Reposted from This Week in Sociology, April 4-10, 2011, edition 3
Since 1981 shaky 401(k) schemes that depend on stock market investing have increasingly replaced secure, traditional pensions in the United States. The financial services industry encourages a belief that these schemes produce generous benefits. But 30 years after their introduction, the first generation of workers to retire with these plans has learned they produce less than half the benefits of the pensions they replaced.
Even before the stock market crisis of 2008, signs were everywhere that very few people would accumulate enough wealth through these accounts to ensure financial security. As a result, most people expect to work longer and experience a dramatic decline in their standard of living when they retireâ€”if they can retire.
401(k) benefits are lower than those of traditional pensions because the financial services industry drains considerable management fees, commissions, and profits from the accounts involved; and individual plans lack the advantages of risk pooling that traditional pensions have. In the strange language of pension economics, it is a risk that someone will live longer than average, thus taking out a larger share of investment.Â Of course living a long life is a good thing.Â The risk is that one will outlive her or his income.Â With traditional pensions, funds built up by those who die early stay in the system to add to the lifelong support of those who live longerâ€”unlike with 401(k)s where those funds are inheritable by younger family members and thereby drained out of the systems.Â In other words, because of traditional pension risk pooling, the short lived subsidize the long lived.
Those who still have traditional pensions, mainly public employees (school teachers, fire fighters, etc.) now find themselves under attack for having decent retirement plans. The financial services industry â€“ aided and abetted by conservative think tanks â€“ has mounted a massive propaganda campaign to convince taxpayers that public employee pensions are the primary cause of state budget deficits. They claim privatized plans would result in significant savings over public pensions and Social Security.
This attack on public pensions amounts to a massive class swindle. The financial services industry is raiding the collective retirement savings of tens of millions of people to inflate its own profits, which have grown enormously at the expense of most peoplesâ€™ retirement security. But undermining retirement security in the United States is part of an international pattern promoted by the World Bank, conservative think tanks, and the financial services industry in general.
In 1981â€”the same year 401(k) plans expanded in the United Statesâ€”the Pinochet military dictatorship privatized the entire social security system of Chile.Â In 1994, after the restoration of formal democracy in Chile, the World Bank endorsed the private model and urged all Latin American, formerly communist Eastern and Central European, and Western European countries to adopt it.Â This plan had the most success in Latin America where by 2000 over half of the regionâ€™s citizens lived in countries that had partially or fully privatized their national retirement systems. By that same year, however, the first generation to retire under the privatized Chilean system realizedâ€”like 401(k) participants in the United Statesâ€”that their retirement incomes would be far less than promised than those who had stayed in the countryâ€™s traditional pension system.
U.S. College professors who have TIAA-CREF and similar plans have also fallen victim to the same swindle since those are variations of the 401(k) approach. In Connecticut public university teaching and administrative employees were eligible to choose a 401(k) type retirement plan originally administered by TIAA-CREF (now by the Dutch financial giant ING) or join the stateâ€™s traditional defined benefit pension plan. Most, deceived by the claim that they would do better under the 401(k) type plan, chose it. After years in the plan, they realized that they were paying more than twice the contributions as colleagues in the traditional pension plan yet would receive less than half the retirement benefits.
As in Chile, a movement developed among Connecticut state employees to allow them to switch from their failing plan to the much better traditional pension plan.Â A rank and file organization with members in several state employee unions, the Connecticut Committee for Equity in Retirement (CCER), initiated and led the campaign.
Faculty filed a grievance through their unions claiming they had been unfairly steered into the 401(k) type plan when the much better traditional pension plan was available.Â On September 22, 2010 an arbiter ruled in their favor â€“ finding that faculty had not been given sufficient information to make informed choices nor had they been told that their decisions, once made, would be irrevocable. As a remedy, the arbiter ordered that they be allowed to voluntarily transfer to the pension plan using accumulations from their defined contribution plans to purchase credit for years of employment.
The Connecticut state employees joined West Virginia schoolteachers who won a similar victory in 2008. Both were significant precedent-setting victories over the financial services industry which has succeeded in transforming the great majority of private sector retirement plans from secure traditional pensions to much less secure and adequateâ€”but more profitable for itselfâ€”401(k) like stock market investment schemes and is seeking to do the same with public sector retirement plans.
The transfer in Connecticut was supposed to be accomplished by December 31, 2010.Â However, the Retirement Commission, in violation of the terms of the Grievance Award, delayed it based on advice from an anti-union corporate law firm it had engaged.Â The firm alleged that an Internal Revenue Service preauthorization through a Private Letter Ruling was neededâ€”a complicated process that could take up to two or more years.
The delay will benefit ING, the third party administrator of the plan, which collects millions of dollars in fees for each year that it maintains control of these retirement savings. CCER is now urging their unions to contest this delay on the grounds that other states that have allowed similar transfers from defined contribution to defined benefit plans have not required IRS preauthorization.
The Connecticut struggle is part of a small but growing movement against 401(k) retirement plans. A parallel campaign exists among Massachusetts state workers. Both hope to achieve the success of West Virginia schoolteachers who in 2008 were able to transfer from their failing 401(k) type plan into the stateâ€™s much better traditional pension plan.
James W. Russell