By Jeffrey H. Birnbaum
Monday, May 16, 2005
Labor unions have left no doubt about their opinion of President Bush's plan to create private accounts as part of Social Security. They hate it. When they aren't sending nasty letters to brokerages that back the proposal, they're staging rallies and news conferences.
The question is, why? Labor leaders say the president's recommendation endangers the retirement of millions of Americans and that they oppose it for the good of all workers. But there's a lot more to their position than that.
Whatever its merits, Bush's Social Security design threatens to undermine one of the few remaining sources of power for the long-faltering labor movement: access to money and the influence it brings. The AFL-CIO and its affiliates are going all-out to kill the president's plan not just out of altruism but also out of a sense of self-preservation.
Union membership has been declining since 1954, when more than a third of the labor force was unionized. Today, that percentage is 12.5 percent; if you take government workers out of the equation, the percentage is a mere 8 percent.
As an antidote to that calamity, unions have been trying to exert themselves not just from the bottom -- by organizing and recruiting new members -- but from the top -- by using their pension funds, which own hundreds of billions of dollars in corporate securities, to compel boards of directors to do what they want.
Unions have been at the forefront of corporate governance initiatives that have restrained executive compensation, required directors to act more independently from management and given shareholders more say in what companies do. Those efforts have put labor on a collision course with business executives more than usual.
Which brings us back to Social Security. The Bush effort would do two things to hurt organized labor.
First, it would speed the demise of the unions' preferred type of pension -- the kind that gives unions the most clout in the corporate world -- called defined-benefit funds. They are for the most part controlled by unions and provide set benefits to their retirees.
In contrast, Bush's private accounts would be defined-contribution funds which, like 401(k) plans, have set contributions but not specific benefits that come out in the end. Defined-benefit plans are already losing adherents. Since 1978, the number of defined-benefit plans has fallen to 26,000 from 128,000. If the president's proposal were to succeed, that trend would probably accelerate and further hobble unions.
Second, Social Security private accounts would flood the markets with money controlled by individuals, not organized labor. That would tend to dilute labor's voting strength on shareholder issues in general.
"Union leaders fear losing the bargaining power they have through their pensions and ultimately fear that the entire union model could become obsolete," concludes John J. Castellani, president of the Business Roundtable, a major corporate lobbying group.
In fairness, corporations would dearly love to see the AFL-CIO stumble on anything having to do with its corporate campaigns. Business groups have for years railed against labor-led proxy battles as costly nuisances if not outright obstacles to higher profits and growth.
Several companies this year have refused to be shamed by labor into dropping their support for Bush's private-account proposal because they back the larger goal of undermining the unions' pension-fund strategy. If they hang tough now against union pressure on Social Security, they figure that labor's sway in the future might be diminished on almost any issue.
Partisanship also plays a role. Corporate representatives say that part of their enthusiasm for the president's Social Security plan is their belief that support for him and the Republican Party on this top priority will be repaid with many pro-business measures down the road. For parallel reasons, labor is equally eager to help Democrats resist the president.
Companies have another, often-unstated motivation for liking Bush's approach: It offers their best chance to repair Social Security without resorting to a tax increase. Few things repulse an executive more than the prospect of having to pay the government an extra dime. So far at least, Bush has ducked any talk of increasing revenue to close the financial gap.
In addition, converting part of Washington's second-largest program into a system of private investments is a step toward dismantling the federal government as we know it. Many regulation-averse business people would heartily endorse that development and, in effect, are doing so by pushing so hard for the president's plan.
All of which is far afield from the debate that the public has been hearing so far. Then again, what matters in the capital isn't always what's said aloud.
Speaking of Staying Quiet . . .This will seem hard to believe but some of the most basic pension reforms that were devised after the Enron Corp. bankruptcy four years ago still haven't become law. Now, one of the Senate's most powerful Republicans -- who is usually solidly pro-business -- is speaking out in protest and laying the delay at the doorstep of big-money lobbyists.
In 2001, thousands of Enron employees lost their nest eggs because they couldn't sell the Enron stock they owned (often to the exclusion of other stocks) in their company pension plans. Virtually everyone agreed at the time that the law needed to be revised to allow more ownership of other stocks in the plans.
Sen. Charles E. Grassley (R-Iowa), chairman of the Senate Finance Committee, has championed a popular list of measures that would do just that. He would permit pension participants to diversify their retirement assets beyond company stock after three years, toughen advance-notice requirements about so-called blackout periods when company stock can't be traded by employees, and increase the portability of retirement assets from one job to the next.
But Grassley says his proposals have languished because of the prowess -- and daunting campaign contributions -- of the financial services industry. Wall Street's allies in Congress, he says, have blocked the proposals until the Senate also adopts a plan that would allow financial firms to give investment advice to people who invest in the funds that they manage. In other words, a financial company would be allowed to recommend which mutual funds, including its own, a person should invest in his 401(k) or IRA.
Grassley and many other senators have balked, asserting that the legislation would promote exactly the kind of conflict of interest that the Enron scandal made clear should be snuffed out.
"This small group of firms and their army of well-paid lobbyists seem more concerned with making money than preserving workers' nest eggs," Grassley said. "I agree we need to do more to get investment advice to [pension] plan participants, but changing the conflict-of-interest rules isn't the place to start."
I guess the dispute isn't quiet anymore.
Jeffrey Birnbaum writes about the intersection of government and business every other Monday. E-mail him atkstreetconfidential@washpost.com.