The Increasingly Precarious Middle Class and Social Security “Reform”
In the past few weeks as President Obama’s poll numbers have increasingly separated from Mitt Romney’s especially in numerous so called “swing states,” a number of prominent voices in print and he left leaning blogosphere have begun a campaign to prevent President Obama from reducing the benefits from what is already the smallest safety net among advanced industrialized society. Paul Krugman, earlier this week, wrote a piece entitled The Real Referendum, and regular readers of Hullabaloo know of their tireless work since 2009 in documenting Obama’s desire to leave behind a legacy of crafting the bipartisan “solution” of reducing the scale and scope of social security that so many of our elites crave. Our own David Dayen has already produced several excellent pieces on this subject this week alone.
During the heyday of the New Deal coalition, wages rose along with productivity gains. Much of this was due to the fact that almost 33% of the private sector workforce was unionized, and business went along with this arrangement because labor unrest was much more costly than granting pay raises lockstep with productivity. Mass production was powered by the mass consumption which was provided
by steadily rising wages. The social contract could best be summed up with a quote from the New England Council which John F. Kennedy popularized, “A rising tide lifts all boats.”
Unlike the rest of the world,the United States has provided its citizens healthcare via employer supported healthcare. Our Rube Goldberg system emerged out of our experience during World War II. Our documentaries on the time focus on the valor of that era’s fighting man, the reality is that the American industrial machine simply overwhelmed the Axis with a deluge of wartime machinery and materiel. For example,Henry Kaiser with his California shipbuilding facilities needed to attract healthy productive workers, but due to wartime inflation controls was prohibited from raising wages.
Health insurance, when it did emerge on a mass basis, came from the business world, as exemplified by the Kaiser shipyard story. World War II-era employers faced government-mandated wage freezes to prevent them from competing with dollars for scarce workers, which would drive up prices and cause inflation. But the IRS allowed companies to offer benefits up to 5% of the value of wages without counting them as taxable income.After World War II, the health security of American families were provided through fully funded employee health plans. Although the United States never had socialized medicine, the federal government was in fact, providing tax incentives for businesses in the post war era.
Up until approximately 1980, the middle class achieved economic security through this social contract. Standards of living were doubling every twenty years, and until the Kennedy administration, the median income earner paid no federal income taxes. Not only were the American middle class wages the highest the world had ever seen, and their lifestyle the envy of the rest of the world, but their retirements were safe, secure, and for American families based upon a much safer footing than today. Back then, in lieu of higher wages, the American wage earners deferred some of their compensation into “defined benefit” pensions which would pay them a definite amount each month until their death.
During the era of 1945 to approximately 1975, the federal government was also dedicated to providing security through high wages by keeping the labor market tight by pursuing full employment policies, and by enlarging the safety net to spread risk throughout the population and to provide security to traditionally excluded groups.
In the aftermath of the stagflation, or the New York city default crisis, or the energy crisis, the social contract of a full employment, high wages, and a widespread but relatively small welfare state was destroyed in favor of neoliberalism. The definition is somewhat elastic, but for my purposes it is a removal to the impediments of capital formation through an aggressive market fundamentalism. It is this neoliberal experiment in economics, the policies it spawned, and its wholesale shredding of the social contract which is the betrayal Amy B.Dean illustrates in her recent Firedoglake interview with Donald Barrett and James Steele, the authors of the 1992 book entitled America: What went Wrong.
The middle class began to lose the benefits of unionization starting with Carter deregulating the trucking industry and accelerating with the PATCO and Hormel Strikes during the Reagan years up to the Scott Walker fiasco and Rahm Emmanuel’s rant demanding that striking Chicago Public School teachers be imprisoned for striking.
Along with de-unionization, the policy of the federal government has been to pit American wage earners against the low wage of third world poverty and child labor. Bill Clinton pushed through NAFTA, and retailers such as Walmart have pressured their suppliers to move production offshore in a quest for “low prices.” At the higher tech end of the spectrum, we have Apple with its Foxcomm factory “problem.” These consequences of these policies have led to the de-industrialization of America and a hollowing out of the middle class.
As Mother Jones magazine has recently shown, the consequence of these policies on the median household are profound.
Productivity has surged, but income and wages have stagnated for most Americans. If the median household income had kept pace with the economy since 1970, it would now be nearly $92,000, not $50,000.
I don’t know about you, but my life would be a whole lot less stressful with an extra $42,000 a year. That’s a lot of dough over the course of a working lifetime.
Where did all that money go? Did it go to better schools and highways?
It went to the job creators who with their superior knowledge of investments would make the economy grow and prosperity would “trickle down” like manna from heaven. Take your time. Get the full flavor how the top 1% invests the fruits of your labor.
Whereas my father’s generation had expanding employer provided healthcare plans with expanding benefit plans, since 1980 businesses have been shedding those plans as a way to diminish their “employee liability” and increase their profits. They justify this shift onto the backs of ordinary Americans by arguing that it is “unsustainable.” Higher deductibles are demanded. Although the Walton heirs are multi-billionaires, their employees who are paid so little that they often are on state assistance even though working full time, Walmart employees who are lucky to pony up a $5,000 deductible (almost 33 percent of the average employee’s yearly pay) if they are lucky enough to have health insurance. The shift might be bearable except that many employers have eliminated health coverage, or escape the responsibility by employing a high percentage of their workforce as part-time or temporary workers.
Buffeted by stagnant wages and declining employer provided health benefits, the middle class’ retirement is at least secure with pensions, 401 (k)s, Social Security, and Medicare, right?
As Jacob S. Hacker has shown in his book, The Great Risk Shift:
— In 1980, more than 80 percent of large and medium-sized corporations offered traditional “defined-benefit” pensions that provide a predetermined monthly benefit for the remainder of a worker’s life. Today, less than a third do. Instead, companies that provide plans now offer “defined-contribution” plans, such as the 401(k), in which returns are neither predictable nor assured.— Between 1989 and 1998—a decade in which 401(k) coverage exploded and the stock market boomed—the share of families nearing retirement that found themselves likely to live on less than half of their prior income in retirement increased by a third, to more than 40 percent.
— Roughly three-quarters of 401(k) account holders in 2002 had less than the widely cited average of $47,000 in their account. The median among account-holders—which is a better measure of what’s typical—was around $13,000. And all these figures include only those who have 401(k)s. Only 53 percent of workers have access to a defined-contribution pension plan, and only 42 percent contribute to one
— More than $100 billion dollars a year in lost income tax revenues is used to subsidize 401(k)s and other pension plans. Two-thirds of this total goes to the richest 20 percent of Americans, only 12 percent to the bottom 60 percent of Americans on the income ladder.
The situation today is this. Although Social Security is fully funded for decades. We have a generation of workers who have had their wages suppressed and therefore have underfunded the Social Security system. He are still in the throes of a long recession with perhaps 40 million Americas either unemployed or underemployed. Millions have exhausted their unemployment benefits and are downwardly mobile. This is on the heels of the Bush presidency which oversaw worst job creation during presidency since Herbert Hoovesr and the destruction of the surplus which would have extinguished the national debt by 2010. People have more health insecurity than two generations ago, and they are unprepared for retirement even if they haven’t dipped into their 401 (k).
Ellen Schultz, a former investigative reporter for the Wall Street Journal, published a book last year entitled Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers
In this book she explains that pension shortfalls are “not a demographic accident. It was manufactured by an alliance of two groups: top executives and their facilitators in the retirement industry—benefits consultants, insurance companies and banks.”
In an interview with Steve Inskeep on NPR she explains:
“The main narrative is that [companies] are struggling to pay both their pensions and these unexpectedly high health care costs for the retirees,” Schultz says. “What isn’t known is that companies were well-prepared for this phenomenon. The plans were in fact significantly overfunded. They had more than enough to pay every dime for every person currently employed and already retired.”
In the early 1990s, Schultz says, companies were looking for new ways to push out workers, especially older, more expensive ones. She says the expensive way would have been to pay severance, “but the cost-effective way was to instead promise them a bit more pension money in lieu of severance.” In the end, “you’ve just laid off somebody who’s expensive and it has cost you nothing.”
The masterminds of this heist should take a bow: They managed to take hundreds of billions of dollars in retirement benefits that were intended for millions of workers and divert them to corporate coffers, shareholders, and their own pockets. And they’re still at it. It might not be possible to resuscitate pension plans, but it isn’t too late to expose the machinations of the retirement industry, which has its tentacles into every type of retirement benefit: profit-sharing plans, 401(k)s, employee stock ownership plans (ESOPs), and plans for public employees, nonprofits, small businesses, and even churches. The retirement industry has exported its tactics, using them to achieve similar outcomes in retirement plans in Canada, Europe, Australia, and elsewhere, and has big plans for Social Security and its overseas equivalents as well. Unless it is reined in, the global retirement industry will continue to capture retirement wealth earned by many to enrich a relative few.
She goes on in great detail of all the ways corporate America has screwed its human capital. She details how corporations get tax subsidized dead peasant life insurance policies on employees and other “legal’ methods to plunder their employees. Get a copy of this book.
The money quote applies to all insurance and pension plans.
“When you have a properly funded plan, it doesn’t matter how many retirees you have or how long they live,” Schultz says. “It’s not the fact that you have a lot of retirees; it’s the fact that you have abused the pension plan.”
What has happened to the middle class the last several decades is no accident, it is not the result of impersonal economic or demographic forces. This was as Amy B Dean recently wrote a premeditated atrocity on the America dream.
What are some solutions? We could simply reverse the policies of the past forty years but that would take too long.
The Beltway solution: The middle class must accept “entitlement reform.” We have Clinton meeting with Paul Ryan after the special election in New York caught on tape speaking of entitlement reform. We also had Clinton and Obama mentioning Bowles -Simpson in their Democratic National Convention speeches. The middle class has already sacrificed enough. Grandma shouldn’t have to eat cat food while the Rich Kids of Instagram post $100,000 bar tabs with the money they plundered from Grandma’s piggy bank.
Thomas Geoghegan in a New York Times Op-ed argued that we should raise Social Security benefits to 50% of the pre-retirement wages for the median worker. It’s a start. We need to raise benefits as a matter of justice to offset the vast redistribution of wealth which the last generation of American workers have suffered at the hands of the top one percent.
The ruling class has already decimated the economic security of the American middle class by pursuing neoliberal policies which has enriched corporations and the wealthiest at the expense of average American’s paychecks, health insurance, and retirement. What neoliberal economics couldn’t finish; neoliberal politics will. The last humiliating kick in the crotch would be if a “Democratic” president “reforms” Social Security and sacrifices ordinary Americans to appease the Gods of the Bond market and the elite shamans of the “Very Serious People.”