December 2013        

Pensions and pay reduction

On 26 November, speaking in relation to the proposed ESB strike, Leo Varadkar stated: “Nobody is being asked to take an additional pay cut.” He is wrong. By changing the ESB pension scheme from defined-benefit to defined-contribution, a pay cut is exactly what is being proposed. Company defined-benefit pension schemes are nothing more than deferred pay.
      Peter Drucker, the capitalist guru, said in his book The Unseen Revolution: How Pension Fund Socialism Came to America: “If ‘socialism’ is defined as ‘ownership of the means of production by the workers,’ then the United States is the first truly socialist country.” Drucker’s view was that increasingly, corporate America was owned and controlled by the employees of businesses and government.
      Drucker believed that pension funds would continue to grow and would control, through shareholding, all the major American corporations. In effect, workers were gaining control of the county’s capital fund. Profits were becoming retirement pensions, that is, deferred pay for the employees. The creation of surplus value was being undermined, and business income was going into the wage fund.
      By the late 1990s pension funds were the major owners of shares, not only in the United States but internationally.
      The number of employer pension plans in the United States rose from 13 in 1899 to 300 by 1919, covering 15 per cent of the work force. They were used to reduce the labour mobility of key employees and to discourage trade union militancy. At first the pension schemes were aimed at managerial employees, and factory workers were excluded. However, government changes in tax treatment and union agitation encouraged employers to make the schemes more widely available.
      In 1949, for example, the Steel Industry Board opposed a wage increase for steel workers and instead recommended the institution of non-contributory pensions for employees. Admission to or the setting up of pension schemes became a feature of pay negotiations, so that by 1960, 41 per cent of the American non-agricultural work force was covered by an employer’s pension scheme. In effect, unions in the United States were able to gain benefits for members by the use of their collective bargaining power.
      In the 1980s this situation began to be reversed. Companies underfunded their schemes or allowed them to collapse so as to reduce their obligations to their workers. The decline of defined-benefit schemes has been dramatic: from 170,172 in 1985 down to 53,000 by 1997. In contrast, defined-contribution schemes have increased from 207,846 in 1975 to 647,000 by 1997.
      In Ireland, pensions have a longer history, but in many respects the situation mirrors that in the United States. The earliest private-sector employers to provide pension schemes were the railway companies. Other employers followed, at first providing schemes for white-collar workers and then extending them to manual workers, for most of the same reasons as American employers: encouraging a stable labour market and discouraging strikes.
      However, legislative changes in the 1990s brought about a remarkable shift away from pensions as a form of income in retirement to pensions as a form of wealth management, with the emphasis on converting income to capital for company directors and wealthy capitalists. The growth of defined-contribution schemes and the closing of defined-benefit schemes to new entrants have meant that the inherent risk in this type of saving is transferred to individuals and away from companies.
      In the first three weeks of 2008 the pension funds of Irish private-sector workers lost €10 billion from their value because of international stock-market turbulence. Irish pension funds had a heavy reliance on bank shares, the value of which was wiped out.
      Between 1996 and 1999 the number of defined-contribution schemes increased by about 12,000; in the three years following 1999 they increased by 35,000. Defined-benefit schemes were in decline in the same period, and no new schemes have been opened in more than ten years. The number of defined-contribution schemes in existence is unknown.
      The advantage of defined-benefit schemes for participants is that costs are lower, because they benefit from economies of scale and the employer bears the costs and the risk. Consequently, those on lower incomes and the standard rate of tax do not incur any great burden by being members. In defined-contribution schemes, on the other hand, the risk is transferred to the individual, who is put into the role of making investment decisions and carrying all the costs. With defined-benefit schemes, adverse selection was eliminated, because the insurance company can base its rates on the average over the set of employees and is assured that all employees in the company will participate.

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