The Plot Against Pensions and the Plan to Save Them

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By Amy Goodman

The following is a transcript from an interview from Democracy Now!

For the 50 million Americans with 401(k) retirement plans, 2008 is a year many wish they could forget. Workers saw their 401(k) plans lose between 20 and 30 percent of their value as the Dow Jones Industrial Average suffered its worst year since the Depression. Between October 2007 and 2008, more than $1 trillion worth of stock value held in 401(k)s and other defined contribution plans were wiped out. For workers nearing retirement, the losses have been devastating.

Meanwhile, several major corporations have recently announced they are suspending matching contributions to workers’ 401(k) plans due to the economic crisis. The firms include FedEx, Motorola, General Motors, Starbucks and Sears. Congress is now considering overhauling the 401(k) program.

AMY GOODMAN: Our next guest, Teresa Ghilarducci, testified before Congress recently and proposed establishing a system where workers pay into a government-managed fund that would offer a guaranteed monthly pension at retirement to supplement Social Security. Her plan has been intensely criticized by the finance industry. One columnist described her as the "Most Dangerous Woman in America.”

Teresa Ghilarducci is the director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research. She is the author of the book When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them.

Well, I am sure risking a lot here, having the most dangerous woman in America sitting next to us, but we’re willing to take the risk. Professor Ghilarducci, explain what’s happening now in light of all -- well, Obama just spoke on the economy yesterday.

TERESA GHILARDUCCI: It’s really the end of a thirty-year experiment with a do-it-yourself pension system. The United States stood above all other nations in saying, “Look, we’re going to hand over this saving and investing responsibility over to individuals. They want control. The stock market is healthy.” The finance industry told people that all you had to do was invest in the stock market, wait for a long term, implied that that long term would end at the end of your working career and you would have enough to live on for the rest of your life. And that experiment is over: it failed. And just like the Great Depression, just like the policies proposed in the Great Depression that brought us Social Security, I think we’re at that point now where we have to rethink that experiment and rethink how we get people their valentines, their pension valentines.

JUAN GONZALEZ: When you say this experiment, I mean, there was an enormous shift in terms of the percents of employees who were getting what’s called defined benefit plans, as opposed to defined contributions. How did that happen? And how big was that shift?

GHILARDUCCI: Yeah. Well, in the 1970s, we passed a law that said that if companies were going to promise a pension, they had to fund it. That was ERISA. And that was a good idea. But then, only about 50 percent of Americans, at any one point in time, had a pension. But the pension was a traditional pension called the defined benefit pension. Even though half had it at the time, it meant that as people got older, they often got into jobs with those kinds of pensions.

GONZALEZ: And by defined benefit, that meant that they were guaranteed a certain income per month when they retired.

GHILARDUCCI: Yes, that’s right. It was based on years of service and on pay, so lower-income workers got less, higher-income workers got more. But that was fair. The point is that it was guaranteed for the rest of a person’s life. And that’s precisely what people want when they retire. They don’t want to be rich. They don’t want to make it big in the stock market. That was always seen as something you did in Las Vegas or with money on Wall Street, money that you could afford to lose. The idea is that pensions were supposed to be secure for the rest of your life.

And we now have a system where older people who are retired have Social Security and their pension on top of that, and we have the great success story in America, was that we went from the 1950s, where to be old meant that you had a high probability of being poor, to a situation now, even though it may be at risk, it may be over, where if you are old, you could actually count on some income. Thank goodness we have Social Security.

GOODMAN: Well, what about what are called the “entitlements.” In fact, Barack Obama referred to entitlements yesterday. What do you see is the future of Social Security, of these pensions?

GHILARDUCCI: Well, a comic said that George Bush’s best success was to try and privatize Social Security. And why that was funny was because it was his largest failure in his initiative for bold domestic policy. It meant that in 2005, when he tried to do that, that Americans realized how much they had at stake in Social Security. Barack Obama, I predict, just can’t touch that. There was a huge political movement against privatization, and that movement said, “Stop. We need this program.” I just can’t imagine Barack Obama going anywhere near that entitlement.

GONZALEZ: But there has been talk of the possibility of him creating some kind of a payroll deduction for—a 401(k)-type program for American workers on top of the Social Security, hasn’t there been?

GHILARDUCCI: I hope so, because that’s actually what I’m proposing. I’m proposing that we have a mandated, a universal supplement to Social Security. It’s not an old idea. It’s just something that I have been bold enough to suggest. It would be a supplement to Social Security, but it won’t be individually controlled. An individual won’t have to go out to retail, you know, mutual funds, pay these high and hidden fees, wouldn’t have to decide what kinds of investments to make, wouldn’t have to be exposed to the risk of the stock market. And most importantly, at the end of their working life, they would get a guaranteed annuity on top of Social Security. That’s what we need. We need a supplement to Social Security. And if he’s talking about that, I’m glad.

GONZALEZ: In terms of that, how would yours work? The money that would be contributed, where would it go?

GHILARDUCCI: What we would do is mandate that everyone add another five percent of savings on top of Social Security. That money would go into a government fund. It would be run much like the pension fund for federal employees are run now. This huge sovereign wealth fund would be dedicated to all Americans’ supplement to Social Security, and it would be invested in a broad portfolio of assets: government bonds, municipal bonds, infrastructure bonds, private equities, private stocks, emerging markets. But it would be professionally managed, again, much like my pension fund is and much like the federal employees’.

GOODMAN: Retirement age is going up. What is the significance of that?

GHILARDUCCI: It's going up because we had a lot of low-wage jobs being created. And so, Americans were working longer, and American women were especially working longer. What it means when you raise retirement age is usually it means that you’re cutting back pensions. And I don’t think it’s sustainable. There is no way that we can actually have a retirement system that’s based on having people work longer. We see now that in a recession that’s just ephemeral, it’s just a fantasy.

GOODMAN: I think the Labor statistics are going to come out later this morning, and we’re talking about a half-a-million more people being put on the unemployment rolls.

GHILARDUCCI: Yeah, it’s unimaginable, you know, that that rate is so large, but it does point to the idea -- is that we can’t have retirement policy based on people not retiring. That’s not a retirement policy.

GONZALEZ: To go back to your plan and the opposition to it by the financial community, they obviously would like to be able, if there is going to be some kind of a plan for additional employee savings, to manage those funds, right, and collect all the fees?

GHILARDUCCI: Absolutely.

GONZALEZ: It would be a huge payday for Wall Street.

GHILARDUCCI: Yeah, but it would be hugely inefficient. We actually had those experiments in Argentina and in Chile and in Peru. In Chile, Peru and Argentina, those experiments came about when there was a suspension of democracy, especially -- the most dramatic cases were in Chile and Peru. And we found out, after those twenty years, is that people are not retiring with enough money to live on, mainly because those private individual mutual funds, those little private companies, they charge fees that are too high. They have to provide profits to their shareholders, and they have to—they actually have to advertise. So it’s wildly inefficient.

So, my plan, any plan that requires employers and employees to save more for their retirement, we have to. That’s actually the fact. We’re going to live longer and retire. We do need to save more. But we can’t do it through these Wall Street boutique retail firms.

GOODMAN: It’s interesting you work at the New School, which is—the president is embattled. He is Bob Kerrey the former senator. And it was years ago -- he was a Democrat -- but heading the commission to look at privatizing Social Security.

GHILARDUCCI: And that commission rejected that proposal, because most anybody who’s practical looks at the issue, and privatizing is just not practical. It’s inefficient. It requires people to do what they can’t do, which is to bear the risk of their own retirement that they can’t control when they’re sixty-five and to face the financial markets.

AMY GOODMAN: Teresa Ghilarducci, I want to thank you very much for being with us, director of the Schwartz Center for Economic Policy Analysis at the School University. Her book is When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them.