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How Business Created Pensions to Thwart Unions

Stephen Mihm, an associate professor of history at the University of Georgia, is a contributor to the Bloomberg View. Follow him on Twitter at @smihm.
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Buried in the $1.1 trillion spending bill that President Barack Obama signed into law last night is a provision that would allow the benefits of retired truckers, construction workers and others who contributed to so-called multiemployer pensions to be cut for the first time.

This change -- potentially affecting as many as 1.5 million current and future retirees in underfunded plans, mostly union workers -- will undoubtedly set off volleys of finger-pointing to find a culprit for the accelerating collapse of the system. Many commentators will blame unions for extorting extravagant, unsustainable retirement packages from employers that are now falling apart. But it’s not so simple. In fact, the long, tangled history of U.S. private pensions is equally a story of how business sought to manage labor, conserve profits and block the expansion of a modern welfare state.

Research by historians such as Jennifer Klein and Steven Sass helps explain why the U.S. is almost unique in its reliance on private, company-sponsored pensions instead of comprehensive, government-sponsored benefits.

Private pensions emerged in the late 19th century in what was then the most important U.S. industry: railroads. In 1877, striking railroad workers protesting wage cuts brought the country to a standstill. Workers clashed with state militias; dozens died in the ensuing violence.

 Although the strike was suppressed, the railroad barons sought ways to avoid further outbreaks of violence and labor unrest. And in 1880, the Baltimore and Ohio Railroad instituted a private pension plan for its employees; it eventually would cover 77,000 workers. This wasn't a matter of altruism. As Dr. W.T. Barnard, who designed the B&O program explained at the time, the failure of management to provide benefits had driven workers into the arms of “agencies most potent in fermenting discontent -- secret societies, brotherhoods, and similar organizations,” most obviously unions.

Labor unions were perceived to be dangerous to employers because they steered the allegiance of workers away from their workplace. The B&O plan, which offered a variety of benefits, was the first comprehensive attempt to compete for the loyalty of employees by providing pensions.

Other railroads and corporations also began to offer similar programs of “welfare capitalism.” Some, like the Pennsylvania Railroad, which came up with a comprehensive plan in 1900, realized that pensions also enabled them to push older, less efficient workers into retirement with minimal fuss, helping the company’s bottom line.

In the succeeding decades, corporations in other industries followed suit. Invoking the spirit of welfare capitalism, they unilaterally introduced pensions, health and disability insurance, and other perks in a rather overt attempt to woo workers away from unions. The programs became so widespread that in the 1920s, many unions protested against such benefits, which they said circumvented the collective bargaining process.

But corporations found further reasons for delivering pension benefits. Starting in 1926, contributions to company pensions became tax deductible. The rise in corporate tax rates in the 1930s gave another impetus to the creation of private pensions.

So, too, did the corporations peddling “group insurance” to companies eager to offer fringe benefits to their workers. Insurance companies such as Metropolitan Life and the Equitable Life Assurance Company sold packages of “group insurance” that offered life and disability plans, and old-age pensions rolled into one product.

Private pensions flourished until the Great Depression, when many corporations went bankrupt, as did their benefit programs. But they soon revived, along with the economy. Between 1939 and 1946, the number of U.S. private pension plans went from 659 to 9,370.

Surprisingly, this enormous increase isn't attributable to the increased power unions acquired during the New Deal. In fact, many businesses instituted pension plans during the war as an end-run around a freeze on wages instituted by the National War Labor Board. Because the freeze didn't extend to fringe benefits, businesses could compete for labor in the wartime economy by offering pensions and other extras. Exceedingly high taxes on wartime profit also promoted the provision of pensions and other benefits as a way of lowering corporate tax burdens. 

The growth of private pensions in the postwar era also reflected a shrewd triangulation on the part of the business community. Business leaders wanted to check the further expansion of what is now derided as "big government." They also wanted to curb the power of unions. Pensions and other benefits such as health insurance enabled employers to achieve both goals. Offering private pensions and health insurance to workers allowed businesses to make a reasonable claim that there was no reason to expand Social Security, much less create a government-sponsored health insurance program. At the same time, these programs served as a prophylactic against labor unrest in years after 1945.

In 1947, the Taft-Hartley Act made benefits part of the collective bargaining process. But it also stipulated that unions couldn't administer their own retirement benefits; they would have to share this role with their employers in a fifty-fifty split. As Jennifer Klein has observed, “with the Taft-Hartley Act, employers had improved the climate within which they could restore welfare capitalism.”

In ensuing years, management, not labor, had the upper hand over benefits, particularly when it came to controlling information on the details of employee benefits, including pension plans. The Welfare and Pension Plans Disclosure Act of 1958 was supposed to fix the problem, but many companies failed to comply with the law.

Although that wasn’t a concern when times were good, the collapse of several pension funds in the 1960s, including one set up by Studebaker-Packard fund in 1963 -- prompted calls for further reform.  Senator Jacob Javits's landmark legislation -- the Employee Retirement Income Security Act of 1974, or ERISA -- led to the creation of the Pension Benefit Guaranty Corp. to backstop private pensions.

Private pensions are now a vestigial presence in American work life, replaced by defined-contribution plans such as the 401(k). In the last 15 years, the portion of the U.S.’s largest companies offering defined-benefit pensions to new workers has fallen to 24 percent from 60 percent, according to the benefits consultant Towers Watson.

The changes in the spending bill, which could permit cuts to multiemployer private pensions for about 10 percent to 15 percent of the 10 million workers in such plans, are framed as a necessary measure to preserve the solvency of the PBGC. But on a deeper level, this step is a harbinger of the ultimate demise of a private pension system that has outlived its usefulness to the business community.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Stephen Mihm at smihm1@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net