Thursday, Aug 9, 2018, 5:04 pm
Will the Left Get Fooled Into Abandoning Worker Pensions?
The ideological blinders of some on the left are aiding and abetting the right’s final assault on labor. Workers and their allies should be appalled, and they need to act quickly.
In the past decade, one of the few hopeful developments in an often bleak labor landscape has been the rise of a new form of activism built on the power of labor’s $3.5 trillion pensions. A new class of activists at the AFL-CIO Office of Investment, the American Federation of Teachers, the National Education Association, the American Federation of State County and Municipal Employees, the North America’s Building Trades Union, the Service Employees International Union, UNITE HERE, the California Public Employees’ Retirement System, the New York state and New York City and Illinois and Chicago and Los Angeles pension funds—and smaller state, county and municipal pension funds across the country—have begun to mobilize these funds to advance the interests of the workers who contribute to them. Under their leadership, these pensions have invested to create union jobs for workers, who then strengthen the funds by contributing to them. They have fought privatization of public sector jobs, pushed back on outrageous Wall Street fees, attacked obscene executive compensation, forced disclosure of the CEO-worker pay ratio, resisted hedge fund attacks on pensions and in some cases divested from them entirely, and sued companies like Enron, Worldcom, and now Wells Fargo for fraud. They have divested from gun companies, demanded companies account for their environmental impact, hammered companies over sexual harassment and assault, and attacked pharmaceutical companies that fueled the opioid crisis. For all these reasons, these funds have come under withering attack from the right—empowered by the recent Janus case—which is using a controversy about the funding status of public pensions to ram through crippling reforms to undermine them. The left’s response has been silence and concessions. The left’s pension paralysis can be traced to its entirely ideological and outdated discomfort with what these pensions really are: labor’s own source of capital.
The best example of this aiding and abetting of attacks on pensions is Doug Henwood and Liza Featherstone’s In These Times piece, “Wall Street Isn’t the Answer to the Pension Crisis. Expanding Social Security Is.” They then double down on their claims here. According to Henwood and Featherstone, pension funds are dead anyway because of systematic underfunding. In support of this conclusion, they cite the research of Joshua Rauh, a Stanford economist affiliated with the conservative Hoover Institution. Rauh is indeed a credible economist. But so is Alicia Munnell of the Boston College Center for Retirement Research, as is Dean Baker of the Center for Economic and Policy Research, and as are others who dispute the conclusion that these pensions are necessarily doomed nationwide, including Max Sawicky, who responded to the Henwood and Featherstone arguments here and here.
Wherever one stands on underfunding, there are cures for it that are worse than the disease itself. The conservative solution is to smash and scatter these pensions into millions of individually managed 401ks. The number one priority on the left should be to stop that from happening, not undermine resistance to this grim fate by scaremongering about the perils of pensions or comparing them to a nonexistent alternative. Turning all these funds into 401ks will do more than just subject workers to a retirement vehicle that has been renounced by its inventors and itself has its own indisputable underfunding crisis. It would also silence worker shareholder voice. This aspect of the argument is repeatedly misunderstood, dismissed, or ignored by parts of the Left.
The necessary precondition for these funds to be able to act on behalf of the workers who contribute to them is to be collective. A pension fund is like a union and a 401(k) is like right to work. Just as an individual worker has little say negotiating pay, benefits or working conditions alone, so an individual shareholder in a company has little say over the fees they are charged or how much the CEO makes. Just as workers are empowered through the collective voice of the union, so they are empowered in their retirement investments through the collective voice of the pension. Divide and conquer the pensions and you kill the shareholder voice that has enabled them to engage in the very activism that promotes their contributors’ interests.
And yet, Henwood and Featherstone’s substitution of Social Security for these pension funds would silence that worker-shareholder voice as surely as 401ks would. They blithely dismiss the power vested in these pension funds by citing three examples of how it has been used against workers. Indeed, this power has been abused, and more than three times. But a more balanced account of this power would also consider the stunning ways in which it has been used to advance worker interests. Ironically, one of the examples Henwood and Featherstone use in their article—KKR profiting off its investment in Safeway supermarkets while laying off workers—ended in a way that demonstrates the very shareholder power they deride and ignore, in which fed up worker pension funds like the California Public Employees Retirement System flipped the script, using their shareholder power to oust several KKR board members from Safeway, demote others, and punish its management for its attack on workers and their benefits. We are seeing echoes of that revolt today in the furious reaction of public pensions to KKR’s handling of the Toys R Us debacle, in which many labor’s capital institutions have pushed hard for Toys R Us workers to receive severance and are reconsidering their KKR investments, as Henwood and Featherstone acknowledge here. What other investors would do that?
On the other hand, they are quite correct to condemn outrageous investments by pension funds in businesses that kill workers jobs, particularly the jobs of the very workers who contribute to these funds. I agree and have argued against that practice here and here. But they make an unjustifiable logical leap in arguing that the solution to this problem is widespread divestment and ultimately abandonment of these pensions in favor of a larger Social Security system.
First, divestment. The left has fallen madly in love with divestment. When it comes to investment issues, we have just one move: Divest. But divestment is only one tool in the toolkit, and anyone who has looked carefully at the evidence must conclude that it is often not the best of the lot. Divestment from publicly held companies is often utterly pointless— pure political theater. Consider the Vice Fund (formerly the Barrier Fund), which invests in tobacco companies, casinos and alcohol companies because they sell addictive products and are often targeted for divestment. How many divesters have sold their shares to the Vice Fund? There’s no way to know. But if the shareholders buying your shares are indifferent to the concerns that prompted your divestment, it will have no effect, other than to make yourself look conscientious in a press release. As shareholder advocate Nell Minow has put it, “the day an activist shareholder divests is the day the CEO pops the champagne and breaks out the caviar.” Investors that stay and fight have had a significant impact, like prompting corporate action on the environment or reining in excessive CEO pay practices.
Yes, divestment can be appropriate at times. I applauded CalPERS’s divestment from hedge funds. I researched and told the story of how Dennak Murphy, a quiet SEIU capital strategist, helped to make that happen. Hedge funds have underperformed the market for over a decade and charge outrageous fees, making divestment from them as an asset class often a logical thing to do, though a report from the American Federation of Teachers Capital Strategies group illustrates how pensions could do better by cutting the fees they pay hedge funds. And it is also true that pensions that have stayed in hedge funds have been able to use their investments to push the funds to stop undermining teacher pensions.
Similar issues present themselves with private equity funds, particularly those engaging in practices that undermine labor. Divesting from private equity might undermine the industry. But it might not. It might instead result in the industry proceeding much as before, but without the only investors who care about labor and have any interest in protecting it. That would be KKR and Toys R Us but with no one pushing for worker severance packages. Alternatives exist. For years, ULLICO—founded by Samuel Gompers to provide life insurance policies for industrial workers when the insurance industry wouldn’t write such policies—has been making investments that require companies to use union labor. The AFL-CIO Housing Investment Trust similarly uses union capital to finance housing built with union labor. New York City recently adopted a responsible contractor policy for real estate and infrastructure investment requiring the hiring of responsible contractors who pay workers fair wages and benefits, inducing private equity fund Blackstone to adopt the policy for its infrastructure projects. In fact, the only reason we know about private equity’s many abuses is because the AFL-CIO’s Office of Investment pushed for the adoption of private fund registration in Dodd-Frank. In short, if properly deployed, labor’s capital can be utilized to advance the interests of workers, not just undermine them.
The spread of worker-friendly investment policies may be a far more powerful tool than divestment. It may, in fact, be critical to the future of labor if and when a national infrastructure spending project materializes, which is highly likely to contain some incentives for private sector funding. Scaling up New York City’s responsible contractor policy for private infrastructure investment could make the difference between whether America gets rebuilt using union or nonunion labor. But for such worker-friendly policies to succeed, you’ve got to have pooled investment funds that can implement them, not 401ks. And not just Social Security either.
There are several practical objections to the pursuit of a single-minded plan to expand Social Security. First, it is politically impossible in the near term; if anything, we will be lucky if we complete the year 2018 without it being cut back. Second, going all-in on Social Security implies that our retirement is more secure in the Washington of Trump, McConnell, and Ryan, or their future incarnations, than it is in Sacramento, Boston, or Albany. Third, if pension critics favoring this approach were being intellectually consistent, they would have to describe Social Security the same way they describe public pension funds. That means describing Social Security as zero-percent funded, since there are no funds actually set aside for it, anywhere. That’s a misleading description, but no more misleading than the arguments made about public pensions that Henwood and Featherstone so credulously accept. The federal government can pay for Social Security—even if it is technically zero-percent funded—just as all fifty states can pay for their pensions. Fourth, there is no good reason why we should not simultaneously pursue a policy of expanding Social Security while also fighting to protect worker pensions in collective form. But setting these aside, it’s wrong to argue that Social Security alone is the right ideal, because it entails forfeiting the shareholder power of pooled, collectively managed retirement funds.
One problem with Social Security is that workers contribute to it over a lifetime of work but have absolutely no say over how that money is used in the interim. In contrast, vehicles that set aside those contributions into actual funds with worker representation and often political representation on boards—like public pension funds, and like some sovereign wealth funds—have say over whether, for example, their funds should be invested in apartheid South Africa, not to mention giving workers say over CEO pay, corporate governance or labor practices. Such funds give workers voice in capital markets, arguably the most powerful force on the planet today. They are the 21st century model for retirement security, because they retain that shareholder voice. Social Security gives away all that power for nothing.
The only plausible argument for forfeiting this massive shareholder power is that it taints workers by making them complicit with the power structures of capital. (“Investing in the stock market achieves the opposite [of guaranteeing future security through social and physical investments]; it expands the wealth and power of Wall Street,” Henwood and Featherstone write.) And indeed, to an extent, participating in the market can make labor complicit in power structures that work against it. So does participating in electoral politics. So does bringing lawsuits. So does organizing into a union that negotiates, and compromises with, management. When running for office, suing, or organizing, you create and enter into power structures that may at times compromise you. The question is not whether this will happen—it will. The question is, would you be better off not voting, suing, organizing? In my view, the answer is no. That same “no” applies just as much to capital markets. Overall, you are worse off if you make no effort to exercise voice within them.
Henwood and Featherstone style their argument as a wake-up call to progressives to “get real” about the purportedly parlous state of pensions. Here is another “get real” wake up call to progressives: capital markets are going nowhere. When corporations operate globally, when capital can flee overnight or starve government functions through punishing bond yields, you cannot rely on the nation state alone to solve all your problems. If it’s the market that is causing those problems, you must have some say inside the market to solve them. You do not empower yourself in the 21st century by unilaterally surrendering your own shareholder voice any more than you empower yourself politically by not voting. Instead, you exercise that shareholder voice, learn to amplify it, organize it to advance the interests of the workers who contribute it, resist the hostile legal interpretations designed to choke it. You engage with it and you fight for it and you push to move it in the right direction. What you definitely do not do is walk away from it in favor of some fantastical, outdated, and nonexistent alternative that keeps you ideologically pure and powerless.
David Webber is a law professor at Boston University and author of The Rise of the Working Class Shareholder: Labor’s Last Best Weapon (Harvard University Press 2018).