the working class is part of a broader offensive by the capitalist class and their public officials against the working class. When they offered retirement pensions after World War II, it was out of fear that the great strike wave that followed the war could develop into even larger social upheavals, like those that swept through much of the world following World War I. For the capitalists, the promise to provide something for workers to retire on in the future was the cheapest way to buy labor peace. Over the next quarter century, the capitalists even agreed to supplement pension benefits under the pressure of continued strikes, often allowing workers to retire early on full benefits, with cost-of-living adjustments and health care benefits. The bosses’ concessions were based on the relationship of forces. They gave up a little out of fear that if they didn’t, they would lose much more to the workers.

But now that there are practically no more strikes, the relationship of forces has shifted in favor of the bosses, and they are pushing to take back everything, especially given the fact that the crisis and long term stagnation that began in the 1970s have reduced the capitalists’ possibilities for profitable investment and production. The capitalists think they no longer have to pay for labor peace and there is nothing to stop them from slashing retirement benefits.

Whatever the capitalists concede to the workers is temporary, no matter what guarantees the capitalists, the courts and public officials pretend to make. As long as capitalism exists, so does the capitalist drive to increase their profits at the expense of the working class. It is a permanent test of strength. And workers have every reason to resist the capitalists’ attacks, for the workers to defend their own rights and interests.

The working class long ago produced more than enough wealth to allow everyone to be able to retire young enough, with a decent income to be able to do other things with their life. Instead, over the last decades the capitalist class is pushing the working class back to conditions of centuries past. Elderly workers are being forced to compete with much younger workers for the few ill-paid jobs. The lack of money also means that they are often forced to depend on their children, who themselves are trying to survive on jobs that pay less and are more insecure. Or else they are being relegated into the supposedly “modern” version of the poor house, that is, single room occupancy hotels (SRO’s), old and broken down cars and trailers, or on the streets.

For workers, the only security is in their capacity to organize and fight. Workers can only keep what they are ready to fight to defend.