The potential threat of workers losing their pension plans has politicians calling for action. In October, Gov. Jennifer Granholm asked Michigan’s congressional delegation to "urge the White House to swiftly enact policies that will positively impact the nation’s manufacturing sector and the working families that depend on it." The federal government, she said, should prohibit "companies from making promises they cannot keep to workers."
Perhaps President Bush heard her plea. In a speech on the economy in early December, the president raised the issue of pension security, urging employers to "fulfill your promises" to workers.
While politicians might not be the ideal people to tell others to keep promises, the governor and president in this case are right in their rhetoric. The pension problem is real, as demonstrated by the bankruptcy of auto-parts manufacturer Delphi. Thousands of Michigan workers relying on employer-provided pensions clearly have a rocky road ahead.
But neither the governor nor the president offered a solution. Gov. Granholm did not specify which proposals the president (and Congress, one assumes) should enact. President Bush was only slightly more specific, calling for employers to "put enough money in the account to make sure the worker gets that which you said."
Fortunately, the lack of concrete ideas from politicians doesn’t mean there aren’t ways to help companies keep their promises to workers. Before we get to solutions, however, we need to clarify the terms.
Pensions refer to benefits that an employer promises to an employee upon retirement. Employees sometimes contribute to these "defined benefit plans," but these contributions rarely constitute the sole assets from which the retirement benefits will be paid. These are the plans discussed by Gov. Granholm and President Bush.
This is the opposite of a "defined contribution plan," such as a 401(k), where the employee, and often the employer, puts money aside — in the name of the employee — as a retirement benefit. Under this plan, whatever has accumulated in the account belongs to the employee.
What determines the type of plan employees receive? Data from the Federal Bureau of Labor Statistics shows that of all the private-sector employees who receive retirement benefits, only 16 percent of nonunion workers are covered by a pension. Most of the remainder are covered by a 401(k)-style plan. By contrast, 73 percent of private-sector union employees are covered by defined benefit pension plans. Apparently unions are quite effective in convincing companies to opt for ill-fated defined benefit plans.
So, understanding all this, how can the problem be addressed? If we really want the federal government to prohibit "companies from making promises they cannot keep to workers," as the governor suggested, then clearly we need policies that move companies away from unpredictable defined benefit plans and into defined contribution plans.
Since pension plans are closely tied to a union presence, any effective government measure must first address why the collective bargaining process results in retirement benefits that companies cannot possibly guarantee as an unbreakable promise.
Unions operate by controlling the supply of labor available to an employer through government-sanctioned bargaining power. They are most powerful in industries where tremendous investment has been made — the auto manufacturing industry in Michigan, for example — because in these situations employers have little leverage against work stoppages. Too much capital is at stake and, in the event of a strike, the company may quickly find itself spiraling towards bankruptcy. As a result, employers often concede to benefits levels that realistically cannot be kept.
In the best cases, management and labor strive to make these benefits a reality, causing an excessive drain on revenue and hampering their ability to compete. In the worst cases, management and labor simply ignore economic realities, leaving the eventual financial meltdown to future generations. By securing benefits that keep workers happy in the short term, managers and union leaders can maintain their position and power. Someone else is left to deal with the fallout.
Before the federal government can propose a remedy, it must first recognize that in trying to correct the wrongs of a century ago, the government created a union system based on principles of coercion. The anachronistic laws governing business and labor relations can, in the long run, do much harm, both to the company operating under these laws and to the society that inherits the mess.
To really help Michigan manufacturers and their employees move from pensions to something more secure, the federal government must make unionism voluntary. The concept that only 50.1 percent of workers in an industry can force union representation upon every other worker is untenable. Far too much leverage is exerted, resulting in unsustainable promises. In such instances, nonunion manufacturers, like Toyota North America, gain a tremendous competitive advantage.
Employees who desire to freely associate in a union should be allowed to do so. But to grant a union monopoly powers over negotiating gives rise to the excessive pressures that force employers to promise more than they can deliver. Reform in this area is absolutely critical if our elected officials are serious about making employers keep their retirement promises.
Thomas W. Washburne is labor policy director for the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Permission to reprint in whole or in part is hereby granted, provided that the author and the Center are properly cited.