When the Good Pensions Go Away Why Americans Need a New Deal for Pension and Health Care Reform
Thomas J. Mackell Jr.
John Wiley & Sons, Inc.
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When the Good Pensions Go Away
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When the Good Pensions Go Away Why Americans Need a New Deal for Pension and Health Care Reform
Thomas J. Mackell Jr.
John Wiley & Sons, Inc.
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Copyright © 2008 by Thomas J. Mackell, Jr. All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey. Published simultaneously in Canada. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978)750–8400, fax (978) 646–8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748–6011, fax (201) 748–6008, or online at http://www.wiley. com/go/permissions. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation.You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762–2974, outside the United States at (317) 572–3993 or fax (317) 572–4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our Web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Mackell Jr. Thomas J. 1942When the good pensions go away: why Americans need a new deal for pension health care and reform / by Thomas J. Mackell Jr. p. cm. Includes index. ISBN 978–0–470–13975–2 (cloth) 1. Pensions—United States. 2. Defined benefit pension plans—United States. 3. Insurance, Health—United States. I. Title. HD7125.M283 2008 331.25'220973—dc22 2007042545 Printed in the United States of America 10 9 8 7 6 5 4 3 2 1
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This book is dedicated to my grandchildren who are full of joy, passion, excitement, and curiosity.They are Olivia, Grace, Charlotte,Thomas IV, Emily, Matthew, Sadie,Toby, Christian, and Brendan.Their lives and the lives of their parents will be significantly influenced by the decisions we make or fail to make today. I also dedicate it to the memory of my parents, Dorothea and Thomas J. Mackell, who taught me a great deal about civic responsibility and political leadership.
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Contents
Preface Acknowledgments Introduction Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter Chapter
1 2 3 4 5 6 7 8 9 10
ix xv xvii
The Fractured American Retirement Dream The New Political Reality The New Realities of Work and the Workplace America’s Love Affair with Debt Employee Benefits at a Crossroad The Retirement Crisis The Time Is Right for Bold Leadership A Time for Change How Did We Get Where We Are? A Call to Action
Conclusion Appendix Notes Index
1 13 23 31 39 47 61 91 103 119 137 139 155 167
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Preface
I
n the immediate aftermath of the terrorist attacks on September 11, 2001, politics, if only for a brief interlude, became bipartisan and the Democrats and Republicans behaved decently and intelligently towards one another as they worked together to assess the impact of the attacks on our nation and its well-being. In short order, that peaceful and productive period of coexistence enabled our leaders—economic, political, business, military, and others— to assure the American people that collectively that they were on top of things. Internationally, virtually every nation around the globe was aghast at this dramatic and bold act of terrorism and they expressed their heartfelt sorrow and compassion to the American people. Joseph Nye, a professor at Harvard University, wrote that, “Terrorism is about theatre and a competition for audience.”1 This horrendous act of the theatrical was so macabre that it has survived and has permeated the collective mind-set of millions of Americans who fear another attack on American soil. This notion of fear and the need to be constantly alert has been promulgated by the Bush administration by what has been characterized
ix
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as “. . . a commander-in-chief who keeps writing chapter after chapter of fictionalized propaganda.”2 Fred Barnes, the executive editor of the Weekly Standard and co-host of “The Beltway Boys” on the Fox News Channel, wrote that “President Bush operates in Washington like the head of a small occupying army of insurgents, an elected band of brothers (and quite a few sisters) on a mission. He’s an alien in the realm of the governing class, given a green card by voters. He’s a different kind of president in style and substance.”3 As a result of the acrimony and bitterness elevated by this mentality and behavior, what did not survive, unfortunately, was the cooperative and genteel spirit of bipartisanship as our respective political ideologues returned to form and their designated corners of the ring preparing to come out again fighting each other over every nuance, morsel, and minutia of policymaking. Once again it reinforced the fact that acrimonious political behavior has the ability to interfere with good policymaking. The net result is that the American people have suffered immeasurably and our nation’s social and economic fabric is badly tattered and threadbare. An editorial in the Financial Times recently stated that, “In pursuit of the imperial presidency Mr. Bush has turned himself into a very premature lame duck.”4 Over the last seven years virtually nothing has been done to deal with the profound issues that we face as a nation with regard to a whole host of domestic issues.The arrogance, disrespect and incompetence manifested by this administration that permeates America may take decades to repair and correct. The focus of this book is primarily on the complicated issues of retirement security and health care policies or the obvious lack thereof. Our public welfare or entitlement programs of Medicare and Social Security are facing monumental hardship and our leaders’ failure to effectively deal with these two bull elephants in the room will put the next generation of Americans, our children and grandchildren, in serious financial jeopardy and at perilous risk. We are mortgaging their futures by failing to act. The private retirement system of benefit plans that, historically, have been provided to workers and their families have been torn asunder with the dramatic erosion of defined benefit plans and coupled with rising health care costs that have outpaced wages and inflation have left many Americans highly vulnerable to economic destruction.
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In the private sector the Pension Benefit Guaranty Corporation (PBGC), which was created in 1974 by the passage of the Employee Retirement Income Security Act (ERISA) as a quasi-governmental insurance company, is in serious financial disrepair. The PBGC was created to protect all plan participants but would pay benefits to many workers, although at a much diminished rate, who have been members of faltering or bankrupt pension plans. As a result of so many defaulted plans, the PBGC has taken on an enormous financial burden and is under siege. George Will in a column in 2005 wrote that “. . . the PBGC’s sudden prominence is symptomatic of the increasingly troubled relationship between America’s welfare state and American capitalism . . .”5 So a world that is terribly bedeviled by ever-spiraling health care costs, consternation over the potential insolvency of Medicare and Social Security, the erosion of the historic pension system, and the awesome responsibility of having to invest one’s 401(k) assets has most people feeling that their backs are to the wall and they have no way to turn. Millions of hardworking Americans are feeling economically insecure. Many are overextending themselves by borrowing to sustain their consumption. A survey of 40- to 75-year-olds, conducted for Ameriprise Financial by Harris Interactive and Dr. Ken Dychtwald, found that only 44 percent feel that they are on course financially for retirement. A separate survey by Harris and Dychtwald for Ameriprise found that 61 percent of respondents feel “financial stress” around saving for retirement, and 54 percent are concerned about paying for postretirement health care.6 Our elected leaders have failed to understand and deal constructively with the new realities of employment, retirement, and health care policies; the education of our children; the retraining of our workforce; and our deteriorating infrastructure, all of which, if dealt with intelligently, would enable us to maintain our robust economic leadership in the world. They have not dealt with the monumental transformations that are changing our society.There is a new paradigm evolving and they seem to be overwhelmed. Americans are well aware that our health care system is in deep trouble and disrepair due to weak and inconsistent incentives for quality control, cost containment and pervasive greed. At the same time that they hear and observe that the system is in shambles, there is concomitant
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media coverage of the multibillion-dollar mega-acquisition deals of the various types of health care providers—pharmaceutical firms, insurance companies, and other benefit group providers—that are being forged and solidified in the marketplace almost daily. What makes these deals so enticing? The answer is the staggering profit margins of the health care provider community whose collective mantra is to elevate the profit margins and deemphasize revenue gathering. In English that reads: Earn more money by eliminating coverage for a certain segment of society. They have been very successful at accomplishing that goal resulting in millions without health insurance coverage. Thus, it is my contention that two of the most pressing problems facing our nation’s economy today and that will continue to do so into the future are the retirement income security crisis and the health care cost crisis. If we do not fix them we face an awful scenario looking out over the horizon. On October 16, 2007, the Wall Street Journal reported that the first baby boomer applied for Social Security benefits, signaling an oncoming “avalanche” by the people born in 1946 through 1964.7 This was yet another cultural milestone for the bigger-than-life American generation. Kathleen Casey-Kirschling, the first of her generation, went down in history when she officially filed for Social Security. She was born a second after midnight on January 1, 1946. Tens of thousands more are expected to follow in the coming weeks until eventually very few workers will be paying taxes to support very many retired people.8 The implications of this demographic shift will guarantee that both of these crises, if unattended to, will undermine and create a major drag on future economic and social prosperity. Denial is a powerful thing and at some point these two crises will be foisted onto the shoulders of federal lawmakers who will have no alternative but to sit down and start the serious deliberative process in order to initiate corrective policies to deal with them, and political ideologies will have to be shunted to the side. Let’s hope that it can be accomplished with as little pain as possible. Americans crave fairness and equity and they feel that the traditional institutions that once provided an element of protection for them have, in fact, failed them.The typical American worker feels that he or she can
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no longer rely on employers or elected leaders for support in contending with the massive changes that have and will continue to occur. Many feel that they are on the edge of disaster and that those who have the power and responsibility to be responsive no longer function with a sense of urgency and the clock keeps ticking and the population’s well-being is eroding. According to a study that was conducted in 2006, Americans have lost faith in the people who lead their federal, state, and local governments, and in businesses, churches, and schools. The survey was sponsored by U.S. News & World Report and the Center for Public Leadership at Harvard’s Kennedy School of Government. The report, entitled The 2006 National Leadership Index, stated that nearly threequarters of Americans think that the nation faces a “leadership crisis.”9 Over the past two years, I have appeared on pension and investment programs speaking before trustees of public and private sector pension funds. At some of these programs I have met a gentleman named Dwight Kadar who retired from Cooper Industries, where he spent a good deal of his career working on investments and financial matters. During some of his presentations, where he discusses the historical erosion of our benefit systems, Kadar has used the following chart that depicts the impact that this erosion has had on his immediate family.
Actuarial Statistics Year Born Year Employed Years Employed Years Retired Retirement Benefits Social Security Monthly Annuity (DB) Cash Balance 401(k) Savings Medical Benefits Medicare Company Provided
Great Grandfather (Andrew)
Grandfather (Steve)
Father (Dwight)
Son (Stephen)
1885 1900 33 0
1921 1937 42 26
1947 1970 37 1
1983 2006 1 ??
No
Yes
Yes
??
No No No
Yes No No
No Yes Yes
No No Yes
No No
Yes Yes
Yes No
?? No
Source: Dwight Kadar; reprinted with permission.
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There are many families in America today that could provide this similar kind of a picture as to how the changing benefit scenario has impacted their own family’s coverage. As the campaign for the presidency gains momentum, there are those who hope that this time may just be health care’s moment. There has been a great deal of discussion by the Democratic candidates and very little by the Republican candidates. But when the health care coverage of millions of children turns into an acrimonious debate between the parties, as it did in the late summer and early fall of 2007, one hopes that an intelligent national program can rise to the surface. Just as leaders during times of war make appeals to the patriotism of the masses, perhaps the voting population ought to appeal to the patriotism of our elected leaders and urge them to look inward during these dangerous days of economic strife and beseech them to be ashamed to remain as the mindless, heartless officials that many of them have become. The country needs leaders who will rebuild alliances and narrow the divisions that the bitter partisanship of the Bush presidency has widened. Leaders who will untangle complex problems and execute an approach to resolve the challenges of a rising China and India and other emerging nations, of globalization and the new, muscle-bound global financial markets. Leaders who can cut through the maze and defuse the ticking time bomb of our nation’s entitlement debt. Have we reached a stage where the idea of having a constitutional convention to rectify our problems and redo our nation is at hand? This book is an effort to recite how we arrived at where we are, to point out who or what is to blame, and to offer some suggestions as to how we can carve out a new path to better days at this crossroad of capitalism and public policy. It is a call to all Americans and their elected representatives at every level of government to experience some sense of self-renewal and commitment to change. Leaders, almost by definition, are people who should change minds. The book by no means provides all of the answers but, rather, it is my desire to stimulate thought and awareness and to aggravate for debate, commitment, and action to restore the principles of fair play and equity that Americans deserve. Thomas J. Mackell, Jr.
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Acknowledgments In my first dealings with men, I hearkened to their words, and took their deeds on trust. Now, in dealing with men, I hearken to their words, and watch their deeds. —Confucius
I
have been a member of the Board of Directors of the Federal Reserve Bank of Richmond since my appointment on January, 2, 2003. I have been the Chairman of the Board since January of 2005. I will finish my term in December of 2008. I state that fact to let the reader know that the remarks, perceptions, and observations recited in this book should be exclusively attributed to me and my world vision and should not be attributed to the Federal Reserve System in any manner, shape or form. There is an endless list of people to whom I am greatly indebted who contributed to the ideas that make up this book. Because life is xv
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a journey, I have been fortunate to have crossed paths with a vast array of individuals, some for a short stint, others for longer relationships, during my 40 years in the employee benefits and investment management world—individuals who represent millions of hardworking Americans who want their slice of the American pie. These folks—professionals servicing retirement and health care funds, trustees, labor and management representatives in the public and private sectors and many others will not have a clue as to how their quest to serve their clients and constituencies have influenced me in life and in the writing of this book. The list is extensive so without listing the thousands, I want to thank them collectively for the contribution that they have made to my education in the world of benefits, investments and politics. It is a pleasure to work with so many of them and I am truly a lucky man who has benefited from so many points of positive contacts throughout my career. I will, however, say thanks to a specific number of people who provided the inspiration for me to write this book. My children encouraged me to put to paper the thoughts and concerns about the state of affairs in this nation that I have conveyed to them ad nauseum over so many years. To my long-time friends of almost a quarter century, Tom Acosta and Geoffrey Dohrmann, and some relatively newfound friends: John “JD” Davis, John Bishop, and Nomi Prins, all of whom peppered me with questions and thoughts and prodded me weekly to get the job done. To my executive editor, Deborah Englander, and her associates and assistants, who believed in this project and cracked the whip when I digressed, I express my sincere thanks and appreciation for your professionalism. I would also like to express my sincere thanks to Kirsten Miller, whose keen eye dug through the details of quotes and footnotes and made sense of my ramblings. Finally, to my wife, Cheryl, who encouraged me to write this book for several years because she believed in me and in the need to write it, and who diligently pushed me day by day, with gentle, loving pushes and suggestions to finish the book, I express my heartfelt thanks. T. J. M.
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Introduction Now, more than ever, we need people who will stand up against the follies and lies of the powerful. —Paul Krugman1
T
here was a time when employee benefit packages were seen as an essential component of the overall employment program. These offerings permitted employers to attract, recruit, retain, and motivate employees who were critical to the corporation’s strategic and tactical success. Retirement plans, medical plans, thrift plans, retiree medical programs, legal service plans, and other types of fringe benefits were offered and periodically updated. However, as a result of global competition putting increasing pressure on companies, employers began cutting back on their benefits and, in some instances, eliminating them completely. The employers said these changes were necessary for the company to compete in the new
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global economy and the employer had to become leaner and meaner. But the employees in many companies were left on the ropes. Today, as employers and employees, we face a world that is almost unrecognizable from the one we knew just 25 years ago. The pressures on employers and employees alike have created an environment of high anxiety. The employers have felt compelled to respond to the changing economic pressures and the employees feel disenfranchised. The net result is that benefit programs have, in fact, all but disappeared in the private sector, and the public sector, now faces similar cutbacks. When the Good Pensions Go Away is an ominous title and one that causes a great deal of consternation when I’m speaking about this issue. Unfortunately, the trends in the private sector have prompted justifiable concern that the good pensions are, in fact, disappearing as corporations have converted their defined benefit plans to cash balance plans, frozen their existing defined benefit plans, or now only offer a defined contribution or 401(k) plan for the newly hired—some without employer contributions. In the public sector, the trend has not accelerated as rapidly as in the private sector, but it appears to be gaining momentum like a fastmoving train heading down the same track of destruction, threatening to push defined benefit plans out of the way as it moves swiftly along. While you probably are aware of this ominous phenomenon, you may not have paid close attention. Most people simply do not want to deal with reality and would rather bury their heads in the sand and let someone else worry about the pension crisis. However, the reality is that if we do not deal with the issues of rising health care costs and disappearing pensions head-on, we will face dire consequences as a nation. My subtitle, Why Americans Need a New Deal for Pension and Health Care Reform, should be self-explanatory if you’ve seen what has been happening over the past two decades—and feel that things are not as they should be in this country. The conditions that have led to failed health insurance coverage for so many millions of Americans and their families and the deterioration of long-standing retirement programs can no longer be ignored. We must deal with them judiciously and leave the apparent political posturing behind us.The conflicting interests of health care and pension service providers, along with the aging population and the inertia that has permeated our policymakers can no longer be tolerated. A call to action is the order of the day.
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For too long, politics and political agendas have complicated and stunted legitimate policymaking. In the latter part of the Clinton administration and, more recently, in the Bush administration, divisively partisan politics have been pervasive and have precluded our political leaders from dealing effectively with our nation’s domestic agenda. In days gone by, it was not uncommon for politicians with different ideological interests to come to terms and seek cooperation, conciliation, and the middle ground. Such cooperation among different political parties is largely absent today. In this book, I examine these issues and recommend some strategies that should be assessed and evaluated in the hopes that we can start addressing this precarious position. America’s strength and security derive not exclusively from military power, but from a strong economy where everyone participates and produces a vital society. Our current state of affairs, economically and politically, demand that we restore fiscal sanity in Washington, reimpose budget discipline, roll back irresponsible wartime tax cuts, and invest in America and its people’s future health, well-being, and competitiveness. The dramatic shifts and pressures that are taking place globally should precipitate a strong desire—on the part of both employees and employers—to become more actively involved in solving these problems. USA Today ran a series of top 25 lists counting down to its 25th birthday on September 15, 2007. The thrust of these lists referred to the kinds of things, events, changes, and inventions that have dramatically influenced our lives in so many ways over these past two and one-half decades. Obvious items such as cell phones, laptop computers, BlackBerrys, caller ID, online stock trading, voicemail, Stairmasters, electronic tools, lettuce in a bag, disposable contact lenses, to name a few, have contributed substantially to our new lifestyles. These additions to our culture have obviously influenced our daily behavior and productivity. The less obvious social change includes the widespread transfer of risk from the institution to the individual in the employer-employee relationship. I am referring to the shift in traditional status of the American worker within his or her workplace and in the benefit coverage of health care benefits and retirement security programs. The so-called “womb-to-tomb coverage” that was historically provided for employees and their families in the United States began disappearing
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sometime around 1980. This diabolical shift, which was influenced by many factors, has contributed to the evolving economic insecurity. I am certainly well aware that we cannot roll back the clock and recreate a world that once existed. In the future, however, the effect on society of these frozen or rolled-back and disappearing benefit programs will be more profound than any of us can envision unless the path of destruction is altered.
Powerful Changes to Retiree Benefits You would think that 40 years’ notice would be sufficient time to come to terms with retirement. While grieving job loss, people go through various psychological stages from denial, to anger, to bargaining, and, finally, to acceptance. Many wrestle with the notion that they are too old to work but too young to die. These are the mental gymnastics that people go through when they no longer have a place to go to on a daily basis that provides an element of comfort. What is happening more and more today is the realization on the part of many people that they may outlive their assets and this creates an entirely new frightening dimension to the concept of retirement. As Kierkegaard noted, “The most painful state of being is remembering the future; the one you couldn’t have.”Webster’s defines retirement as “withdrawal from one’s position or occupation or from active working life.”2 Some people think that retirement is a time to put an end to dreams and accept that most of them will not happen. I recall that when my father was in his mid-fifties he had a friend who was in his early seventies who was still working and building a new home. When my father asked him what kept him so youthful, he responded that he “hung around with young folks like yourself ” who were still putting their kids through college and were in the midst of their robust careers. Today, most baby boomers would blanch at the idea of putting an end to their dreams. However, there are a growing number of people who know that retirement is only a dream for them because of the changed retirement paradigm. The introduction and implementation of the 401(k) retirement plan has virtually revolutionized retiree employee benefit coverage in ways
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that are likely to have a potential debilitating impact on the lives of millions of Americans. These types of plans are not retirement plans, but, rather, they are forced-savings plans and many people look to them for loans when a financial need or crisis within the family arises. Previously, loans could not be taken from a defined benefit plan. That money was set aside for the long haul to be used exclusively upon retirement. Table I.1 depicts how a loan of $10,000 from a 401(k) plan would affect one’s retirement assets. Say a worker has been making monthly contributions of $264 to his 401(k) account, which has been earning an annualized return of 8 percent. When, at age 40, he takes out the loan listed below and halts his monthly contributions, his after-tax monthly loan repayment would be $198, based on an interest rate of 7 percent. In the not-too-distant future, people will begin to realize the significant macroeconomic consequences of a vastly changed and failed retirement system and how that dissipation will erode their quality of life, a life that has defined what America was all about, namely, freedom and equality for all and the pursuit of economic opportunity. A cadre of business elites has made significant progress toward rolling back the principles and benefits of FDR’s—President Franklin Delano Roosevelt’s—New Deal. Organized labor, the backbone and advocate of the working class, has, for all intents and purposes, been decimated. The laws that govern employer and employee relations were fashioned during the New Deal era and are outdated and inappropriate for today’s workforce. Much of the regulatory structure of our businesses and industries that were given birth during the New Deal has been dismantled and defunded. Unemployment benefits, an incredible safety net for people who became Table I.1
The impact of a 401(k) loan Loan
Initial 401(k) balance at age 40 Loan amount Balance at the end of the 5-year payback period Balance at age 65
$50,000 $10,000 $73,143 $520,799
No Loan
$50,000 $93,891 $618,095
Source: T. Rowe Price, reported in USA Today, October 12, 2007.
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disengaged from the workplace during hard times, have been trimmed to the bone. Persistent calls by business leaders and conservative ideological elites in Congress for the government’s discontinuance of the Medicare, Medicaid, and Social Security programs, programs that have lifted so many elderly out of poverty, have placed progressives and anyone who cares about these programs on constant high alert in an effort to protect and preserve them. Their proposed skeleton-like replacement programs would replace these existing programs with riskier and less generous individual health and retirement accounts. By means of tax cuts, energy subsidies, defense expenditures, and financial and industrial deregulation, these conservative ideologues have transferred a trillion dollars to their principal constituents who see no need for or interest in New Deal–type entitlement programs. Restoring a fraction of these subsidies designed to pay to shore up programs like Medicare, Social Security, tuition assistance, earned-income credits, and the like will take a monumental initiative on the part of those members of Congress, and society in general, who care about what has unfolded and want to give back some of these lost benefits to the disenfranchised. The historical high-quality, all-encompassing health care plans that were part of the employment contract have faded as most institutions now view such programs as prohibitively expensive and, therefore, are no longer appropriate as part of the employment package. Even in workplaces where, historically, there has been very strong union presence, the question of continuing to pay for these pension and health care legacy costs has been a contentious issue debated at the bargaining table for years. Each industry has dealt with these concerns differently, as best they can, predicated on the new reality of their specific industry’s economic conditions and on the historical collective bargaining relationship, but the terrain has changed along with the type of coverage provided. Business has engineered, willingly or not, a less secure, more disposable workforce with drastically reduced benefits along with the dilution of their bargaining power to protect workers. When the former CEO of General Electric, Jack Welch, commented that he would like to have had all of his company’s plants set upon barges, not to move the workforce from country to country to take advantage of low wages, but rather to gain competitive advantage with currency shifts, something incredibly nuanced had unfolded.3
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The old concept of shared risk by a large pool of employees, upon which pension and health care benefits were built, has been replaced by a new employment initiative called personal responsibility or the widely used term of an ownership society. This is a society that is tantamount to the dismantling-of-the-safety-net society or a society made up of those who already own and those who don’t. The current administration is blind to the economic risks facing many Americans and, apparently, is comfortable with a sharecropper or debt peonage society. This paradigm shift has transitioned to an ugly Conservative New Deal, which has as its principles greed, mendacity, selfishness, and indifference, even hostility, towards the notion of protecting the public interest or the common good. The Congressional Research Service estimated that Pentagon spending on Operation Enduring Freedom and Operation Iraqi Freedom at approximately $12 billion per month for the first six months of FY2007, significantly higher than the $8.7 billion per month estimated in FY2006. As of July 2007, Congress has appropriated approximately $610 billion for the wars in Iraq and Afghanistan and for increased security at military bases worldwide.4 Joseph Stiglitz, the Nobel Prize– winning economist, and his colleague, Linda Bilmes, have tried to put together an estimate of the real cost of the Iraq war. They calculate that it will cost about $2 trillion by 2015. The conservative American Enterprise Institute suggests a figure at the opposite end of the spectrum—$1 trillion.5 Both figures are an order of magnitude larger than what the Bush administration publicly acknowledges. How can we afford the types of programs at home that will provide some decency and financial security for American citizens with this enormous fiscal burden weighing on our nation’s shoulders? The combination of this shift in attitude and irresponsibility, along with the reality of demographics, namely a broad and aggressively aging population, will dramatically impact our world for decades to come unless the seriousness of these changes and their effects are addressed. There are no easy answers or solutions. In spite of the fact that 95 percent of incumbents are reelected and returned to office by less than 50 percent of the population who vote, this sea change must be recognized by the people who make this country move. The so-called forgotten ones impacted by the changes in the pension system are the very individuals whose work stimulate and energize our economy and move
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it forward on a daily basis, allowing the country to compete in the global economy.
Creative Solutions Will Be Needed The need for innovative thinking must be a high priority and should be embraced by leaders in all segments of society—industry, labor, and government.We truly are a nation at risk. We must forge a new industrial policy where everyone participates and no one, regardless of his or her economic status, reputation, or influence is left behind. A tripartite approach may be our best solution. If we fail to link our arms together, putting self-interests aside, and work thoughtfully and aggressively towards tackling these issues, we will pay for them in ways that will be very destructive and mortgage the future for Generation X as well as for all of society. America is in for a rude awakening if we fail to confront this headon and quickly. The demographic shifts that are occurring will begin to unfold in the next 5 to 10 years and will impact every aspect of society. The move by the country’s leadership to a nondemocratic, empire mentality has only one direction that it can take.This course, as evidenced by an array of factors, has the potential of possibly ending in economic and political collapse. On a number of occasions I have listened to Andy Stern, the International President of the Service Employees International Union (SEIU), a union that represent some 1.9 million workers, say that today, “We are as far away from the New Deal as the New Deal was from the Civil War.”6 It made me think of something that I read in a newer biography of President Roosevelt. “Analogies,” writes author Jean Edward Smith, “between military and political campaigns are often overdrawn, but what FDR did in rescuing the country in the first hundred days (of his administration in 1933) bears comparison with what General Ulysses S. Grant did in preserving the Union. Both men accepted responsibility, delegated freely, and radiated confidence that inspired their subordinates to do their best.”7 While I am aware that those two historical events and figures were, in fact, separated by many decades and by the varied dynamics of what
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each was confronting, their leadership styles were similar. This gives me hope that we can rise up and respond to the challenges today. When was the last time you heard any American, whether Republican, Democrat, or independent, say that a particular political leader inspired them? The phrase longevity risk, familiar to pension plan administrators, has entered into the vernacular of many working Americans as they wrestle with the notion and potential reality that they will outlive their assets if they have not adequately prepared for their retirement. What are the implications for a society with an eroding pension system when its elders are too old to work and too young to die? Will they lose the right to retire and be forced to work until they drop? That is quite a frightening and depressing prospect. The topic of pensions is the most significant concern for many workers regardless of their age. Many of the older workers who are closer to retirement age have enormous pent-up anxiety as they realize that they are facing imminent financial danger. The younger workers must be challenged to save early and set aside money habitually and diligently in order to meet their longer-term retirement goals. For them, retirement seems quite a distance away but they must stay riveted on their ultimate target—financial security in their old age. Fortunately, some people are beginning to understand the concept of risk as they start to wrestle with their impending retirement and the dynamics of rising and falling capital financial and investment markets. They tend to shift their assets into less risky investments since their tolerance for risk changes as they get older. For those who have their eye on their goals, they recognize that pension plans are subject to interest rate risk because liabilities rise as rates fall. They recognize that they are subject to inflation risk because future benefits grow faster with rising inflation and longevity risk has accelerated because we are all living longer and the rate of health care improvement, in spite of its dramatic cost, is rising each year. But how have employers attempted to mitigate their risk? They have shifted from traditional actuarially determined defined benefit plans to defined contribution or 401(k) plans. They have shared the risk with the plan participants based on future improvements in longevity. Some have used investment strategies to manage risk, namely, liability-driven investments, which is a framework that seeks to match
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pension fund assets to the promise made to participants Some are offloading risk to a third party—either all or part of the liabilities to an insurer—in order to eliminate the risk of running the pension fund. Many employers or plan sponsors have reconfigured their funds’ asset allocation into alternative asset classes in order to broaden diversification and, hopefully, improve investment returns in the process. New asset classes have been introduced such as hedge funds, private equity funds, timberland funds, commodity funds, infrastructure funds and real estate investment trusts, and international stocks and bonds that are noncorrelated to the traditional U.S. stock and bond market investments. These new asset classes have become part of the typical Wall Street vernacular and have seeped into the daily media coverage of financial activities. But unsophisticated investors may not have knowledge about or the financial wherewithal to participate and invest in these new asset classes. Over the past 25 years, the world of work has changed dramatically, moving from our country’s historical manufacturing and industrial base to a new globally oriented service- or knowledge-based economy that has fractured and even pulverized many American workers and their families in the process in ways that they never dreamed possible. The glut of retiring baby boomers will have an equally significant effect on the American society in general, impacting the world of work, leisure activities, housing needs, our health care delivery system and retirement policy to name a few.Those who are ill-prepared financially will feel the pain more than those who are more insulated and prepared.
The Changing United States How and why have we changed as a nation? The evolution of our politics and our political leadership has contributed immensely to this change. When we look to the past as a guide we note that, “To the people, FDR was larger than life when it came to addressing their concerns . . . We’re now in the age of Bush, Cheney, and DeLay, small men committed to the concentration of big bucks in the hands of the fortunate few.”8 As a result, we have evolved into a nation that crossed the threshold of the 20th century galvanized by victory in the Spanish-American War, that was driven by new visions of empire and energized by a steady
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influx of immigrants seeking opportunity and freedom in their newly adopted land. We have now transitioned from a once prosperous nation for many that has limped into the 21st century mired and crippled in an unpopular and markedly unnecessary war, hated worldwide by nations, former friends and allies, and now galvanized by a pervasive, unrelenting fear of terrorism with a monumental legacy of damage socially, economically, and politically that is so profound that it may take us generations to repair. It appears that the people of the United States are unknowingly aiding and abetting their government in allowing it to maintain a facade of constitutional democracy, while all around them their rights are being eroded, until this once great nation drifts into bankruptcy. The kind of bankruptcy I mean would have a broad effect, spreading blanket-like over our entire nation both domestically and internationally. It would mean the continued and drastic lowering of the American standard of living, a loss of control and influence over international affairs, an unwelcomed and incredulous adjustment to the rise of other national powers such as India, China, and others and a further discrediting and erosion of the collective notion that America is somehow more exceptional than other countries. Wake up, America—before it is too late! What is needed, perhaps, is what 20th century President Theodore Roosevelt saw as courage in the early 20th century, “Far better it is to dare mighty things, to win glorious triumphs even though checkered by failure, than to rank with those poor spirits who neither enjoy nor suffer much because they live in the gray twilight that knows neither victory nor defeat.”9 Consider this bold and profound statement about our national ideology as we moved into the 21st century, as articulated and characterized by Teddy Roosevelt, compared to the ideology and practices that over the last seven years have contributed to the erosion of our democratic principles, the incompetent bungling of natural and not-sonatural disasters, incredible fiscal irresponsibility of profound proportions, and massive, arrogant neglect of our national interests by the current administration. This administration dare not state our nation’s fallacious new ideology for fear of exposing its pervasive hollowness and wanton disrespect of people at home and abroad as well as its willful, determined disconnect. As Bob Dylan’s “The Times They Are a-Changin’” predicted in the early 1960s, the times certainly have. Today many of us question
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how and why our world has changed so dramatically for the worse. It has been a journey that has taken us in a direction that is vexing and problematic for those Americans who have been left behind economically and that fact will become more evident as the current workforce prepares to cross over into the world of retirement, a world which is taking on a whole new meaning and will have incredible implications for those ill-prepared for it. As an example of this changing scenario, Putnam Investments during summer 2006 released the results of a research study that pointed out that the traditional concept of retirement has changed. Some 7 million previously retired Americans had returned to work after an average sabbatical of fewer than two years. The study revealed the major unfolding changes in traditional retirement patterns. On the whole, retirees in the workplace are typically upbeat about pursuing their active lifestyles as they move away from the workplace. Yet this surprisingly affluent group has regrets that offer important lessons for younger workers who have the time and apply the discipline to save for their retirement. This study found that working retirees as a group are relatively young, averaging 61 years of age, and are back at work in earnest. Overall, they’re working 29 hours per week, while some are working more than 41 hours per week. The group surveyed also represented an educated and highly skilled segment of the workforce. Interestingly, most had expected, for a variety of reasons, to rejoin the workforce when they had initially retired. On average, they stayed retired for just 18 months before making the U-turn and returning to work. Among those who went back to work, 68 percent reported that they were working because they wanted to versus 32 percent who cited the financial need to work.10 Why has the concept of retirement changed? My research, discussions, and experience in the employee benefits industry has yielded an explanation of how we have gotten to where we are today. What will our world look like when the good pensions do go away? Will retirees enjoy the same type of retirement that their parents enjoyed? Will retirees be able to purchase goods and services if their resources are limited and what does that portend for our nation’s corporate profitability and for society in general? How will leisure time for retirees be reconfigured? What pressures will be placed on the millions of American family members who are
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already hard-pressed financially and who are sandwiched between two generations with the responsibility of having to take care of their offspring as well as the added burden of assuming responsibility for their aging parents? The tension as a result of those issues is daunting. Dr. Ken Dychtwald, a well-known social scientist who has studied retirement and the baby boomer generation, offered his brief history of life when he wrote: If you had been alive in the year 1000, the last time we entered a new millennium, you could expect to live to the ripe old age of twenty-five. That was the life expectancy a thousand years ago. And that’s up from eighteen a thousand years before that. Life was indeed “short and brutish.” Throughout 99 percent of human history, people have died young. Although a few lived to fifty or sixty or even eighty, infectious diseases, accidents, and violence brought life to an early end for almost everyone else. In the last century, life expectancy rose more than any period before. Improvements in public health, sanitation, medicine, and nutrition have added about one hundred days of longevity for each year that passed—approximately two days per week. Boomers who turn sixty this year (2007) have an actuarial life expectancy of 82.3 years. And that’s without anticipating any major medical advances in the next twenty-five to fifty years. Our generation will live longer than any previous generation in America.11 A most significant question to pose is what portion of retirees’ income and assets will be allocated to health care needs in order to maintain a healthy retirement lifestyle and will those assets be sufficient? Will the infrastructure of an already fractured and deteriorating health care delivery system in this country be capable of caring for a dramatic shift in a large segment of the population who require more medical attention, more facilities, and more procedures in their aging years? Will there come a time when we must put a cap on medical procedures for our elders or seriously consider euthanasia? How will our nation’s political and corporate leaders assess the lay-of-the-land and respond
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when some of these predictable problems engulf our collective wellbeing even more profoundly than we have witnessed thus far? Will the necessary crisis-motivated or -oriented policy solutions or shifts be implemented that will preclude the kinds of societal ills that could ultimately lead to a depiction of a land of the living dead, where the disenfranchised and desperate have-not groups take out their frustrations, fears, and anxieties against those that have more? Have any of our leaders given any serious thought to this unfolding scenario? Do they have the capacity to connect the dots? Regardless of their diverse political ideologies, education, or financial state in life, everyone agrees that all people are entitled to some financial well-being in their old age. No person wants to see parents hard-pressed to survive for want of a secure retirement and adequate health care coverage. In fact, most of us would take whatever steps were necessary to make things right for our parents regardless of their age. But there is a vast schism between reality and what people would like to see or how they should behave. It is imperative to work towards creating a strong bridge over this chasm. Ideologies must be shelved in the process. In this book, I review where we are in this crisis and propose some solutions to rectify the problems. Some readers may embrace some of my proposals, reject them all as frivolous or absurd, or, hopefully, take away some ideas that will be worth exploring. It is impossible from where I sit to envision reforming the pension system without also reforming the health care system.They are joined at the hip. Failure to fix both systems in tandem only puts undue pressure on the other and does not accomplish our goal of financial security for retirees. Failure to take any action only results in the same old policies that are rooted in quicksand and will continue to suck us further into this quagmire smothering any potential for serious change and wreaking havoc throughout the land.
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Chapter 1
The Fractured American Retirement Dream If I had known that I would have lived this long, I would have taken better care of myself. —Jimmy Durante
A
recent survey of some 2,500 adults ages 45 to 64 conducted by Action Research for Thrivent Financial Retirement indicated that many of the respondents plan to work after retirement. The question they responded to was “What income sources other than Social Security do you expect to have during your retirement years?” The top sources of income varied among the group. For example, some could rely on a 401(k) plan while others surveyed could not as evidenced by their responses. Some included savings and investments such as a 401(k) and stocks (52 percent); employment (43 percent); employer’s 1
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pension (39 percent); individual retirement account (36 percent); and inheritance (16 percent).1 Full-time retirement may very well be a thing of the past. Clearly, the notion of traditional retirement is dramatically changing and this is not limited to the United States alone. Pension reform has been on the national agenda for many countries for the last decade as each attempts to deal with their aging populations.
Longevity and High Costs Necessitate Pension Reform One of the major and ongoing global initiatives of the previous decade was pension reform. In developed countries, the driving force was the recognition that economic and fiscal irresponsibility threaten existing retirement systems that will become unaffordable in coming decades given the demographic developments that present a staggering real risk. Countries that are evolving and making the transition to market economies are confronted with the challenge of introducing public pension systems that will provide social security in old age to its citizens and also support a market economy. There is hardly a country in the world where the reform of the existing pension system is not on the national agenda. The driving factors behind the need to reform are similar and common for all countries facing them. The first are the short-term fiscal pressures that dictate immediate action while looming, larger problems resulting from an aging population and the insufficient, long-term resilience of retirement systems remain inadequately addressed. Second, socioeconomic changes demand a rethinking of the original and historical basic ideas that are the underpinning of the pension system design, some dating back to more than 100 years ago. Third, the challenges and opportunities of globalization have required countries to pay more attention to the broadening economic effects of pension plans, including creating a larger risk pool and offering portability to workers to carry their pension assets with them to the next employment opportunity that in some instances may even mean across national borders. People around the world are living longer. “Longevity risk is a tremendous societal issue,” according to Thomas Hess, chief economist of
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Swiss Re, the world’s largest reinsurer by premium income. “If you include also the health cost related to old age, I think it’s definitely among the biggest risks we have today.”2 Attempting to add up the gap between the amount of money needed for funding retirees’ pension systems and in addition to what they have saved is dizzying because it requires estimating a range of figures that include rapidly rising health care costs, increasing life spans, the unpredictability of potentially volatile market gyrations, and individuals’ personal savings rates. Right now, no one has discovered the crystal ball to view and resolve all of these complications. While it may be possible to hedge against stock or interest rate changes, there is no pure financial hedge for the varied dynamics of longevity. This is an unknown. Pension and health care costs are “the most volatile and unpredictable risks on companies’ books at the moment” according to Stephen Hunnisett, an insurance analyst with Moody’s in London.3
The Three-Legged Stool Approach to Retirement If people have been and continue to openly acknowledge the problem, why are our pensions still in danger? There are numerous reasons that have contributed to retirement insecurity. It was not that long ago when the old adage of the three-legged stool, that is, the three-pronged formula, was the rule in preparing for a financially successful and rewarding retirement. Although that approach is still the answer to retirement security, it is rarely discussed today. The three legs of the stool comprised a monthly governmentguaranteed Social Security benefit, a solid independent pension plan, and one’s individual savings. Today, all three of the legs are infact fractured. None of them is strong enough to sustain the weight of a robust retirement due to the varied economic burdens and conditions that exist for many Americans. Let’s look at the facts. Americans have had a very long and strange relationship, which I would categorize as a warped and uncontrollable love affair, with the assumption of debt. This personal savings leg of the retirement stool is being splintered by debt. We, as a society, have
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willingly accepted an extraordinarily high level of debt. It was encouraged and fostered throughout society at every level. Even within days of the horrific attacks of 9/11, Americans were supposed to be consoled in the midst of their shock and their collective grief by our president when he encouraged us to go out and lead normal lives and shop. Apparently, in his mind this is what most Americans were capable of doing in their hour of deep, incredible stupor of perplexity and pain. Over the last few decades, we have taken on more and more debt. As far as the second leg of the stool goes, pension plans, we are well aware of the dramatic movement to shift the burden of retirement onto the shoulders of individuals and away from employers. This has been successfully accomplished by removing defined benefit plans from the private sector, replacing them with 401(k) or defined contribution plans, which are nothing more than forced savings plans for those who are smart enough or make enough money and have the foresight and discipline to set aside contributions from their weekly paychecks. For those who do not set aside this money, their futures are bleak. The public sector pension arena is beginning to mirror what has taken place in the private sector over the last 25 years. There have been efforts to eliminate defined benefit plans for teachers, sanitation workers, firefighters, police officers, toll-takers, correctional officers, hospital workers, clerical workers, and other public workers. If these forces are successful, the pension leg for public workers will also fracture.
The Future of Social Security Finally, the Social Security trust fund is not fully funded and cannot be trusted in the long-term to pay the benefit obligations to the millions of baby boomers who are anticipating retirement in the near future as well as the Generation X’ers who are following right behind. The so-called trust fund no longer exists. Today’s Social Security surpluses are invested in U.S. Treasury bonds, which enable uncontrolled and wanton government spending on everything except future Social Security benefits. Future beneficiaries have no real security other than the hope that future workers will pay more payroll taxes and fund their retirement on their own. Conversations with Generation X employees reveal that they have
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little faith that the Social Security system will help them when they retire. They feel that the system has been squandered. Their discontent about the state of Social Security could well contribute to intergenerational warfare. There are hard choices that will have to be made in order to maintain Social Security as a viable leg of the retirement stool to stand on. Decisions could include lowering the benefits or raising the payroll taxes to elevate the required contributions or borrowing the money from somewhere else. Each of these options takes a solid commitment from policymakers to initiate—and for the population to accept. Historically, there has been very little political will to accomplish serious policy initiatives when it comes to Social Security. It has, indeed, been called the third rail of politics. No policy solution can be accomplished without a determined political will by our nation’s elected officials as well as a massive educational effort of the public in order to receive their tacit approval and the recognition that all Americans have to make some sacrifices. Failure to communicate the truth about this poor state of affairs has already contributed to suspicion among workers and, as already noted, caused intergenerational friction and led to a serious breakdown of our nation’s social fabric. David Walker, the Comptroller General of the United States, has publicly stated that Uncle Sam has developed some very bad money habits. He has said on TV and in public appearances on college campuses, at civic clubs, and many other venues, that our nation is saddled with debt to the tune of some $50 trillion. In fact, he said, “I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility.”4 While Walker’s testimony in Congress apparently fell on deaf ears, his remarks have struck a chord with some people.Walker maintains that issues such as Social Security, Medicare, and Medicaid and long-term health care expenditures are at a serious juncture and require that more severe controls be placed on federal government spending in order to preclude the nation from going into bankruptcy. He believes that a Congressional initiative must take place over the next 20 years in order to avoid financial disaster for Americans. Fiscal irresponsibility in Washington, D.C. is out of control and I posit that if history provides any clue, our leaders in Congress require a serious sit-down about their
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inadequate or nonapproach to dealing with our nation’s fiscal problems. The signs in Washington point to the fact that neither political party gets the message. Our nation’s future fiscal soundness is in jeopardy and our elected leaders do not give a damn. What will focus them on the problems and convince them that their constituencies are concerned about our nation’s well-being and are prepared to take some action? How many people have to be without health care insurance or have to work well beyond their normal retirement age before they get the message? In Christopher Buckley’s novel Boomsday, the first page is a prophetic, dire scenario of what happens if the facts mentioned thus far do not get addressed. Buckley’s title was coined by economists to define the day that the first of the baby boomers began to retire with full Social Security benefits—and his story begins with a television news reporter who is communicating live on the ground from Florida. The commentator starts off, “In Florida today, another attack on a gated community by youths protesting the recent hike in the Social Security payroll tax.” The reporter continues: Several hundred people in their twenties stormed the gates of a retirement community in the early hours this morning. Residents were assaulted as they played golf. Demonstrators seized carts and drove them into water hazards and bunkers. Others used spray paint and gardening implements to write slogans on the greens. One such message, gouged into the eighteenth green, read: “Boomsday Now!”5 Could this ominous albeit fictional account describe the world to come? How many times have we thought of how close fact is to fiction and vice versa? How difficult it is to determine where the fine line exists that separates the real from the surreal? Perhaps buckley has shown us something like virtual reality and taken it to an eye-opening level. Reality is knocking and here fiction can clue us in on the seriously growing friction between the generations of boomers and those of the Generations of X and Y. Retirement practitioners, like our storytellers, have been thinking a great deal about this in the last decade. How dramatically and deep will that intergenerational tension grow?
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How will it manifest itself as this reality of guaranteed entitlements to the elderly comes face-to-face with the cold hard fact that we cannot leave this enormous tab for the generations that are to follow us? As the German theologian Dietrich Bonhoeffer said, “The ultimate test in moral society is the kind of world it leaves for its children.”6 Will gated communities truly be safe havens for retirees to live out their final golden years if they haven’t given serious consideration to the generations coming up from behind? What kind of financial burdens will the younger generation inherit? Will we see the growing legions of the “sandwich” generation who have responsibilities both to their children and are now facing the issues of caring for their aging and ailing parents driving them to physical and financial exhaustion? Today some 33 million people are in that sandwich group. Most are women who provide care not only for their own parents but also their in-laws. That number is just the tip of the iceberg as the boomers begin to age and retire in large numbers and families do not have the financial wherewithal to make use of assisted living institutions.These are serious questions that appear to go unanswered because people lack either the resolve or the will to correct them. Politicians who make statements and call for reform seem like they are whistling in the dark.
Economic Revolutions Humankind has witnessed three major historic economic revolutions that compare to climate change or tectonic shifts in the earth’s crust. The first was the agricultural revolution, where mankind went from being hunters and gatherers foraging for their food and shelter and, ultimately, after centuries, moved to an agrarian society evolving gradually yet, steadfastly, over a period of some 3,000 years. The second economic convulsion was the industrial revolution, where society went from being a mostly rural, agrarian society to an industrial, urban one. This began over 300 years ago and introduced a totally new world order. The current economic revolution is the globalization revolution, in which a society that might have been based on industry, with millions of workers in plants, factories, and related workplaces made things—steel, coal, rubber, aerospace, and shipbuilding industries, to name a few—have
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diversified into one that is less based on industry and increasingly based on the service sector. Facilitated by changes in finance and money management, the wonders of the information age—the Internet, personal computers, and the like—the removal of trade barriers (e.g., NAFTA), and outsourcing, the transition from an industrial- to a knowledge- or service-based economy has been both a beneficial challenge and entailed painful change. This is especially true in the United States as we have shifted from heavy industry and manufacturing over the past 30 years. The last surviving behemoth of the industrial age—auto manufacturing— is nothing more than the skeletal remains of a once-powerful industry that employed the heartland of America. The workforce has eroded dramatically over the last three decades.The once-powerful United Auto Workers (UAW) in 1970 had 1,619,000 union members. By 1990, the UAW was down to 952,000 members and at the end of 2006 it had shrunk to 475,000. In recent times, Ford, General Motors, and Chrysler have offered lump-sum payments to their workers in order to get them to leave the industry so that these automakers can get out from under the now-onerous, hard-won, and bargained work rules and legacy costs of health care and retirement that have been part of the industry’s collective bargaining culture that today accounts for approximately $1,500 of the cost of an American-made car. During the preliminary stage leading up to the impending contract negotiations in 2007, the union’s President, Ronald Gettelfinger, during a speech at the union’s collective bargaining convention, warned the automakers against seeking too many concessions during the contract talks. He stated, “Collective bargaining is not collective begging. It would be a grave mistake to equate our actions to capitulations.”7 The ground rules and parameters are beginning to be defined and the final outcome regarding the workers and their employers will be hard to predict in this turbulent period going forward. Needless to say, the anxiety of workers is rising because of the unknowns. The world does not stand still. What will the next economic revolution look like? How long will it take for the effects to dramatically change the landscape of mankind once again? We know that this is no time for complacency because the economic consequences are daunting. The extraordinary advances of science and technology, together with the rapid development of emerging countries and economies such as China, Brazil,
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India, Vietnam, and Russia to name a few in the borderless, globalized economy, should prompt all nations to reform fiscally in order to take advantage of the new state of the world. Those of us who have been alive over the last 35 years have witnessed first-hand the fallout and spillover in society. It is still unfolding and will further change the world that we knew. The bright side is that when these economic and societal revolutions develop, they bring new opportunities and new and dynamic ways of working, thinking, communicating, and behaving toward significant change.
The Evolving Glossary of Finance Let’s review for a moment some of the new language that has entered our daily lives during this latest economic revolution: the language of finance and Wall Street as well as groupspeak of politics and those in charge of retirement administration and policy. Over the past few decades, we have been introduced to such new terminology as concession bargaining, portable workers, outsourcing, off shoring, maquiladoras, two-tier workers, give backs, downsizing, going postal, expendable workers, employee stock ownership plans, rust belt, plant closings, supply chain, job sharing, workplace violence, telecommuting, the Northeast industrial corridor, trade agreements, employee buyouts, and legacy costs to name a few. The influence of these terms has had a profound effect on the way people function as well as the way newly designed work systems have evolved. In the political world, the new vernacular includes terms like: hanging chads, blue states and red states, free trade, the moral majority, opposition research, aggressive unilateralism, soccer moms, the third way, neoconservatives, neoliberals, family values, the blogosphere, triangulation, bundling of contributions, and mega-fundraising, and voter apathy and fatigue—also to name but a few. On Wall Street and in the world of finance, we have seen the new barbarians and their dynamics, their language and activities that include leveraged buyouts, day-trading, deregulation, junk bonds, shareholder activism, subprime mortgages, exchange-traded funds, structured investment vehicles, hedge funds, soft dollars, quarterly performance, stock
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options, privatization, merger arbitrage, proxy voting, derivatives, conduits, dot.com, sovereign debt, free markets, manager of managers, mergers and acquisitions, option adjustable-rate mortgages, securities litigation, currency exchange rates, economic imbalances, corporate governance, petrodollar investors, sovereign wealth funds, and irrational exuberance. The world of retirement plan policy, investment management, and fund administration has developed its dynamics and language—some of which it shares with the Wall Street crowd—over the last two decades or so. Words such as downshifting, asset allocation, baby boomers, pension reform, securities lending, vesting, fiduciary responsibility, pension protection, real estate investment trusts, popup options, timberland funds, surviving spouse options, actuarial assumptions, portable alpha, mutual funds, economically targeted investing, benchmarks, annuities, unfunded liabilities, self-directed plans, retiree health care, new asset classes, lifestyle funds, hedge funds, defined contribution plans, power boomers, private equity funds, halfback retirees, fullback retirees, emerging markets, global investing, leakage from 401(k) or defined contribution plans, alternative investments, commission recapture, risk shifting, defined benefit plans, value and growth, micro-, mid-, small- and large- capitalization stocks, transition management, cash balance plans, infrastructure investments, and socially responsible investing come to mind.
Final Observations Over the last 35 years, these massive changes in the U.S. economy and in world financial markets have largely condemned a great number of American workers and relegated them to lives of economic insecurity and misery. No longer can the worker count on a steady job for a single employer for his or her entire working life—a job that provides a paycheck and health and retirement benefits, too. Over the last three decades, workers’ annual incomes have consistently increased while their aggregate income has stagnated. In the brave new economy of outsourced jobs, short-term gigs, and on-again, off-again health care coverage, American workers cannot rationally plan their economic futures. It is like being placed in a lifeboat without oars with the desire to row to a safe haven.
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I find it amazing that as various injustices keep unfolding, the citizenry has responded with only momentary outrage that quickly evaporates. There is a widening restlessness that has spread throughout the United States. Perhaps this is due in part to the behavior and ineffectiveness of the two principal political parties. As H. L. Mencken said, “Under democracy one party always devotes its chief energies to trying to prove that the other party is unfit to rule—and both commonly succeed and are right.”
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Chapter 2
The New Political Reality You and I ought not to die, before we have explained ourselves to each other. —John Adams to Thomas Jefferson, 1812
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s the campaign for the 2008 presidential election progresses, the hurricane-like fundraising will make political history itself. In addition to the multimillions of dollars that have to be raised, candidate exhaustion—on the part of the public—will be more intense during this election and may translate into voter fatigue before the polls ever open. There is already speculation that this upcoming campaign could see as much as $1 billion being raised in combination by the Democrats and Republicans. With the road to the White House paved on how much 13
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money a candidate raises, qualified individuals who could bring great ideas, integrity, competence, experience, and credibility to the race will fall by the wayside because they cannot raise a serious war chest of money. I am also troubled that would-be candidates seem clueless about real-world issues. In the early stages of the campaign, the Democrats picked apart each others’ prospective health care reform plans, none of which provide any real solutions, while their counterparts in the Republican Party all appeared to be vying for the John Wayne toughguy award debating each other about who will administer the most pain and torture to our enemies. Do they understand how disconnected to the real world they are? Why are some candidates elevated by thoughtful words and ideas and then thrown to the ground and dismissed by the public because of some absurd statement that they may have made a few days later? It is clear that dollars define the election and policy agenda of every political campaign. Over the past three decades, money has transformed the landscape of American politics in our national and state capitols, and at the municipal level. Raising money has become the key ingredient to electoral success whether it is raised on the campaign trail or spent as taxpayers’ dollars, to help incumbents get reelected. And while this obsession with money goes on in and out of political office—look at the former legislators who become lobbyists—on average, 94 percent of incumbents get reelected1 by approximately 50 percent of the voting population.2 Something is radically wrong and this is a sure-fire way to see the dissolution of democracy in a society.We have arrived at the realization that some tens of millions of votes in America don’t really count and, in fact, many individuals have abandoned their right to vote and continue to participate as active citizens in their communities. Shortages of voting machines and poll workers don’t help and add fuel to the fire in elections supercharged by disappointment rather than civic-mindedness. (Look at what has unfolded recently in the march and hype leading up to the presidential election of 2008. More states have moved their primaries to earlier in the year in order to have more of an impact on the race.) Some voters still blanch from the debacle that followed the presidential election of 2000 in Florida and believe that victory for Al Gore was hijacked by a five-to-four vote in the Supreme Court.
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The Divide between the Rich and Everyone Else A dichotomy exists in society today. A large group of Americans do not have sufficient money available for their day-to-day survival while others throw baskets of money into the campaign coffers of hungry politicians. It is not a pretty picture and it shows the division between the have-mores and have-nots, which is growing wider with each passing day. There is a great deal of media coverage of how wealthy Wall Street titans and well-to-do corporate CEOs plan million-dollar birthday parties for themselves or their spouses with rock star appearances. There are bar mitzvahs and weddings and sweet sixteen parties held in the Caribbean for their children. At the same time, we cannot sustain social protections for those who cannot afford these kinds of elaborate and unnecessary celebrations. When a community such as Greenwich, Connecticut becomes the hub for hedge fund companies, it skews the income of the entire community by virtue of the outrageous money that is being made and the impact that the spillover effect has on every economic aspect of that city. There must be a remedy for the debilitating split that is growing in 21st-century America. We are reliving a Gilded Age. The late Arthur Schlesinger, Jr., the historian and lion of American liberalism, said that democratic politics is about “the search for remedy.”3 His life was devoted to the proposition that a belief in remedy—namely, in problem solving—was the antidote to social indifference and despair and about our capacity to act in common through the efforts of the government. That “search for remedy” does not appear to be a part of our democracy today as we move further away from those types of standards, and it appears that very few people lament that fact. An analysis of 2005 census figures found that nearly 16 million Americans are living in deep or severe poverty. The percentage of the poor has reached a 32-year high. Millions of other working Americans are falling closer to the poverty line, and the gulf between the nation’s haves and have-nots continues to widen.Wouldn’t it be great if we could use this mega-fundraising genius for political campaigns and raise those kinds of dollars for people who have no health care coverage? Or to
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feed the homeless and then let the best man or woman in the presidential race win? Let’s make this presidential election about the issues. There are many domestic and global issues that should be part of the debate: the wars in Iraq and Afghanistan; diplomatic and foreign policy initiatives in the Middle East, Latin America, Asia, Europe, Africa, and elsewhere; the budget and trade deficits; health insurance for all; retirement insecurity; immigration; tax policy; abortion and partial-birth abortion; stem-cell research; global warming; the minimum wage; same-sex marriage; labor law reform; privatizing Social Security; fixing Medicare and Medicaid; affirmative action; capital gains taxes; liberalism versus conservatism in order to frame policy initiatives and many others. Let’s demand that the candidates explain what they propose to do about the many real problems facing the nation, and judge them by how they respond. Former Congressman Newt Gingrich has suggested that we conduct nine presidential debates between Labor Day and Election Day in 2008. His rationale is that this many debates will, in fact, force the candidates to thoughtfully address the issues in a more substantive way than they have ever done so in the past. He’s hit upon a terrific idea. Let’s see which of the candidates seizes the opportunity to have a serious discussion about what is troubling this country and how we must face these issues. Let’s keep their focus on the real issues by asking hard questions and look for solid answers and targets for our problems and not allow them to slither to the vicious, sleazy, mendacious politics that have been pervasive over the last decade or so. Let’s insist for necessary reform on an array of serious issues and not wait until a crisis stings. That, unfortunately, has been the behavior of our national leaders during our most recent history. CEOs, whose average tenure in the job is approximately three years, no longer articulate their vision for their companies peering 10 years out. They dance to the drum of Wall Street analysts and have more interest in the potential of their upcoming quarterly earnings than their employees’ long-term well-being. Politicians cannot get beyond their next effort to get reelected whether that is two, four, or six years from now. They are riveted to their election-cycle fundraising, their favorite fat cats—and the constituents be damned.
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People Just Aren’t Saving Enough for Retirement While CEOs and politicians are very interested in money for all the wrong reasons, ordinary citizens have become disinterested in money in the worst possible way—saving for that rainy day. Indeed, they have become their own worst enemy. Americans are socking away less for their future than at any other time since the Great Depression.4 In March 2007, the Fidelity Investments Research Institute in Boston released the results of a survey of workers on how well they are saving for retirement. Guy L. Patton, Executive Director of the Institute, said that Americans on average were saving only enough to provide them with 58 percent of their preretirement income, counting personal savings, Social Security benefits, and pension income.5
The Ever-Increasing American Debt Crisis When added up, American consumers carry approximately $2 trillion of debt.6 Bankruptcies are higher than they’ve been at any point since the Great Depression.7 The nation’s personal savings rate was at a negative 1.5 percent rate or a negative $116.6 billion for 2006.8 What does that mean for workers who are staring down the last several years of their working careers? One thing it does mean, according to a Federal Reserve Board study, is that the retirement of U.S. baby boomers, about a third of whom do not own any stocks or bonds or mutual funds at all, will lead to a steep decline in U.S. consumption unless measures are taken quickly to boost labor force participation such as increasing the retirement age. “Barring a significant increase in labor force participation, population aging will lead to a reduction in per capita consumption relative to a baseline in which the demographic composition of the population does not change,” write the study’s authors, Fed economists Louise Sheiner, Daniel Sichel, and Lawrence Slifman.9 Those who have been retired for years are more likely than tomorrow’s retirees to have a regular monthly pension check, the remnants of the by gone era when corporations felt willingly compelled to provide this coverage as well as the coverage afforded by health care plans.
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In summer 2006, the Government Accountability Office, Congress’s investigative office, issued a report that indicated “the wealthiest 10 percent of baby boomers own about two-thirds of the financial assets held by this generation”—excluding traditional pension plans.10 This kind of report elevates the fear level of those contemplating retirement in the near future, those who are not in that select 10 percent category. America is facing a monumental crisis of fear. Fear about retirement insecurity and health care costs. The percentage of large employers offering health care coverage to retirees has steadily declined since 1993, according to Mercer’s National Survey of Employer-Sponsored Health Plans.11 The future looks even less promising. Coverage appears to be slowly disappearing as more employers announce the discontinuance of many kinds of benefits.
Will Retirement Be Affordable for Anyone? Many people’s retirement fantasies of traveling or taking on new and exciting adventures may well be jeopardized for all future generations. Struggling to pay medical bills will become the primary consuming activity of their retirement years. As health care costs rise and private sector employers reduce spending on retiree health care and public sector employers begin to realize how much in liabilities they have committed to for their impending retiring workforce, there will be less and less money for the frills, for the good life. Fidelity Investments recently determined that a 65-year-old couple retiring in 2007 will need approximately $215,000 to cover medical costs in retirement—an increase of 7.5 percent from the previous year.12 For about 40 percent of the retirees whose primary source of income is Social Security, health expenses could eat up as much as half of their retirement benefits, according to that report. Some estimates of retiree health costs have even been higher. Even high–net-worth households (so-called affluent power boomers) nearing retirement, who are confident and prepared when it comes to planning for life after work, are concerned that medical care costs will impact their ability to enjoy a comfortable retirement.13 They spend more time in the planning for their retirement than most others but they are still not free of anxiety. The study revealed
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The New Political Reality
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that those with less than $2 million in investable assets said they have concerns about declines in the stock market, reduction of social security benefits, reductions in pension benefits, or the death of a spouse having a negative impact on their standard of living. The average life expectancy has risen to an all-time high, and that is good news. However, the amount of money people are putting away for retirement is not rising. People will outlive their savings. Americans will not be able to rely solely on Social Security for a comfortable retirement. Some fear that they will have to rely on others to support them when they leave the workforce and many fear that they will have to cut back on their desired lifestyle when they do finally retire. These kinds of concerns are similar to the worries and fears that were pervasive during the Great Depression in the 1930s. And we seem to be getting closer to the economic horrors of that period as a nation.We are in a fast-paced and take-no-hostages economic climate, where executives function with a winner-take-all, scorched-earth mentality. We had to struggle with the old enemies of peace—business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering. . . . Never before in all our history have these forces been so united against one candidate as they stand today. They are unanimous in their hate for me—and I welcome their hatred.14 These words were spoken during the period when Franklin Delano Roosevelt faced fierce opposition as he created the institutions—Social Security, unemployment insurance, a progressive taxation program, public works projects, and the like—that helped alleviate the pervasive angst and fear in America at that time. He did not shy away from confrontation. There is something strangely reminiscent about Roosevelt’s Depression-era America and the the erosion of the financial well-being of the middle class, the income inequality and economic disparity among workers, retirement income insecurity, and horrendously rising health care costs that exists today. The national malaise that has overpowered many Americans can be laid on the doorstep of the Bush administration, which has contributed to the fear, hate, and anxiety that is manifested by so many of our citizens today. In the past, two presidents stand out— Franklin Delano Roosevelt and Ronald Reagan—as having the ability
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to rally the American people to the challenges that they faced. I believe President Bush lacks the capacity to rally the American people.What we need is the collective will to overcome these challenges and a leader who can define and articulate the vision that will lift us from this collective lethargy and malaise. What so many political leaders fail to recognize is that nothing that is morally wrong can be politically right. Just as Don Quixote, Miguel de Cervantes’s legendary Spanish knight-errant, is immortalized in literature and the theater as the man who tilted his lance at windmills and dreamed the “impossible dream,” we must all dream that dream. This country is at a grave crossroads and is crying out for leadership. The old political landscape is being redefined and the old party labels are being scrambled causing much consternation among the citizenry. Leaders today must have the gumption, wit, and tenacity to be unafraid to tilt at windmills. America needs a new deal for pension and health care reform and that will only come about when our political leaders garner the political will and get down to doing what they were sent to Washington to do, namely, the hard work of the people’s business. All the wishful thinking in the world will not move any reform agenda. Hope, without action, gets you nowhere. Because many American companies treat their employees as disposable commodities and have operated with great flexibility—hiring and firing at will, shifting labor from where it is not needed to where it is— the American people can only worry about their jobs and economic security. They are at a loss as to how to engage the attention of their political leaders to address the changing terrain of their employee benefit programs. While you can’t protect people throughout their working lives, you can’t tell them that they have been abandoned, that they have no security at all. It is imperative for every man and woman to convince their local and national leaders to give serious thought to the challenges—and then act to address these challenges. Sound bites do not resolve issues. The days of political lip service to the populace must be replaced by innovative policymakers who work for the common good. We must reverse the selfish society to become the selfless society. This is no small task. The short-lived presidential campaign of former Vermont governor Howard Dean, a physician and now chairman of the Democratic Party,
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created a new dynamic in political activism that blew away the traditionalists of political campaigns. Two young veterans of this new era of political activism and of the Left blogosphere, Jerome Armstrong, a founder of the once-Deaniac blog MyDD.com and Markos Moulitsas, webmaster of DailyKos.com, the largest and most influential liberal blog, have collaborated on a book titled Crashing the Gate (New York: Chelsea Green, 2006). It echoes the 2004 Dean spirit and argues that netroots activists represent a countervailing force of liberalization from big campaign contributors and the interest groups and consultant power elites in Washington. As the title suggests, the book is full of guerilla warfare rhetoric, fulmination against Washington insiders in the party, and hubristic references to the potential of people-powered politics necessary to deliver Democrats from perdition. Perhaps some people from their suggestions can find a place for like-minded and frustrated citizens who believe strongly that it is time for a change.
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Chapter 3
The New Realities of Work and the Workplace An imbalance between rich and poor is the oldest and most fatal ailment of all republics. —Plutarch
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e are aware that our nation’s industrial base has been eroding for decades, that, potentially, it can leave terrible devastation in its wake. Since mid-2000 alone, the country has lost some 3 million manufacturing jobs and this continues unabated.1 At the same time, the U.S. trade deficit, the largest piece of the current national deficit, soared to an all-time high in 2005 of $782.7 billion, the fourth consecutive year that our trade debts set such records.2 The trade deficit with just one nation—China—rose to $201.5 billion.3 The highest
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imbalance ever recorded with any country. To cope with these imbalances, on March 16, 2006, Congress raised the national debt from $8.2 trillion to $9 trillion. This was the fourth time since George W. Bush took office that the limit had to be raised. Had Congress not raised it, the United States would not have been able to borrow more money and would have had to default on its massive debts. These staggering, mind-boggling numbers mean little to most Americans as they go about their daily lives. They are busy. They are trying to find those lost jobs. They need to pay the rent, feed the family, pay the doctor bills, fill their gas tanks.They have no time to think about China and Japan and the huge trade surpluses these countries enjoy with the U.S. as they sustain America’s incredible demand for their exports.What happens when these countries no longer want to buy U.S. Treasury bills? What happens when they sell, dump the ones they have on the world market. The ramifications would change things dramatically for the worse. The world of work as we knew it would explode in ways that are unimaginable. Talk to the people who have lost their jobs in the nation’s industrial heartland. Many are stymied and perplexed and feel that they have no place to turn. Families have been crushed by the financial devastation that joblessness produces. I have spoken to hundreds of labor union leaders and their members at the local level as well as state and international union leaders who are hard-pressed to come up with solutions. Many of them express the fear that if we think things have been torn asunder now, watch out for this type of futuristic nightmare. As Supreme Court Justice Louis Brandeis once said, “We can have a democratic society or we can have great concentrated wealth in the hands of a few. We cannot have both.”4 But rather than dwell on potential horror, let’s get back to today’s reality. The notion of retirement is taking on a new meaning. Not that long ago, the combination of employer-sponsored, defined benefit plans along with 401(k) plans were the most important sources of retirement income for the nation’s workforce aside from Social Security benefits. However, in a world where 1 percent of the nation’s population has 90 percent of the wealth, we are separating into two distinct groups— one with glittering wealth and the other saddled with growing, harrowing debt and the fearful prospects of impending poverty. Few in the
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second category are guaranteed a secure retirement. Most working individuals no longer have their basic future retirement income covered by employer-sponsored pension plans. This is what has been characterized as the “new world of retirement, [where] government employees have secure benefits and private workers are increasingly on their own.”5 I would submit that in the near future, those public sector benefit programs, too, could be curtailed. They are, after all, in the target sights of many political leaders and could very well be swept into the dustbin of history.
Shifting the Burden to the Employee As the burden of funding retirement savings has shifted from employers to employees, many employment experts predict that most Americans will have to buy many of the benefits that they now get as part of their employment package. “Health costs,” says John Castellani, President of the Business Roundtable, “are the single largest cost pressure that employers face far exceeding energy, labor, materials, even litigation.”6 Employers who have yet to cut back on their health insurance plans were faced with cost increases of 10 to 12 percent in 2007. As a result, many will use these hikes to justify making adjustments to their otherwise generous benefit packages to spread the pain of such increases in the future. Increases in the costs of maintaining benefits for health care are simply part of the same five-year pattern. Unless something dramatic is done, then more workers will be forced to pay a larger portion of their health care bills through higher premiums, and deductibles, copayments, or, worse, be dropped from coverage altogether—thus adding to the growing number of uninsured Americans. Amid these rising health care costs, more employers offer a growing menu of insurance products that employees pay for themselves—just like the defined contribution plans that are supposed to provide a pension. Why are we in such a vulnerable position in our health care system? Part of the reason is that we are in a so-called “arms race between insurers who deploy software and manpower trying to find claims they can reject—and doctors and hospitals that deploy their own forces in an effort to outsmart or challenge the insurers.”7 This is called denial management to
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which you can add the cost of the insurers’ marketing and underwriting that provide no health care benefits and further add costs built into our dysfunctional system.8 The consulting firm of McKinsey & Company released a report dissecting the reasons America spends so much more on health care than other wealthy nations. One major factor is that we spend $98 billion a year in excessive administrative costs, with more than half of the total accounted for by marketing and underwriting—costs that do not exist in single-payer systems.9
The Health Care Crisis in America The soaring cost of health care is causing an epidemic of anxiety that has permeated society and has catapulted potential reform back onto the national spotlight.The dramatic increase in the number of uninsured Americans has risen to nearly 47 million, 9 million of which are children.10 One out of nine Americans has no health care coverage and increasingly those uninsured are the financially squeezed middle class. The number of families without coverage is swelling. The federal government’s figures show an increase of 6.8 million uninsured since 2000 and they are not the poor, the unemployed, and the undocumented immigrants.11 The shrinking middle class is one of the fastest-growing subgroups among the uninsured. Today, more than one-third of the uninsured—17 million of those nearly 47 million—have family incomes of $40,000 or more, according to the Employee Benefit Research Institute.12 More than two-thirds are in households with at least one fulltime worker. There are too many people who are falling through the cracks and the numbers keep accelerating. For example, the National Association of Realtors reports that 28 percent of its 1.3 million members are without health insurance.13 Many workers have no health care coverage and their prospects of obtaining coverage become more remote with each passing day. After 15 years of intermittent political warfare over health care on Capitol Hill, the struggle to establish universal health insurance is back and it appears that a détente has been declared between Democrats and Republicans. Universal coverage may become politically tenable. The
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American Association of Retired Persons (AARP) is committed to mobilizing its 35 million members to push health care, Social Security, and pensions to the front of the presidential election agenda. If taken seriously, the initiative will be a somber and profound challenge for the negotiating skills and bargaining techniques of our political, corporate, and labor leaders, as well as consumer groups and health care insurers and providers. This challenge is made especially so since it goes against the tone set by the bully pulpit of George W. Bush, who opposed anything resembling government-run health care. Andy Stern, International President of the Service Employees International Union, says that this is “a moral test” and poses the question,“Why doesn’t every American have the right to the same health care as the president, the vice president, 535 members of Congress and three million federal workers?”14 Since the failed health care initiative of the Clinton administration in 1994, which totally lost its political momentum, the politics of health care has changed dramatically.With the impending crisis, the support for a new approach will hopefully be more effective. However, there is much work to be done, and that comes with Arnold Toynbee’s caveat. An economic historian well known for his social commitment and desire to improve the living conditions of the working class, Toynbee wrote, “Those who forget the lessons of history are doomed to repeat it.” That said, today’s members of Congress should look back to 1994 and learn why the Clinton program did not become legislation. Although Senator Hillary Clinton says she still bears the scars from that earlier experience, I hope she can come up with a formidable proposal that is not just political pabulum. All presidential candidates, Republicans and Democrats alike, must recognize that people clamor for something substantive that will allay their fears and provide a real solution. It would seem to be impossible to ignore Toynbee given that the climate has changed since 1994, with the steady rise in costs, the erosion of employer-sponsored insurance, and the increase in the number of uninsured people. Americans are now eager for a fix. In polls, health care has passed the economy, unemployment, and terrorism as a top domestic concern. The Pew Center for the People conducted a telephone survey in January 2007. It asked which issues should be a top priority for President Bush and Congress? The results showed that 68 percent opted for reducing health care costs, 63 percent for taking steps to make the
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Medicare system financially sound, and 56 percent for providing insurance to the uninsured.15 By the middle of that year, nothing had been done. The American people clearly have set their priorities; but these concerns seem not to be shared by the elected officials. Sam Rayburn, the Speaker of the House through much of the 1940s and 1950s, used to say that, “There’s no education in the second kick of a mule.” How many times will our elected officials need to be kicked by the mule before they get it? Since the Democrats took back control of the Congress in November 2006, the dialogue over potential health care reform has been elevated to a certain extent and seems to be on the agenda again. How this debate unfolds is key. In the interim, more Americans are waking up to the stark reality that employer-provided benefits are no longer considered part of the employment package—and the notion of their “empowerment” in assuming this burden by “free-market” promoters is ludicrous. One example of this empowerment is that 32 states require that hospitals provide pricing information to the public. Some critics of this pricing transparency, however, say that it is largely symbolic, that it diverts attention away from the real causes of health care inflation and only masks that the onus is now on the consumer to make tough analytical decisions without really having choices. It is just another strategy of shifting risk to many individuals who are ill-equipped to make such choices.
The Troubled World of Health Insurance The number of employers providing health care coverage for their employees is on the decline, dropping from 69 percent in 2000 to 60 percent in 2007.16 Almost 19 million employees, or 17 percent of the workforce, were without insurance in 2005.17 This is not surprising since so many employees without employer coverage cannot afford to pay for their own coverage because they are saddled with an inordinate amount of debt. These are only numbers. The real cost that comes when seeking treatment for the psychological toll can be excruciating at every point of contact with the health care system for a person who lacks or has insufficient coverage. Some medical professionals can cause great embarrassment and mental discomfort to people without coverage.
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Some patients are summarily dismissed and pushed off to the side by the enablers and service-provider employees who serve as gatekeepers to the caregivers in the medical profession. Also, you may have experienced the behavior of some doctors who fire you as a patient.You discover this when you call to reschedule a follow-up visit only to be told by the receptionist that the doctor no longer accepts the health care insurance plan that covered you and your family during previous visits. When you leave a message to speak with the physician, by and large, you never hear from him or her again.The tenets of the Hippocratic Oath and the traditional bedside manner rarely exist. Unpaid medical bills can result in providers or insurance carriers obtaining judgments against the patient or the patient’s family. They can even file liens against homes. This type of aggressive credit squeeze is an incredible pressure on those already experiencing ill health or the ill health of a loved one.
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Chapter 4
America’s Love Affair with Debt Whoever is frugal will never suffer financially. —Mohammed
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heavy debt load is usually not among the images conjured up when people consider or discuss retirement. Yet, retirement looms for a growing number of American families who are in that very predicament. The Employee Benefit Research Institute found that 60.6 percent of families headed by someone 55 or older carried debt in 2004, up from 56 percent in 2001.1 The level of debt rose, too, from an average $29,309 in 1992 to $51,791 in 2004.2 Apparently, would-be retirees don’t understand the problems they will face during their retirement years from carrying such debt.
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The average holdings in a 401(k) plan for those who participate and actually have one is approximately $62,000. The average American family only has total retirement savings of $20,000, according to a study conducted by Fidelity Investments. Non-mortgage consumer debt is an increasing problem among households headed by 55- to 64-year-olds, with debt percentage to income ratios rising four percent over a ten-year period.3 Just like younger workers must participate in a defined contribution plan, people in their middle years must make a diligent commitment to paying down their debt well in advance of their retirement. Author, actor, attorney, and economist Ben Stein, Honorary Chairman of the National Retirement Planning Week, estimates that 40 percent of boomers are in jeopardy of leading a worse lifestyle in retirement than their parents because they have not saved enough.4 He added that for those in their late 50s, if they have saved little, they must save 50 percent of their earnings for life and continue to work in their older years. Those in the same boat who are in their 40s must save 20 percent of their earnings; those in their 30s, 15 percent; and those in their 20s, 10 percent. This should not fall on deaf ears. The issue of consumer debt has grown dramatically over the last few decades. We know that the credit explosion that began approximately 25 years ago has contributed in no small way to sharply rising personal bankruptcy filings. Bank advocates believe this reflects debtors’ increasing abuse of the protections granted by the Bankruptcy Reform Act of 1978. Personal bankruptcies cost every household a hidden tax in the hundreds of dollars each year, in the form of rising prices and higher interest rates.5 With interest rates as high as 29 to 30 percent for some credit cards and loans, consumers on tight budgets will likely have difficulty paying more than the minimum balances on their cards or loans.6 In 2005, the magnanimous national financial institutions, with the assistance of sophisticated, politically connected Washington lobbyists, were successful in securing the support of both Republicans and Democrats resulting in the adoption of the Bankruptcy Abuse Prevention and Consumer Protection Act. The lobbyists mounted a campaign for protection against what the banking industry called an epidemic of defaults by debtors. The reality, however, was that this epidemic was caused in large measure by the
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banks themselves. The real hidden costs were the usurious interest rates that these institutions charged legions of already debt-ridden borrowers. In an op-ed article in the New York Times that responded to the Act and its implications, the authors pointed out that from 1980 until 2004 personal bankruptcy filings increased 443.45 percent.7 But over the same period of time, consumer credit debt rose a bit more at 501.29 percent. It’s no wonder that many families have not had the resources and wherewithal to set aside serious money for their retirement. They are being gouged by the lending and credit card financial industries. Credit-counseling firms, which provide bankruptcy screening, report that 97 percent of their clients could not repay any of their accumulated debt, and 79 percent have sought relief for reasons beyond their control such as job loss, large medical expenses, rising credit card fees, predatory lending practices, and, more recently, the subprime mortgage debacle that has left many overburdened with debt to fall deeper into the abyss.8 Something is radically wrong with our priorities. Our elected leaders continue to allow the nation’s financial institutions to entice the working poor and draw them into the credit maze with interest rates that are the one-two-knockout punch to the defenseless and sometimes unsuspecting consumer.
The Hidden Problems of the Subprime Loan Debacle According to a study by the Federal Reserve Bank of Chicago, the homeownership rate has grown to 69 percent from 65 percent within the past ten years, half of which came from subprime lending.9 During the housing boom of 2005 and 2006, financial institutions lowered their credit standards. They then made another greed-induced, calculated error in offering subprime loans to borrowers with poor credit. This made up 12.75 percent of the $10.2 trillion mortgage market in 2006, up from 8.5 percent in 2001 according to Inside Mortgage Finance.10 Seeking new clients when home values were soaring in many markets, emboldened lenders offered an estimated $3.2 trillion in new home mortgages. Easy credit for exotic lending instruments, such as piggyback
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loans, required no down payment. No-doc loans let borrowers state their incomes without any supporting documentation. Interest-only loans featured principal payments scheduled in the future or adjustable rate mortgages. The ninja loan is self-explanatory—no income, no job, no assets loan. The net result is that these offerings to unknowing, wannabe homeowners, many of which had shaky credit ratings, led to rising defaults and surging delinquencies. These have wreaked havoc in the mortgage industry. Banks with potentially problematic loan portfolios could potentially cause trouble for the overall U.S. economy. Like their homebuyer-borrowers, these banks are experiencing their own potential death-rattle from financial losses. In opening remarks to the Senate Banking Committee in February 2006, Sen. Christopher Dodd (D-Conn.) indicated that the threat of foreclosures in the subprime lending industry remains a significant cloud. He stated, “Several credible reports say that we are facing a tidal wave of defaults and foreclosures, which could strip families of their major, if not only, source of wealth and long-term economic security.”11 A third of borrowers took out a second mortgage, up from 6.8 percent in 2003. This suggests that they did not have enough money for a down payment.12 The Center for Responsible Lending predicted that as many as one out of every five subprime borrowers who took out reduced payment, interest-only, or low-documentation loans between 1998 and mid-2006 could lose their homes.13 But this debacle is not isolated to the individual homeowner. Many of those risky mortgages were sold to investment banks that became increasingly reliant on turning mortgages and other kinds of debt into complex bond-like products in order to generate a significant share of profits. These banks carved them up and packaged them into collateralized debt obligations and complex asset-backed securities or IOUs that they then sold as bonds to investors. Chasing the dream of ever-higher yields, these investors flocked into the mortgage-backed market worldwide. These investors included workers’ pension funds, hedge funds, insurance companies, and other banks. This horror story has been unfolding as the turmoil from the financial markets liquidity crisis began racing around the globe in the summer of 2007, and will continue to plague investors worldwide going into 2008. This process of packaging and reselling home loans to
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investors—known as securitization, which has provided much of the cash fueling subprime lending—has also made it harder to modify debts that go bad. At the end of 2006, more than 2.6 million home loans were either past due for more than 30 days or in foreclosure—of these; 40 percent were made to people with weak or subprime credit.14 Many economists predict that the number of troubled loans which continued to rise in 2007 and will continue spilling over into 2008 as more mortgages are adjusted to higher rates and home prices decline further. According to an analysis by JPMorgan Chase, more than 37 percent of the subprime loans finalized in 2006 were made without verification of borrowers’ incomes, up from 15 percent in 2000.15 The explosive growth in subprime lending turned mortgage bankers and brokers into multimillionaires seemingly overnight. Wall Street firms made billions in fees, commissions, and trading revenue from packaging and selling subprime mortgages to investors as bonds. Now that this segment of the mortgage market is in trouble, certain Wall Street firms have already expressed the potential for “meaningful distressed opportunities.”16 The predators are on the move once again. Meanwhile, low-income, wage-earning families who took advantage of the easy credit to buy their houses might as well have borrowed from a loan shark. They are in an ever-worsening bind as mortgage rates rise and face the prospect of default. The Center for American Progress, a progressive think tank in Washington, D.C., outlined a series of steps the government should take to help families that get tangled up in the subprime mess. Among their recommendations is to make grants available in order to beef up mortgage assistance, offer a foreclosure assistance program, and encourage more oversight by regulators.17 As credit quality begins to deteriorate from unusually strong levels, some Wall Street analysts predict the need to boost loan-loss reserves, which cut into the banking industry’s profits. More than 20 percent of global private debt securities are now tied to housing in the United States, where outright blindness to the real risks of this scenario is pervasive.18 These securities total some $7.5 trillion— and are far larger than the market for United States Treasuries.19 If the mortgage market in the United States continues to deteriorate, the losses could be global in nature. Perhaps it is time to think about rolling back the excessive tax cuts granted in recent years so that government
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has more resources available to respond when the next financial crisis does come. Of the 77 million baby boomers planning to retire in the next 10 to 15 years, some 75 percent are hurtling towards unexpected financial difficulties, including some going back to work. From 2000 to 2006, the proportion of the nation’s 65- to 74-year-olds who remained in the labor force increased by nearly one in five to one in four, according to U.S. census figures.20 Unfortunately, many people won’t realize how illprepared they are for retirement until it’s too late. According to some other surveys, half of employees currently in their 50s will be unable to retire. One-quarter of all workers will be hard-pressed financially to afford retirement and will have to work longer.21 This uncertainty will make the retirement process a mess.
The Cost of Longevity Most people will live longer than they think. How can this be scary? Today, the typical American worker is on track to replace only 59 percent of his or her preretirement income. Only 15 percent are on track to replace 85 percent.22 In 1993, 23.1 million workers contributed to a 401(k) plan.23 By the end of 2004, 16.3 million workers had a 401(k) plan.24 There are 4.2 million Americans who are over the age of 85 and this number is expected to grow 40 percent to 5.9 million by 2014. Today a 45 year old has a 50 percent chance of living to age 85. A 45 year old has an 18 percent chance of living to age 95.The average male of age 65 has a 50 percent chance of living until age 85 and a 25 percent chance of living to age 92. At the same time, the average female of age 65 has a 50 percent chance of living until age 88 and a 25 percent chance of living to age 94. Today, 10.7 million people are age 80 or above. That number is projected to rise to 15.6 million by 2025. By 2030, one in five U.S. residents will be 65 years or older. Over one million people will be over the age of 100 in 2050.25 As longevity risk shifts to individuals, you need to ask whether you’ll have enough assets saved to sustain a potentially longer life.Will you be able to retire at what can be defined as a reasonably normal age? Do you have the tools you need to help make that determination?
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At an employee benefits conference in Fall 2006, Dallas Salisbury, the highly respected President and CEO of the Employee Benefit Research Institute (EBRI), recited a list of questions that are well worth repeating as part of the introduction to this very important subject. Will workers put lifelong trust in others keeping their income promises? What industries have the prospect of long life and long term pricing power? With medical research advances bringing ever longer lives, what institutions should bear the burden that annuity income promises? Can public sector workers benefits survive if they are among the only workers with them? Can “retirement” survive as a concept in the world of tomorrow? Finally, could we even afford mandated programs that would provide adequate retirement income in a free market economy that essentially allows unlimited offsetting debt?26
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Chapter 5
Employee Benefits at a Crossroad Coming together is a beginning, keeping together is progress, working together is success. —Henry Ford
T
he employee benefits industry has experienced monumental change and growth over the past four decades. It has influenced and benefited the lives of millions of people both on the receiving as well as the production and delivery side of its products and services. Today the health care industry comprises almost 17 percent of our nation’s gross domestic product (GDP) and continues to grow. Projections into the future show that the numbers will double over the next decade, reaching $4.1 trillion in 2016, or nearly 20 cents of every dollar 39
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spent.1 Other projections forecast health care costs to grow even further—to 40 percent of the GDP by 2050—a level that will break the current system of financing health care through employers, pension funds, and Medicare and Medicaid.2 In a related area of growth, the assets of institutional pension funds continue to increase and hold more of the U.S. equity holdings of our financial capital markets. In proportion to the growth in the money that they manage, these pension funds influence corporate governance and the markets worldwide. Despite the tremendous growth in these two areas and their positive effects, issues still remain in the fulfillment of retirement income security and health care benefit delivery provisions. These need to be addressed.
The Rising Cost of Health Care We are at a critical period. There is no alternative but to deal head-on with health care costs, which have seen no abatement for decades. The problem has been worsening over time with little recognition or action taken on the part of lawmakers and members of the health care industry. Meanwhile, the American psyche has been hammered badly on this issue—for so long that people are skeptical that anything can be done to staunch the soaring costs, to lessen the growing ranks of the uninsured, and reverse the continuous erosion of corporate, labor union, and public sector institutions’ health benefits. Is profit motive the cause of problems in America’s health care system? Does it result in excessive costs, inequitable access to care, or inferior quality? Is the notion of employer-provided health care, once available through almost every employer, obsolete? Matthew Hollon, an internist at the University of Washington, wrote that, “The most overlooked problem in the health care system today is the extent to which it is permeated by avarice.”3 The system is too fragmented and poorly regulated. Our system of medical care delivery may even be out of date and failing to deliver affordable, comprehensive health care to all citizens. It is in desperate need of a major cross-industry consolidation. Some contend that deficiencies in the system are directly attributable to flawed government policies that have led to incompatibility between good health care and
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profit-seeking. There has to be an agreement between Democrats and Republicans, employers, providers and the public about the future of the nation’s health care system.There has to be agreement on the proper role of government and the role of private markets. Indeed, a balance needs to be struck between market competition and government regulation to secure a system that is viable without being prohibitively costly. Politicians have to address health care issues forcefully. They have to face unpleasant decisions. Rather than deal with a major overhaul, however, they have embraced health services accounts as a means to expand access to coverage by individuals. This is not a sound long-term solution. Our nation’s politicians have skirted around the notion of universal national health care since Teddy Roosevelt in the early 1900s. This continued into the administration of President Harry Truman and on into the present. No meaningful reform has been accomplished in our health care delivery system and now our system is in desperate shape. Many people and organizations with vested interests must be brought to the table. They must engage in a serious dialogue to address this crisis. Part of this crisis of inaction is the cost of drugs. According to the Agency for Healthcare Research and Quality, which is part of the Department of Health and Human Services, the five costliest classes of drugs accounted for twothirds of the $181 billion spent on outpatient prescription drugs for adults in 2004. The top five, in billions spent, were $31.7 for cardiovascular, $24.5 for hormones, $23.7 for the central nervous system (including painkillers and seizure-control drugs), $21.5 for cholesterol-lowering medications, and $17.9 for psychotherapeutics, antidepressants, and the like.4 According to the Kaiser Family Foundation, in 2005 roughly 3.6 billion prescriptions were purchased in the United States—an increase of more than 70 percent as compared to 1994.5 As the population ages and new drugs come on the market, the trend continues to grow. For example, in 2004, 82 percent of U.S. residents had used at least one prescription drug, over-the-counter medication, or dietary supplement within the preceding week. According to the Sloan Epidemiology Center at Boston University, 30 percent had used five or more of these drugs during the same time frame.6 In 2005, 75 percent of senior citizens—Americans over the age of 65—took about four prescription drugs daily. The average American
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75-year-old took eight different prescription medications daily.7 Young people, too, are medicated more than ever. In 2005, approximately 1.6 million American teenagers and children (almost 300,000 of whom were under age 10) were given at least two psychiatric drugs in combination, according to an analysis performed by Medco Health Solutions for the New York Times.8 The plight of several elderly people was described in a recent newspaper story. They were denied entry to an assisted-living facility, even after paying a monthly fee for years to an insurance company for that kind of health care should they ever need it. One widow had paid the monthly premium since the age of 65. Now, at age 81, she needed assisted-living services. She was denied entry to the facility, which she and her children had selected, which had been approved by her insurance company. The company denied her claim for entry into the facility at age 81.9 What I was particularly astonished to read was that this poor woman was also taking 37 prescription pills a day for various ailments— 37 pills! And her claim was denied because she was not considered to be sufficiently infirm. The cost of drugs shows up in other ways and has a serious impact on our health care delivery system. In October 2006, the Journal of the American Medical Association reported that adverse drug events are a major cause of serious illness in the country, especially among the elderly. The journal’s study revealed that the majority of those who found themselves in hospital beds for an adverse drug event were merely following their doctor’s orders—or the orders of several doctors.10 With more than 10,000 drugs in the marketplace, at least 1.5 million preventable drugrelated injuries costing at least $3.5 billion annually occurred in 2006 in American hospitals, long-term care institutions, and outpatient clinics, according to the Institute of Medicine of the National Academies, which advises Congress on health policy.11 Despite being in the Information Age, only 6 percent of hospitals use drug computer entry systems for the dispensing and delivery of medications to ensure that patients get the correct medication at the correct dose.12 Hospitalized patients can expect to experience at least one medication error a day. Though some mistakes are harmless or quickly corrected, others can be deadly. Last year 98,000 deaths occurred—more than highway accidents and breast cancer combined—both because of
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mistakes in administering drugs—most of which involved painkillers and antibiotics—and because of infections contracted in the hospitals. Hospitals around the country are taking steps to reduce medical mistakes. But with so much at stake, many experts say patients and their families also need to take a larger role in ensuring their safety in the hospital. Patients are intimidated by their doctors. They must take a more proactive role in their own care.There must be more interaction between the patient, his or her family, and the medical professional. Suggestions have been made to empower patients in protecting themselves and participating in the decision-making process. There are a number of things patients can do to get the best treatment. They should bring an advocate with them who can step in if the patient is too groggy or weak to speak for themselves.They can prepare a health profile, which provides the status of their medical conditions, allergies, and medications.They can avoid wrong-site surgery by marking the location of the impending procedure before entering the operating room.They should double-check all medications and treatments before accepting them. Patients should take notes when the doctor is discussing their condition. Most people forget over 50 percent of what the doctor has told them. They should follow up when test results are due.They should educate themselves about the prescribed medication: What is it for? When do you take it? What are the likely side effects? Is the drug safe to take with other prescriptions? Is there anything that should be avoided while taking the drug? Lastly, what steps should be taken to guard against bugs that might cause infections or ensuring that all equipment used in the facility has been sanitized?13 The health insurance business has been commonly referred to as a racket. Insurers spend a lot of money looking for ways to reject claims. And health care providers, in turn, spend billions on denial management, employing specialist firms to fight the insurers. The need for substantive health care reform is undoubtedly one of the three most important domestic items that all of the presidential contenders will be forced to address in their march towards the White House in 2008. Impotency and unresponsiveness on this issue should not be tolerated by the American people. High quality health care is all about the elimination of obstacles (including endless paperwork) and the provision of easier access, convenience, and safety.
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The ERISA Era The worker retirement system in this country grew in coverage during and after the Second World War. In the 1950s and the 1960s, serious gaps in corporate pension plans alerted policymakers to the need for a new approach to providing retirement security. Senators Harrison “Pete” Williams (D-New Jersey) and Jacob Javits (R-New York) and Congressmen John Dent (D-Pennsylvania) and John Erlenborn (R-Maryland)— commonly referred to as the Fathers of ERISA—worked this incredible legislative feat. The Employee Retirement Income Security Act of 1974 (ERISA) was hailed by many when signed into law by late President Gerald Ford on Labor Day of that year. Retirement income security was the focus of this law. The enactment of the law was a necessary imperative in the wake of an array of highly publicized horror stories about the lack of assets in some corporate pension funds.With the possibility that companies could default on their pension payments, the legislation guaranteed a monthly annuity benefit for life to retiring workers along with surviving spouse provisions. It also included additional protections such as reporting and disclosure requirements on the part of plan sponsors, enhanced federal governmental oversight and regulation of benefit programs, as well as the introduction of vesting of benefits provisions for the average worker and the establishment of a quasigovernmental insurance entity known as the Pension Benefit Guaranty Corporation, which provide coverage for workers whose pension program failed. Of course, ERISA had its critics from the beginning. Some twisted the acronym into “Everything Ridiculous and Idiotic since Adam.” Wags said ERISA was the “full employment act for actuaries, accountants, attorneys, and administrators.” The fact is this legislation was a solid concept of long-term retirement income protection and provided peace of mind to millions of working men and women at the time. Since the law’s enactment, however, the world has changed incredibly and the combination of significant global economic and financial trends, political and social influences, and legislative changes have contributed substantially to significant changes in the landscape of the retirement system. Today ERISA is in jeopardy of total annihilation as we know it and the cooperative sensibility that it took to create it has
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been replaced in this unwieldy, free-for-all, winner-take-all free market economy. The emasculation of the defined benefit plan will for all intents and purposes erode ERISA’s original intent. Some people who oppose the maintenance of a secure retirement system are formidable foes. So it will be up to the people to apply pressure to get lawmakers and corporate chieftains to recognize that a creative new approach to retirement is necessary. Perhaps a proactive social project should be approached—as if a company were introducing a new product or service to the marketplace. The process usually goes like this: Pollsters and marketers determine what the masses want, then product managers guide the creation and design, followed by engineers or scientists who bring the product or service to life and then it is ultimately introduced to the consuming public. The launch is part of a long-term campaign with every nuance studied and analyzed to make the initiative a financial success. Perhaps we must take the same approach to making pension and health care reform a successful, productive campaign. Where can we find today the successors to Senators Javits and Williams and Congressmen Erlenborn and Dent? Who will participate in the ambitious project of putting the retirement income security commitment back into the retirement equation? I submit that this laceration of retirement security is immoral and will ultimately lead to economic inefficiencies for this country. It will affect the financial well-being of millions as well as contribute to the erosion of our social fabric. I’m not exaggerating for dramatic effect. I think the nation is in desperate need of substantial and bold solutions to these significant issues.
The Threat to Non-ERISA Retirement Systems Budget cutters in state capitols and city halls, whether for fiscal or ideological reasons, now threaten government pension plans.Their initiatives have started to go down the same path with the goal of the erosion of defined benefit programs at the state, county and municipal levels. This, as we know, has occurred in the private sector for the last 25-plus years. The government workers, unfortunately, will get little sympathy from their private sector colleagues given the pension envy between private
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and public sector. It has become part of the national debate in the battle over these government worker pensions. The public workers’ organizations who represent these employees as well as the representatives who serve as trustees on these retirement boards will have their work cut out for them in the years ahead. Their activities that are already subject to “sunshine” laws will receive even more scrutiny. The responsibility of trustees will become more cumbersome as time goes on and the diligence, commitment, and education will be more complex. They will be required to look over their shoulders more often and be subject to more inquiries from participants, retirees, political leaders, and the media.
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Chapter 6
The Retirement Crisis If you didn’t know how old you are, how old would you be? —Satchel Paige
O
n November 10, 2006, the 401(k) defined contribution plan celebrated its 25th birthday with virtually no fanfare. Although the 401(k) and related plans have had a profound impact on the retirement well-being of millions of America, most people seem unaware of their existence or their development over the past quarter century. In 1977, there were almost 30 million participants in defined benefit plans. By 2002, participation in defined benefits plans had declined by eight million, to 22 million. During the same time frame, the number of participants in defined contribution plans increased by 48 million, from 10 million to 58 million.1 Additionally, as of 2006, there was $2.4 trillion in 401(k) plans, as compared with $1.9 trillion in all private sector defined benefit pensions.2 47
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The legislation that created the 401(k) defined contribution plan led to the shifting of retirement risk from the shoulders of the institution onto the smaller, vulnerable shoulders of the individual. As more corporations shifted from traditional defined benefit pension programs to defined contribution plans they encountered little resistance on the part of the employees affected. Workers did not understand the consequences. What they got instead was a maze of complex investment asset allocation offerings that now changes the way we prepare and plan for retirement. How did this come about? We have gone from an economy of regulated institutions to a free market environment where industries have been deregulated and companies have, for all intents and purposes, abandoned the national economy and internationalized their production. This has resulted in a focus on a global economy—not a domestic one—that changes the dynamics of what was acceptable behavior on the part of corporations in a new emerging and fiercely competitive economic climate. Add to this the decline of unionization. The erosion of union strength has removed from the workplace an important check and balance mechanism in overseeing and reacting against corporate and governmental changes that can negatively impact workers’ retirement plans and benefits. In 2006, 12 percent of workers were still represented by unions compared to the peak of 35 percent in the 1950s.3 Consider the outcome. At a conference in December 2006, a well-known actuary envisioned hordes of elderly people who, without adequate financial resources for retirement, would be forced to live under bridges. That is a frightening prospect. It is all too reminiscent of the Hoovervilles of the Great Depression, where millions became homeless, experienced dire poverty, and many were forced to live as hobos on the streets, near rail yards, in abandoned buildings, and the like.4
Who or What Destroyed the Defined Benefit Plan? By substituting the 401(k) plan for the defined benefit plan, many existing pensioners are economically and financially vulnerable. This crisis will be more obvious as more working adults, the baby boomers,
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approach their inevitable retirement dates. An array of enablers, intentionally or not, contributed to the demise of defined benefit plans. They run the gamut from asset managers to consultants. They include plan sponsors and regulators, elected officials at all levels, and even the media, which has failed to examine these issues. Every institution, every professional practitioner in the defined benefit plans arena have contributed intentionally or unintentionally to the death of these plans. These enablers have to be disabled so we can devise a system that actually protects workers’ financial interests. Many people, including benefit professionals, political leaders, and, for that matter, ordinary citizens, have given much thought to the changing demographics and the shift of risk. The aging of America will have profound and long-lasting implications for all of society. In the late 1980s, I had the good fortune to introduce Ken Dychtwald, the president and cofounder of the California-based company Age Wave, to an audience of pension plan sponsors at an investment management seminar in New York City. As he climbed on to the stage, I grabbed his hand and pulled him up towards me at the podium. He then said, “I am going to change your life in the next 45 minutes.” I recall thinking that was a pretty bold statement. But as soon as he turned on his slide presentation, the audience— and I—were spellbound. His first slide was of an elderly woman sitting at an open window in an apartment building. It could have been in any city in America. Using a pillow, her elbows rested on a windowsill. She looked out onto the street watching the world go by. He asked, “Is this your perception of old age or is it this?” The next slide was a picture of a group of women in their 70s locked arm-in-arm in a chorus line like the Rockettes of Radio City Music Hall. They lived in a retirement community in Sun City, Arizona. I had seen them before on some of the morning TV shows performing their high-kicks. To be in their troupe, you have to be at least 70 years old. Of course, they are in great physical shape, tremendously vivacious, and exhibit a lot of upbeat enthusiasm. His next slide depicted a sick elderly man in a home hospital bed connected to an array of life-supporting medical tubes. Then Ken quickly switched to a picture of a 67-year-old man dressed in sweatpants holding a barbell in each hand with a washboard abdomen that would have made many twenty-somethings envious. The slides were intended
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to contrast what old age was supposed to look like—and the changing mindset about aging in America. Ken then talked about our typical view of the aging process. He used anecdotes and vignettes. He told us that the baby boomers would dramatically redesign and reinvent aging. It was a revelation for me. I found myself comparing my aging parents and the parents of my friends to the way senior life would be for their children. Since Ken’s talk, I marvel at how the world looks just as Ken described it—perceptions, products, services, the workplace, retirement policy, health care, and lifestyles for seniors are all undergoing a change defined by the needs and expectations of the baby boomers. The world’s industrial nations now face dealing with the realities of their aging populations. People are living far longer, well beyond their wildest dreams.This is unprecedented and the implications for the world are unknown. Serious societal issues must be addressed. The U.S. is going through a major transitional shift that is as profound as the early post–World War II period that was followed by the Cold War. We have witnessed seismic changes in the worlds of work and leisure, technology, education, climate change, energy needs, our domestic economy, and the influences of global interdependence that have wreaked havoc in the lives of many American families. The most massive influence is made by the ever-advancing technological changes that occur almost daily. The compulsive, driving advance of an ever-more sophisticated civilization has created positive changes. At the same time, there is concern about whether the progress of man can still benefit mankind from all of these accomplishments. Thomas L. Friedman of the New York Times and the author of The World Is Flat: A Brief History of the Twenty-first Century has lamented how, in this new wireless world of gadgets such as cell phones, iPods, BlackBerrys, laptops, and the like, he believes that personal contact between humans is taking a back seat.5 He also refers to Linda Stone, the technologist, who labeled the disease of the Internet age as “continuous partial attention.” She means that, because we are accessible at all times, we are inaccessible due to the distractions and the addictive nature of electronic gadgets. Those who are super-connected develop a dual-dependency—they not only depend on being in contact with people, they are also hooked on the devices themselves, sometimes to the point where they feel utterly
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disconnected, isolated and detached without them.6 Hans Geser of the University of Zurich said that constantly talking on your cell phone is doing more than annoying the people around you. Calling someone to assuage a bad mood, or to ask a question, may result in more dependence on others and a diminished ability to experience life fully.7 Some workplace experts warn that soon compulsive users of these devices will need to be weaned off them using abuse-treatment programs similar to the ones drug addicts, gamblers, or alcoholics, or others with compulsive behavior traits attend. This may take on more serious consequences regarding our youngsters’ connectedness and disconnectedness going forward. Teenagers, who are the members of Generation M (born between 1980 and 2000), have hundreds more friends than their parents had at their age—without having to leave their rooms and meet them. According to the Pew Internet and American Life Project, 87 percent of 12- to 17-year-olds, or 21 million children, are regularly online—11 million at least once a day. Seventy-five percent use instant messaging (82 percent of them by the seventh grade) and 84 percent own cell phones and iPods as well as laptops, BlackBerrys, and the like. Those who cannot afford them still manage to get on—at friends’ houses, Internet cafes, or libraries—and 78 percent use school computers to shop online or to check their e-mail.8 Life has changed dramatically by the forces and instruments of technology. Perhaps this has been to the peril of mankind, who have become distracted by all these changes and to the multitude of gadgets available. As a result, retirement security is a topic that is now discussed continuously in the media, at the workplace, within the family unit, yet most people are perplexed as to how our pension system has deteriorated to the extent that it has. Have they been mesmerized by technology and all of its apparent advantages to the detriment of paying attention to issues that will govern their financial well-being going forward? In the fall of 2006, I participated in a conference, Pension Funds in Crisis:The Future of Defined Benefit Plans after Pension Reform, sponsored by the Strategic Research Institute. The tenor of most presentations was negative. The collective assets of the pension systems in this nation have grown to monumental proportions.Yet the unfunded liabilities that exist throughout give serious pause as to how we will fund the
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retirement of American workers in the future. The mountains of assets may seem immense, but the liabilities for paying the benefit obligations dwarf them. One of the first speakers at the conference had frightening statistics about underfunded programs that exist throughout this country. For example, he said that the Armed Services retirement system is underfunded by $1 to 2 trillion, the Social Security system by $10 trillion, corporate pension funds by $200 billion, the public sector pension funds of states, counties, and municipalities by some $1 trillion and our overall health care system by some $60 to 70 trillion.9 In Texas, the House of Representatives and the State Senate voted overwhelmingly to introduce and pass legislation that would give Texas municipalities and the state the right not disclose the unfunded health care liabilities of the various pension and health care funds. The governor signed it into law in the summer of 2007. This was done even though the municipalities and the state were mandated to reveal their unfunded liabilities by the new recently adopted Government Accounting Standards Board (GASB) accounting rules. It seems to me that hiding a number from the public venue does not make it go away. In an era that is characterized by the desire for full disclosure and transparency one would think that this group of leaders still believes that we live in the Dark Ages.
The Future Doesn’t Look Rosy . . . and People Are Concerned It may be hard to believe, but I consider myself an optimist—but I am also a realist and I usually paint a dire scenario with the statistics to get people’s attention. I do this to initiate substantive dialogue and to encourage others to think about designing a strategy to reunite our country around a new agenda of renewal and reform for the 21st century. The American people are starved for two things: truth and leadership. Right now they get neither. David Walker, the Comptroller General of the Government Accountability Office (GAO), which audits the government’s books and serves as an investigative arm of the U.S. Congress, has totaled up our
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government’s income, liabilities, and future obligations. He concludes that the numbers simply do not add up and it is, according to Walker, the “dirty little secret everyone in Washington knows”—financial truth so inconvenient that most elected officials don’t want to talk about it.10 Walker has been conducting a fiscal wake-up tour throughout the country with other speakers. He is telling civic groups, university forums, and newspaper editorial boards—and anyone else who will listen. He is taking his message directly to the taxpayers and opinion makers hoping to shape the debate in the next presidential election. His message is simple: We as a nation are suffering from a fiscal cancer. One hopes that Walker’s message is heard loud and clear by people. They then should take their concern to our lawmakers. Other credible people such as Ben Bernanke, Chairman of the Federal Reserve Board—he replaced the venerable Alan Greenspan— has also publicly addressed his concerns about the unavoidable demographic shifts and their fiscal consequences if we fail to address and correct them. The Social Security and Medicare programs needed substantive reform at least a decade ago. With more people joining the rolls of retirees, the surviving, younger workforce will face the potential adjustments in payroll deductions in order to maintain the benefit payments to pensioners. Ultimately, the costs could be prohibitive and create a younger generation that is resentful of their parents’ generation that insists on adjustments that would impact their working lives. These shifts will have a profound impact on our country stretching out across the 21st century and impact generations. If the head of the Federal Reserve Bank is worried, perhaps we can get the attention of policymakers to do something about the problems. We cannot grow our way out of this problem. Any politician who tells you that we can solve this problem of fiscal irresponsibility without reforming Social Security, Medicare, and Medicaid is simply not telling us the truth. Mr. Bernanke recognizes that demographics are destiny—no matter how you slice it. This issue cannot be sidestepped for much longer. The question many ask is whether they will have a financially comfortable and secure retirement. Many older people are remaining in or rejoining the workforce when the financial security in retirement stares them in the face. The concept of being retired for years volunteering, grandparenting, traveling and, perhaps, playing some golf, is changing.
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Some folks just like working and want to remain actively engaged in work; others are or will be compelled by financial reasons to continuing working. Table 6.1 depicts the trend of older workers who are part of the workforce. For those people who are already retired or who are on the verge of doing so and leaving the workplace they need valuable and serious professional advice on how to protect their assets and on how to reach retirement and live comfortably with the benefits gathered during their working years to which they feel rightfully entitled. Issues such as contending with rising health care costs and developing financial strategies to build a stream of long-term income are a critical part of the dialogue. In an obvious appeal to the baby boomer generation, sales pitches about financial programs and products from hundreds of financial and investment institutions have inundated the media over the last several years. I recently saw two well-known financial institutions advertise on television about planning for retirement. One focused on a youthful, attractive, well-to-do couple. “You’re the generation that has redefined retirement,” the commercial goads. It discussed how savings and professional portfolio management can make your retirement years more successful. That may be true if a couple has the assets to be managed in a portfolio. The other ad focused on outliving your assets. It depicted an elderly woman sitting in a rocking chair and saying, “I never thought that I would live to be 100.” Table 6.1 Percentage of people over age 55 who are part of the workforce Older Workers Working More Age in Years
Percentage in Workforce
1986
1996
2006
75+ 70–74 65–69 60–64 55–59 Total 55+
4% 10.3% 19.2% 43.3% 64.5% 30.1%
4.7% 12.5% 21.9% 45.8% 68.5% 30.3%
6.4% 17% 29% 52.5% 72% 38%
Source: Bureau of Labor Statistics, Reported by the Employee Benefits Research Institute
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This kind of advertising aims at two issues and two audiences that, perhaps, can afford to pay, namely, the importance of planning for those at the beginning of retirement and for those who should be planning for the prospect of living beyond what was considered historically as a normal retirement age. A third advertisement, by a drugstore company, pictured a young pharmacist lamenting the fact that some people are in a very difficult dilemma and are forced to choose between paying their gas bill and much-needed prescription drugs. Unless we do something dramatic about the high cost of prescription drugs too many retirees will fall into this category.
The Corporatization of the American Political System The infusion of corporate influence on American politics and policymaking has grown exponentially over the last two decades. Their influence has skewed policymaking away from the interests of the people and their common good and heavily influenced and fostered the special interests of the corporations. As a result, the list of troubling developments such as corporate corruption (as manifested by Enron,WorldCom, and others), political scandals, and the promulgation of the commonality of interests of corporations, lobbyists, and politicians resulted in a world rearranged to focus on image rather than substance.The resulting generation of spin in politics and business has caused a major sense of mistrust on the part of voters. Add to this activity a host of debilitating problems in our cities, states, and our nation and you have some devastating and problematic challenges that our policymakers, with their heads buried in the sand, are not addressing. Some of these problems were once dealt with by good public policy—namely, the creation and maintenance of a social safety net for workers and their families on the cusp of hopelessness and despair. Perhaps these safety-net programs masked the seriousness and pervasiveness of the problems. Nevertheless, they enabled many families to rise up and overcome their difficulties. We witnessed the erosion of that era of governmental responsibility to its citizens and the common good during the second half of the
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20th century. We have become a government of inertia on many issues where leaders serve no defensible public purpose.This happened as conservatives became the dominant intellectual force in American public life and the social compact was chastised as a thing of the past, something that would not work in this new economic order. It is true that the country’s domestic economic policies had their genesis in the 1930s and that today there is an argument one can make that they are in need of some repair. For example, our system of archaic labor laws which governed the workplace of the post-Depression and World War II eras and well into the latter part of the 20th century are badly in need of revitalization in order to be more responsive to the changing world of work in the 21st century. During the Republican National Convention in 2004, George W. Bush laid out in rather definitive terms his plan for domestic reform. He announced that “Many of our fundamental systems—the tax code, health coverage, pension plans, worker training—were created for the world of yesterday, not tomorrow. We will transform these systems.”11 Upon his reelection that year, he boldly stated that he would use the bully pulpit and his “political capital” to engage the American people to embrace his “ownership society.” Yet he began, as part of the conservative ideology, by trying to dismantle the historical social safety net without recognizing that people needed protection in the “world of tomorrow.” His first attack was on the Social Security system. He promoted a plan of privatizing a segment of the program for people to take charge of managing their own accounts. One of the obvious failures of this proposal was the fact that financial illiteracy is at an all-time high in this country. Many Americans do not know the difference between a stock and a bond. Previous administrations have attempted to eradicate financial illiteracy but it is a monumental task. In fact, I believe we should insist that grade schools mandate a course in the curriculum that starts in the very low grades to teach children about money, checking accounts, credit cards, and debt, and weave that into their everyday lives.The world that these youngsters will inherit will be governed by finance and with little preparation and understanding of it, these kids will be relegated to living in financial limbo or, worse, living in financial desperation. For the average individual worker today, I would
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submit that the idea of having to manage a portion of their privatized Social Security assets is a frightening prospect, especially since they are already fumbling over what to do with their personal 401(k) assets (if they have the assets) in these forever rapidly changing markets. When Enron was on the verge of collapse in the late 1990s the corporate leaders were withdrawing their assets from their retirement funds while at the same time imploring and encouraging the employees to keep their money in their accounts while the ship was sinking. Many of those employees had a large segment of their retirement accounts in the company’s stock. Clearly, some of those folks were not tuned into the notion of diversifying their assets and they were held hostage by their desire to participate in the success of their employer without understanding the jeopardy they were in should the company fail. The idea that American workers are now responsible for managing their private 401(k) or defined contribution assets is already a major burden placed on their shoulders. Layer on top of that this irrational proposal to put a portion of the potential Social Security benefits into the same jeopardous game, and you have serious potential angst. Fortunately, some of the Democrats, the labor unions, and many other organizations voiced their opposition to this transfer of responsibility and tipped the scales against this idea, and it has not gained any more traction thus far. There are many who viewed this as a major payoff to Wall Street for its financial support of the Republicans’ congressional campaigns and for its support of George W. Bush’s 2000 and 2004 campaigns. This initiative was not about a secure retirement as much as it was about saying thank you in a big way to Wall Street—and the little guy once again pays the freight for the politicians’ benefit. Austan Goolsbee, a professor of economics at the University of Chicago, apparently did some calculations and projected that the setting up of private accounts for Social Security could have earned as much as $940 billion for those financial institutions.12 As a sidebar, although this has not gotten much public play, there are some observers who feel that this initiative could have something to do with the retiring baby boomer generation. When people begin to age they become more concerned with their assets. That concern usually results in their diminishing their exposure to stocks and adding more
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fixed-income-like investments in their portfolios. If this were to happen in a dramatic fashion, namely 77 million boomers unloading their stock holdings over the next 18 or so years, the effect on the stock market could be dramatic. Is it possible that Wall Street and the current administration could have concerns about this, and a potential solution was to gain the support of the younger generation, who would buy stocks through their privatized accounts? It was clear after much orchestrated grandstanding in nearly 60 selected cities throughout the country with supportive, obviously Republican-dominated audiences that most Americans did not want the responsibility of managing those assets. Nor do many of them have the professional capacity to do so. Fortunately, for the sake of millions of Americans, that initiative has gone nowhere. Lame duck presidents rarely attempt to make major policy initiatives when they have one foot out the door. However, a president who is in the midst of a very contentious war, who has a horrendous approval rating throughout the country, and who has disenfranchised his own party, neutering its ability to build a formidable platform upon which to mount a campaign for his successor, must apparently feel compelled to move an agenda no matter what its flavor. Historically, a president’s success at the polls, in terms of the percentage of popular votes, runs the gamut in second-term victories. George W. Bush squeaked by with 2 percent, Bill Clinton won by 8 percent, Ronald Reagan by 18 percent, Richard Nixon by 23.2 percent, Lyndon Johnson by 22.6 percent, Dwight Eisenhower by 15.4 percent, and FDR by 24.3 percent. They all clearly left Bush in the dust. After George W. Bush was anointed by the conservatively influenced U.S. Supreme Court justices in 2000, he was quoted as saying: “If this were a dictatorship, it’d be a heck of a lot easier—just so long as I’m the dictator.”13 After his reelection in 2004, in a New York Times op-ed piece, Adam Cohen wrote that, “Part of Mr. Bush’s legacy may well be that he robbed America of its optimism—a force that Franklin Delano Roosevelt and other presidents, like Ronald Reagan, used to rally the country when it was deeply challenged.”14 Prior to the 2004 election, E.J. Dionne, a columnist for the Washington Post critically observed that “Bush . . . hides the details. He wants to get himself re-elected by talking about terrorism—and he will inform the
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electorate only after November 2 that they voted for a lot of other things that they never much cared about.”15 Subsequent to the election by only a few days, economist Robert Samuelson wrote that, “In all likelihood post-Bush ideology will permit future workers to withdraw part of their Social Security into private self-managed accounts. Why? Because that will work out well for the greatest number? No. It is virtually guaranteed to work out expensively for most people. But the finance industries will make out well, doing their usual mediocre job for their clients.”16 Bush’s disrespect for the American people and our country as manifested by his words and behavior will not be forgotten.
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Chapter 7
The Time Is Right for Bold Leadership [H]unger and unemployment, like the lack of access to health and education, have no ideology. . . . My discourse, my person and my testimony are above political parties, whose own members are desirous of change and want an end to a system that favors narrow partisan interests over those of the country.” —Msgr. Fernando Lugo Mendez, “The Bishop of the Poor” and Paraguayan presidential candidate1
E
xtraordinary times demand extraordinary measures. I cannot think of another period during my lifetime that is so poignant and problematic as this one. In theWashington Post, Robert J. Samuelson suggested that we saw the end of the “Pax Americana” in 2006.2 He goes on to say that since the end of World War II, our nation has flexed its military and economic muscles to promote a stable world order 61
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and foster peace and promote prosperity worldwide. Now many factors contribute to the erosion of our nation’s role on the world’s stage. First and foremost, the debacle in Iraq has had a profound destabilizing and demoralizing effect on the nation’s collective psyche. To that Samuelson adds that “China’s rise; probable nuclear proliferation; shrinking support for open trade; higher spending for Social Security and Medicare that squeezes the military budgets; and the weakness of traditional U.S. allies— Europe and Japan—have contributed to this malaise.”3 The Vietnam War, the civil rights and feminist movements, and gutwrenching social and cultural upheaval doubtlessly made the 1960s a profound decade. Those old enough to be engaged in the many initiatives and activities of those tumultuous days believed our exhilarating experiences would define our lives forever. Nevertheless, some would disagree. In The Professors: The 101 Most Dangerous Academics in America, David Horowitz excoriates so-called boomer liberals. These are the 1960s radicals whom he describes as suffering from progressive osteoarthritis of the mind, betraying their youthful ideals in favor of accommodation and moderation.4 Conservatives have blamed the 1960s for influencing the decline of the American family, the rise in divorce rates, the number of children born out of wedlock, and the like.The reality is that the families of the working class have always been plagued by these social ills—perhaps more so than those in the upper class. The “Great Communicator,” President Ronald Reagan, should be saddled with a good deal of responsibility for contributing to the demise of family values. During his administration, deregulation and the dismantling of antitrust mechanisms proliferated. During his administration, the air traffic controllers went on strike for better working conditions and were annihilated by his edict to fire them all and destroy their union. That act alone sent a message to every CEO in America that it was acceptable to destroy the rights of working people and the collective bargaining system in this country. That insensitive and contrived act initiated class warfare in this country—although it was one-sided. When working families are hard-pressed to provide food, clothing, shelter, and education for their children, the family unit is stressed. When both moms and dads are forced by economic reality to work full time, the family unit begins to change and the social fractionalization
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leads to drug and alcohol abuse or unwanted pregnancies. When the fight for corporate superiority accelerates, the workers become disposable. Where do we lay the blame for the erosion of family values? Does it fall on the shoulders of the progressive change agents of the 1960s who wanted a better world—or does it fall squarely on the shoulders of those who stripped away the protective devices that had been established ages ago in order to protect our citizenry? I believe the blame should be on the latter. Granted, the 1960s, with its assault on traditional authority, played a role in weakening the fabric of the traditional family. But those conservatives, who promote the efficiencies of our new, more flexible economy and extol the flexibility of our workforce, decry the flexibility of the personal lives of American workers. These right-wing ideologues, who have championed outsourcing, offshoring, and union busting, have celebrated the changes that have condemned American workers to lives of financial instability. Meanwhile, they piously lament the decline of family stability that comes with their favorite economic changes.5 American conservatives are the primary authors of the very deteriorating social order they rail against. Harold Meyerson, in the Washington Post, can see the irony of this. American conservatism is a house divided against itself, It applauds the radicalism of the economic changes of the last four decades—the dismantling, say, of the American steel industry (and the job and income security that it once provided) in the cause of greater efficiency. . . . It decries the decline of social and family stability. . . . [However,] disperse a vibrant working-class community in America and you disperse the vibrant workingclass family.”6
New Leadership for America Institutions Going forward, America faces broader and more globally instigated economic, political, social, technological, cultural and foreign policy issues. They are changing every aspect of our lives. It is the equivalent of what this nation has not been faced with since the Great Depression and
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World War II. Where is the leadership for these new times? What leader can cope effectively with all of this turbo-charged change? Today, we need to speak frankly about the intellectual sophistication that is required of our president and our congressional leaders. We can no longer tolerate a chief executive whom the media has politely called “incurious” throughout his entire tenure in office. His lethargy influences the rest of our political leaders.They cater to their titular head and his idiosyncrasies and fail to properly represent the interests of the people. We cannot have politicians who run against the decline of the social order when their ideology plays a major role in creating it. Corporate recruiters want business schools to make leadership development a higher priority in their curricula. The four leadership characteristics recruiters value are: (1) being honest and trustworthy, (2) accomplishing what one sets out to do, (3) working well with others in a team setting, and (4) motivating and inspiring others.7 However, one of the biggest management challenges of our times is to determine how to get people working together in different time zones to collaborate effectively, raising their performance to meet competitive challenges. How do you encourage groups of people who may only get to see each other every few months? These are serious challenges. There are three core elements that must emerge within the organization: a cooperative mindset, an ability to span boundaries, and the successful igniting of purpose. A fourth element—productive capacity—is necessary to create real value.8 The challenge is to ignite all elements into a cohesive, energized, and innovative initiative. The French writer and philosopher Albert Camus wrote, “Presenting the truth is everything.” Would that all leaders in all walks of life work to maintain that philosophy as they deal with their constituencies’ needs and their responsibilities? We need leaders who still believe that there is a place in this world for justice, fairness, honesty, and integrity— personal and intellectual. Is it really too much to ask? What is leadership? Is it the ability to have others follow you over the hill into the unknown in the storm of a dangerous battle—or is it the ability to encourage others to perform the obvious chicanery necessary to “cook the books” on the way to devising activities and methods to perpetrate corporate fraud?
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What are the characteristics of leadership? Are they innate? Do we all possess the unique qualities for leadership? Do societal influences smother the innate potential or encourage its manifestation in people? Can we be mentored to become great leaders and, if so, what is the process? Obviously, the number one requirement is that those who are to be mentored must admire and respect their mentors otherwise it is ludicrous to think that there will be a positive outcome. Early in my career, I went to work for a trade union because I believed that unions provided equality and job protection to workers, which was the last potential vestige for social change. I had the good fortune to work for and with an extremely thoughtful and dedicated labor leader who shared his knowledge, skills, passion, and relationships as he guided me through the world of organizing workers, collective bargaining with employers, networking with political leaders, in the development of the all-important interpersonal, relationship-building required in this world, as well as the development of skillful professional requirements of trust fund administration. He was a true steward for his membership. His leadership emphasized the personification of loyalty to the institution, to the all-important supportive staff, to the tasks at hand, to our institutional and personal responsibilities, to the constituents we served, to our adversaries, and, most importantly, to the fight for what we believed in. It was a joy to work with him because he truly believed in his work. He was a true mentor. Many, unfortunately, will never have the experience of this type of workplace-nurturing relationship. In life, there are many followers but few leaders, and perhaps this has something to do with poor mentoring or the lack of strong, supportive mentoring or with the failure to recognize that this is a critical element of organizational and individual development. My introduction to a different type of leadership came some years later, when I moved on to work for a Wall Street investment management firm.The founder was a natural-born salesman, quick witted and a fast learner. Yet he was a lonely, self-isolated man. Unfortunately, he defined himself by his net worth and was riveted almost exclusively on the accumulation of capital. He was a member of the Young Presidents Organization (YPO), a group of under-40 corporate leaders. This poor
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soul never experienced a connection with the concept of elected officials and their important role, if exercised properly, in policymaking. All citizens should recognize the importance of participating in their communities and understanding the political dynamics that contribute to the community.With more participation, people would complain less if they could make a positive contribution. He never bothered to learn who his local or federal representatives were and, I suspect, he never exercised his civic responsibility and voted in elections.Yet he was charged by his clients to manage other peoples’ pension assets without understanding the nature of politics and politicians and the potential of their actions or inactions and the influence that their behavior could have on financial markets. Once he even told a board of trustees of a pension fund that the federal budget would be balanced in a year because Congress said they would.This was during the early days of the Reagan administration, when they were practically burning money in Washington and spending it on Star Wars and the like. I guess he never heard of “pork barrel” politics or earmarks! Every year the head of this firm would trek off with his YPO cohorts to a conference in some exotic location and would return with a pile of books distributed by self-styled management gurus who spoke about running successful and growing organizations. What he did not realize was that the soul of a leader is not easily developed and that leadership must be taught over a period of time—not at a three-day conference. He distributed his books to other partners and the senior management team of the firm so that they could present a new redefined managerial or team-building approach to once again reconfigure and change our organization.This time-consuming, annual exercise brought nothing but frustration and quiet ridicule and criticism from the staff. They felt hard-pressed to fabricate a “makeover” and redesign themselves into the image presented by these unknown self-anointed gurus. These exercises merely regurgitated the gurus’ mantras. Certainly there was very little mentoring, if any. The exercise was more of an ego-massaging for the founder who never really committed or bought into any of it and, thus, the result was a painfully vacuous experience with no real gain for the people and the institution. Sadly, we continued to repeat this exercise year after year ad nauseam. Upon reflection, it was a falsely promoted and ill-designed attempt to create the notion and mindset that the head
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of the firm’s innovative leadership was always on the leading edge, but it lacked the passion, creativity, sustainable discipline, belief, and motivation required in providing truly self-inspirational and successful leadership. What this man failed to recognize was that leaders are shaped by personal crises or other significant life experiences over various stages of their lives, which infuses in them a burning sense of mission. A mission to earn huge sums of money is no real mission. It suggests a childhood in which something significant was missing. It is a shallow attempt to provide all of the entrapments of what money can buy, but provides no real satisfaction for what life is supposed to be about. Without this sense of mission, there is no real vision, no leadership. What are the lessons that we can learn from these experiences? What are the influences and passions that push a person to the point of leadership? Is it the persecution of the individual or his or her ideas that cause others to flail in response? Is it the observation of injustices towards others? Is it a particular passion that is unique to an individual because of hardships experienced? Is it the desire on the part of someone to attain a better deal for herself, himself, or others? Or is it the recognition that, to accomplish goals, there just has to be a better way of doing things? Is it the clamor, the expectations, the anticipation, and hopes of those around the prospective leader that pushes him or her to rise above the crowd and take the steps to inspire others to follow his or her lead? What is it that gives that person his or her voice? How do we inculcate those qualities in others and create a broader base of qualified, sophisticated, thoughtful, and conscientious leadership talent pool? The charismatic leader, as opposed to the career politician, appears to his or her audience as an austere, trustworthy figure whose altruistic motives are beyond question. As described by the French historian Alexander Dorna, “His speeches give the impression of truthfulness, honesty, and seriousness, which stand in marked contrast to the wooden language of run-of-the-mill politicians. . . . It’s a feeling of authenticity that he communicates to his audience and that allows him to move them in direct, unmediated fashion. . . . The charismatic political speech is a collective High Mass via exclusively verbal means.”9 Any head of an institution has the ability to leverage the impact of the lives in his or her circle or leadership realm.The emotional connection with the entity’s mission catapults one to strong leadership. They possess
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a deeper desire to serve a greater goal beyond simply making money and when that is recognized by others in the organization successful leadership is a given. Leaders whose goal is the quest for power to control other people, or only seeking fame or fortune generally evidence a high degree of narcissism. No one will care to follow that type of leader. If we look back over the last 50 years throughout our nation’s history, as well as looking abroad, there are highly recognizable and prominent and not so recognizable names that come to mind, each of whom changed the course of millions of people’s behavior and their lives. People like Ralph Nader, who altered many industries’ approach towards the nature of consumer protectionism. Rosa Parks served as a catalyst and galvanized the civil rights movement. She provided the impetus for Dr. Martin Luther King Jr.’s long and personal crusade towards enabling Black Americans’ freedom. There are the large number of nameless heroes who fearlessly stood down the tanks in Tiananmen Square. There was that unknown Polish electrician, Lech Walesa, who was catapulted into international prominence by scaling a shipyard’s wall and making the Solidarity movement in Poland a worldwide phenomenon, with incredible consequences for the Cold War and Communism in Eastern Europe.There is the great African leader Nelson Mandela, who changed the destructive and corrosive apartheid policy in South Africa by his commitment, long personal suffering, and years of imprisonment. He ultimately rose to become the president of his country and to be embraced worldwide.There are many countless others whose leadership has been admirable, profound, steadfast, deep-rooted, passionate, and inspiring. The evolution of a leader is best characterized by a quote from that historic and cataclysmic Indian leader Mahatma Gandhi, who said, “First they ignore you, then they fight you, then they laugh at you, then you win.” When you believe in something as passionately as he did, there is no surprise that through tenacity, commitment, and selfless devotion and dedication to a cause, you can win. On April 4, 1967, Dr. King took the pulpit of Riverside Church in New York City at a meeting organized by Clergy and Laymen Concerned About Vietnam. The nation was already coming apart over that terrible war and Dr. King was in New York because “his conscience had
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left him no choice.” In that church, over 40 years ago, people of conscience declared that “a time comes when silence is betrayal.” His words are still poignant and resound today, perhaps for new and different issues. He preached that “We are at a moment when our lives must be placed on the line if our nation is to survive its own folly. Every man of humane convictions must decide on the protest that best suits his convictions, but we must all protest.”10 This is that charismatic speech that Dorna called a High Mass. Few can engage their fellow citizens that way. It takes a leader to convey so powerful a message and convincing people to act. Herbert Spencer, the 19th century philosopher wrote that, “The great aim of education is not knowledge but action.” Last fall, I received an e-mail from a good friend and labor leader in the entertainment industry advising me and others of the untimely death of a young labor figure in the same industry. He characterized the leadership qualities of his departed friend and colleague as “the most amazing example of the impossible, graceful entwining of The Lion and The Lamb in leadership. . . . He was fierce in his devotion to and defense of our dignity, our rights, our families, and our just needs as Professional Performers. And yet he wasn’t all fight all the time; he understood that we have spiritual needs as Artists, and that we’re all in this wildly improbable life’s work . . . to work.”11 Every person who aspires to carry the mantle of leadership should devote every aspect of her or his being to those glorious qualities. What a dynamic, inspiring and soulful legacy to leave behind. On the front page of the New York Times of Monday, September 25, 2006, the headline read “Only 25% in Poll Voice Approval of Congress.” This was the result of a joint poll conducted by the newspaper and CBS News that reflected the American people’s disdain for Congress. That feeling is as intense as it has been since 1994, when Republicans captured enough seats to end 40 years of Democratic control of the House of Representatives. It was the lowest it has been in many decades. In fall 2006, Americans had an overwhelmingly negative view of the Republican-controlled Congress. They gave control of the House and the Senate back to the Democrats. Poll results indicated that people felt that their representatives are too tied to special interests and that they lack understanding of the needs and problems of the average American.
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I would also submit that the egregious political and lobbyist corruption scandals of 2005 and 2006, as well as the general discomfort with the way the administration and Congress dealt with the wars in Iraq and Afghanistan had also influenced attitudes. It is my hope that the Democratic leadership will not continue the usual feeding frenzy at the trough and garner the strength and gumption to take the appropriate steps necessary to enhance their fiscal credibility and set themselves apart from the Republicans. Failure to do so will only put them into the same category of those they defeated and continue the disenfranchisement of the American voter. Who knows what the outcome will be in 2008?
The Polarization of America’s Leadership Our political leadership is so dramatically polarized. As a result, our representatives embrace empty symbolism rather than crafting thoughtful, effective policies for the American people. Corporate leadership is up to its eyeballs in the ongoing conflict over what constitutes good governance as it attempts to deal in this post-Enron scandal era. Its credibility is in question. Labor leadership, challenged by the changing world of work and wrestling daily with the need for innovative and creative thinking, is hard-pressed to offer solutions to easing the pain and anxiety of the overly stretched working family. Wall Street’s vision thing relates only to how quickly they can make mountains of money in the short term and continue to perpetuate the infectious greed that has woven its way into our culture. Academic leadership is frustrated by the overwhelming number of poorly educated youngsters at the grade and high school levels who arrive on campus.These students are ill-equipped to achieve the goals of higher education and prepare themselves for the new world of increasingly global and fierce competition. It is not that our students are changing. What is changing is the product coming into the schools. Early in the Reagan administration, a study was released in 1982 entitled “A Nation at Risk.”The problems recited in that report were shocking then and they were never dealt with effectively. Today our education system has even more systemic problems than just those that have lingered for over two decades with no real resolve.
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I recently heard from a corporate leader, who is building an ice cream plant in the eastern part of the United States, about his organization’s efforts to hire 800 new employees.The pool of potential employees interviewed had grown to over 14,000 people because so many of the applicants did not have the appropriate reading skills and could not read the basic rules and regulations about safety and other issues that would be required to perform their jobs. Many of them could not pass the drug tests.This says a great deal about our educational leaders, our schools, the pervasiveness of drugs in our communities and our nation at risk. The problems that plague our society have forced many people to throw up their hands and acknowledge that the challenges appear to be insurmountable. So many people declare that life is not fun anymore. They are giving up. The people who are being left in the lurch are those who have become disenfranchised by an economic system that takes no hostages and provides no safety nets. Inequality is growing and the middle-class is being squeezed into oblivion. This trend has been unfolding for some thirty years and shows no abatement, according to Jason Furman, a scholar at the Brookings Institution.12 IRS data that was reported on in Wall Street Journal recited that, “The wealthiest 1 percent of Americans earned 21.2 percent of all income in 2005. . . . That is up sharply from 19 percent in 2004, and surpasses the previous high of 20.8 percent set in 2000, at the peak of the previous bull market in stocks.”13 The article continued with data for the bottom 50 percent earners who, “. . . earned 12.8 percent of all income, down from 13.4 percent in 2004 and a bit less than their 13 percent share in 2000.”14 As we look out over the horizon it is not difficult to assess that the list of problems we face as a nation is so long and complicated that there are many who feel that we are beginning to unravel and are heading towards a serious meltdown. Morris Berman, in The Twilight of American Culture (2000), described the country as a highly dysfunctional society afflicted with apathy, cynicism, and alienation. In his newest book, Dark Ages America:The Final Phase of Empire (2006) he has a grim prophecy of decline and fall. He cites four traits that we share, with the late Roman Empire, namely, “the triumph of religion over reason,” “the breakdown of education and critical thinking,” the “legalization of torture,” and
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“declining respect and financial power on the world stage.”15 Can you think of anything that he has missed?
Who Bears the Blame? What has gone wrong and why? Where do we put the blame? Can we reverse the debilitating trends that consume so many talented people, many of whom are perplexed by what surrounds them? Will some charismatic individual step onto the world stage and energize a movement to turn things around? Those concerned about change have a sense of what’s wrong rather than ways to fix it. We must talk about the issues in every forum. We must recruit and engage as many people as possible across generations. We must foster dialogue and tap constructive, meaningful outrage over the state of affairs in this country. If we fail to engage others, encourage positive leadership skills, and demand more from our leaders, then we will fail to get the high caliber of leadership that we deserve and sorely need. Historically, it was not until the Great Depression that the U.S. attitude about the responsibilities of government came closer to those of the Europeans. With the New Deal, Americans embraced the concepts of the welfare state, including insurance against such risks as unemployment, crop failure, poverty, and old age.This was the creation of the social contract between government and employers and the American workforce in particular and the population in general. It marked a departure from the behavior of the past. The historian Herbert Harris in 1938 wrote that “Employers everywhere seemed determined to rid themselves of ‘restrictions upon free enterprise’. . . .” This is the classic tension that exists within the employeremployee relationship and now the notion of loyalty up and down the employment structure has eroded. The issue of trust is no longer part of the vernacular. Political leaders have a propensity to charge that conditions or behavior are unacceptable, but they do nothing to correct these wrongs. During our country’s industrial history, the balance of power between employers and employees alike has been debated by both sides. The political, economic, and social goals were supposed to prevent
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workers and their families from falling into destitution and having to rely on the poor substitutes of charity and philanthropy. Public aid in times of need was just. Full employment was the critical element for the well-being and dignity and self-respect of society. There were challenges that prevailed during our nation’s economic history, as we moved from a largely rural, agrarian economy to an urban, industrial economy. The poor working conditions that were experienced by millions during that period were thought to be, clearly, behind us as a nation. As we approached the latter part of the 20th century and realized that things as we knew them were unraveling and, as we entered the 21st century, we began to ask: Who stole the American Dream? Years ago, two Pulitzer prize-winning investigative reporters for the Philadelphia Inquirer, Donald L. Barlett and James B. Steele, assembled their vivid and incisively written series into a book, America:Who Stole the Dream? (1996). They chronicled of the lives of middle-class Americans under siege from corporate raiders on Wall Street and the government officials who made it possible. Our supposed leaders became enablers. Over the last decade we have been besieged by a wealth of literature dealing with the New Economy. It dictates how institutions and people must behave and how free-market institutional changes are required to take advantage of the new information technologies. This coupled with newly restructured institutions will lead to a new era of unprecedented prosperity. Other writers, however, have recorded the debilitating effects on those on other side of the equation—namely, the suffering working families of America. These families experience inequality of income, receive little tax relief and, as a result, experience anxiety. The top 10 percent of taxpayers do not suffer from the lack of a safety net.16 They get richer while other working Americans are losing ground. Unfortunate millions have to worry about what will happen if the car breaks down or a child gets ill or the roof needs fixing and the like. These are the people who live from paycheck to paycheck and are already deep in debt and wake up each morning climbing a very steep wall of worry. This may very well be one of the reasons why so many Americans suffer from hypertension and other anxiety-ridden diseases. Has the medical profession ever given any thought to studying the effects of ongoing financial anxiety and their effect on a person’s health
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and well-being? Solving that mystery may very well have a positive impact on our ever-rising health care costs.
The American Dream—Still Alive? What does the American Dream mean? Does it mean being able to make ends meet on your annual income? Sending your children to college without incurring huge debts or overburdening them with the fear and burden of outstanding life-long college loans? Making your mortgage or automobile payments? Doing better than your parents and grandparents have done? Being able to retire with some modicum of dignity without the fear of financial disaster? Passing on a better world than the one we were given? Why is the middle class shrinking at such an accelerated rate? Is upward mobility for the average citizen a thing of the past? Is there any end in sight to stagnating wages, the constant growth of inequality in the workplace, pervasive corporate outsourcing, offshoring, and the disappearance of health care coverage and substantive retirement benefits? Will the cost of caring for aging populations around the world bankrupt national treasuries? Will our health care delivery system’s failing infrastructure be adequate and capable of responding to the needs of millions of baby boomers leaving the workforce and facing potential long-term health care and assisted-living needs? Are all of these questions unanswerable? Have conditions in the workplace changed so dramatically that corporate leaders no longer recognize that part of their calling is to run well-balanced economic institutions that provide financial advantage to their shareholders? Is it their responsibility to also provide a safe, healthy working environment for the people who are the guts of the operation, who run the engine of the institution day-in and day-out? This is the challenge today and going forward, and the business world—amid allegations of corporate fraud and scandal—has started to change.The public company boardroom has begun to undergo a serious makeover. The once clubby, old-boy network is changing for the better. Corporate board members, having abandoned their laissez-faire approach to governance, are more willing to flex their muscles and aggressively
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press management for changes. In more recent times, the complexities and pressures of today’s global business environment has resulted in boards of directors having, when necessary, bounced the boss. Independent directors now hold 96 percent of board slots at companies on the Standard & Poor’s 500 stock index, up from 77 percent in 2001. Many of the new outsiders are former regulators and retired executives. Many supported Sarbanes-Oxley and are more outspoken and willing to challenge things—and have been welcomed by long-time directors and management for their expertise. In the past few years, CEO firings have become more commonplace. Major companies such as Bristol Myers Squibb Co., AIG, Boeing, Disney, Fannie Mae, HewlettPackard, Kraft Foods, Nike, Radio Shack, Viacom, Merck, Morgan Stanley, Pfizer, the Internet news publisher CNet, security software firm McAfee Inc., and online recruitment service Monster Worldwide come immediately to mind. There will be more to come in the ever-volatile and competitive business world. In fact, Bloomberg Markets cited a study by Challenger, Gray & Christmas that reported that an additional number of American companies were on track to fire or “lose 1,400 chiefs in 2006, up from 1,322 last year (2005) and 663 in 2004.”17 Influenced by corporate governance changes, institutional shareholders have experienced success in capturing the attention of corporate leaders and making them more responsive. Historically, the CEOdominated corporate institutions had done a pretty good job of creating jobs and wealth that was more equally distributed in the middle of the 20th century and into the 1970s than it is today. One hopes that the newly empowered boards of directors—and less powerful CEOs— can do as well in the 21st century. We must think about what policy initiatives can be adopted for the growth of social programs—based on our gross domestic product (GDP). We must go forward to deal with the “aging problem,” sustain Social Security, Medicare, and Medicaid. Medicare and Medicaid are the real monsters in the closet looming in the not-too-distant future.These entitlements are not going to be fixed without some incredibly hard decisions. This alone has been a monumental obstacle for Congress. Even some Democrats oppose modest changes that impact only the rich. How will they find the courage to support more far-reaching, much needed reforms?
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The Ever-Increasing Cost of Health Care In 2006, nearly 49 million Americans received approximately $539 billion in Social Security benefits. The Centers for Medicare and Medicaid spent $515 billion in 2005—21 percent of the federal budget. That was about $21 billion more than all defense spending. Federal spending on the elderly is plausibly projected to double from 2000 to 2030 as a share of our national income. About three-quarters of that increase is health spending—Medicare but also Medicaid which represents 70 percent of the money that is spent for the old and disabled. This projected increase in health spending exceeds all of today’s discretionary domestic spending on schools, the FBI, the environment, and much more. If the aging problem involved only higher Social Security spending, we could handle it easily with minimal pain. How does Congress face the tough decisions on financing the Iraq and Afghanistan wars, the deepening costs of homeland security, and other earmarks that go towards pork barrel projects and still contend with these entitlement programs for the growing rolls of the elderly? How will we contend with the escalating cost of a private health care system? What are the long-term macroeconomic consequences for the United States in the shadow of an increasingly failing retirement system and out-of-control rising health care costs? Companies that have forced their employees to assume more risk in the management of their retirement and health care assets may find that those employees, as financially strapped would-be retirees, will not be able to afford their products. Financially depressed retirees will be hardpressed to keep up their spending habits as consumers. Consumer spending accounts for more than two-thirds of all U.S. economic activity. What percentage of those retirees, who are economically challenged, will fall out of those statistics and to what extent will it impact our nation’s overall economic well-being? There is an abundance of broad, complex, and dynamic questions that require answers, a more diligent and dynamic stewardship, and definitive goal-producing policy solutions. These questions must be resolved if we, as a society, are to continue to be a leading industrial
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nation that historically has successfully fulfilled the economic needs of most of our citizenry and kept the American Dream from eroding. Sherrod Brown, a Democrat, successfully unseated an incumbent Republican for his seat representing Ohio in the Senate. He wants Democrats to adopt industrial policies that champion the development of new industries in old manufacturing towns. One observer of that campaign, Roger Tauss, legislative director of the Transport Workers Union, states, “The Democrats have had trouble figuring out how to talk about economics. They don’t know how to reach people who are hurting but still vote Republican. Sherrod refuses to believe those voters can’t be won over.”18 There is no question that a new industrial policy for this globalized age must be developed. How to gain widespread support and create a sustainable mechanism to stay on target is the challenge. One thing is for certain—we cannot maintain our global economic leadership exclusively by sending American troops worldwide to protect our nation’s vested financial and market-driven interests. We must make reforms at home and, by example, show the world how societies can benefit from a truly egalitarian approach to economic well-being. The debate in Congress—over yet another long-awaited attempt at pension reform—in spring and summer 2006 led to the Pension Protection Act of 2006. It survived half-baked attempts to add on other items such as estate tax relief for the wealthy and lacked a compromise on an incremental and much needed increase in the minimum wage before it was signed into law by President Bush. The Act purported to strengthen our private-sector pension system. The jury is out and only time will tell. But a segment of professionals in the pension world have commented that the Act could be the final nail in the coffin of the private defined benefit plan system. This attempt at legal pension reform was hard-fought, long-awaited, highly acclaimed, and a big disappointment. It was a half-baked attempt at correcting a corrosive pension system without dealing with the core problem. Defined contribution plans are not effective retirement plans for all. The system is dying, and for all intents and purposes, on life support. The Wall Street Journal’s August 4, 2006 editorial, commenting on the final passage of this legislation, was titled “The Pension Era, R.I.P.” This hardly hid the glee over the demise of the retirement system that
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had provided so many pensioners, over so many decades, with a dignified and financially secure retirement. The editors opine: The real importance of this exercise is that it signals the end of the old, defined benefit pension era. . . . [M]ost Americans should be pleased. As we’ve seen with GM and the airlines, the idea of a single company guaranteeing retirement for decades is no longer practical, if it ever was. Defined contribution plans—in which workers and companies contribute to a tax-sheltered retirement account—give workers personal control of a fund they can take with them from job to job.Yes, they are responsible for how they save and invest, but we suspect most Americans prefer their own judgment to the hope that GM will be solvent in 40 years. Where is this writer living? America has been in a financial illiteracy crisis for decades. The average American does not know the difference between a stock and a bond. When it comes to personal control, most Americans do not have the desire nor do they have the skills required to plan the sophisticated, long-term asset allocation decision making necessary to prepare for their retirement in order to protect a corpus of money that is stashed away for this purpose. Any employee who is enthusiastic about his or her employer removing the defined benefit plan and, thus, saving the corporation millions in the process, while placing the burden of retirement squarely on his shoulders, clearly needs to rethink the basics of his high school economics education. This law channels great sums of money to the retirement benefits industry by making enrollment in corporate 401(k) savings plans automatic. Employees are required to opt out if they do not want to participate in their employer’s program. Automatic enrollment increases 401(k) participation from 66 to 92 percent of employees, according to the Investment Company Institute, which has the potential to dramatically boost assets from the current $2.4 trillion.19 This infusion of money will be a boon to Wall Street financial firms. A great deal of effort will have to be placed on the education of these employees, many of whom are financially illiterate, for them to be armed with the tools to learn more about how to allocate their assets and look to these programs as retirement plans and not as forced-savings plans.
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Any American who applauds the passage of this piece of legislation has not paid attention nor read political and economic history over the last 30 years or, simply, sits within the camp of those who have made every attempt to erode this new world order of unprecedented hypocrisy and greed. In 1997 through 1999, I served on the ERISA Advisory Council to the Secretary of Labor. In 1997, we convened a working group whose title describes its purpose: “The Merits of Defined Contribution vs. Defined Benefit Plans with an Emphasis on Small Business Concerns.” I served as Deputy Chairman. During the course of this study, we had various professionals from the pension community testify before the working group. Generally, they saw a growing use of preretirement distributions from defined contribution plans and IRAs. These distributions were referred to as leakage. During this period, the stock market was on its meteoric rise and working people were quickly lulled into the notion that the market went no place but up and that it could control its own long-term financial destiny. A monkey throwing darts could have picked winning stocks during that period. Employees enthusiastically contributed to driving this change to defined contribution plans and were totally unaware of the problems that were being created for them by their employers moving away from a more secure defined benefit plan system. Some of the revelations that were made during this study included how only one out of three new employees participated in a 401(k) plan when it is offered.Also, 70 to 80 percent took out a loan from their plan and never paid it back. Lastly, in this age of portability, where workers move from job to job over their careers, 80 to 90 percent of younger employees do not roll their money over to their new employer’s plan. They take the money and run with it and, in short order, spend it on other things. There is no question that defined benefit plans face some challenges in today’s global economy. Companies are reluctant to maintain them and the long-term legacy costs that they have amassed. Employees are changing jobs more readily and the workforce has become more mobile. Companies’ attempts to be competitive have caused much consternation with respect to maintaining defined benefit plans along with costly health insurance. Both corporate leaders and their employees are hardpressed to deal with these challenges.
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The move to privatize companies through leverage buyouts by private equity funds places an inordinate amount of pressure on the leaders of newly acquired companies to focus on a short-term process to turn the fund a profit for its investors. The number of plans that have been frozen, rolled over to cash balance plans, or turned over to the Pension Benefit Guaranty Corporation (PBGC) is on the rise.There should be a strong initiative to rethink the defined benefit plan creating a new model that can survive in today’s highly competitive world. A panel of benefit experts along with conscientious political leaders could create such an entity. But the federal government has to be willing to put special interests aside and focus on the goal to cover more Americans with a pension plan that will provide a steady income so they are not stuck with the burden all alone. Historically, however, defined benefit plans have cost-effectively managed the risk that people face in retirement. Defined benefit plans have provided recipients a lifetime of income. They have contributed to reducing the prospect that there would be a future generation of poor, elderly retirees who outlived their savings, and were forced to subsist only on Social Security and on some meager savings. Defined benefit plans are not the problem. The problems are: • Poorly written laws by our nation’s lawmakers. • Pension administrators who have promised higher benefits without properly funding these increased obligations. • State legislators who function within election cycles that are shorter than the financial cycle required to fund a pension benefit. • Trustees who are ill-equipped to perform their fiduciary duties. • Actuaries who have used a technique called “smoothing” that, in some plans, have distorted pension calculations. • Professional investment managers motivated primarily by enormous fees who have lost their compasses in terms of delivering long-term, consistent, risk-averse performance. • Investment management consultants who have looked the other way in the hiring and firing of managers or had their own set of self-interests. I was raised during a period that fostered the notion that we all have a responsibility to help one another and contribute to the common woodpile.
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No one would dare to remove more from the pile than what he or she had put into it.This custom, unfortunately, is no longer the norm. I have had the opportunity to work in the world of employee benefits administration assisting workers and their families sorting through the maze of rules, regulations, and schedules of complex benefit programs. Although I recognized the importance of health care coverage and the need for a secure retirement plan early in my career, I never envisioned a world totally devoid of a rock-solid commitment to those two goals. Over a period of 40 years, I have witnessed dramatic changes and the obstacles today are significant. Now is not the time to give up the fight. I began to think about what down-shifting pensioners like to do if they are fortunate enough to have a pool of assets upon which they can rely in their retirement years. As the biggest demographic wave in our country’s history transitions out of the workforce over the next two decades, the retirement opportunity will represent the single largest driver of growth and profitability for the financial services industry. But what if a large segment of this group do not have sufficient assets and cannot do things such as buying gifts for the grandkids, eating dinner out, purchasing a new car, taking a cruise, or paying for a country club membership to name a few? Picture the kind of environment that could unfold where many of those activities are hampered or restricted. Think about the implications for our consumer-driven economy when a very large portion of the aging boomers and subsequent generations have no discretionary dollars to spend. Add to that how Social Security benefits will erode over time. Add to that the rising cost of health care, which is a cancer feeding on our society with no diagnosis in sight.These factors put tremendous pressure on people’s bank accounts, their financial prospects, and the Medicare and Medicaid programs. The potential result is that we could have shell-shocked elderly citizens who have lost their dignity and are too old to work and too young to die and are right smack in the middle of the land of the living dead. We need a “new deal” for pension and health care reform. Some may enter this period in their lives where they are forced to break their prescription drug pills in half in order to extend their use, feel compelled to occasionally shoplift at the local grocery store to save a couple of bucks and have a wholesome meal, or remain imprisoned in
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their homes because there is no place to go. Some may not to go to the doctor with a significant medical complaint for fear of the costs not being covered by insurance. Some might not eat regularly or properly. Some might even eat cat or dog food as a substitute and suffer undernourishment or malnourishment with all of the accompanying side effects. The vision is pretty frightening. The reality is closer than we think. We have witnessed a whirlwind of incredible change over most of the 20th century. We have arrived at a place where the political, social, and economic divide keeps increasing and obligations to the people have been tossed to the wind. Progressives and moderates debate whether the middle-class Americans have done just fine economically for the last few decades. One common phenomenon from the disappointing gains experienced by so many Americans—among Republicans and quite a few Democrats—is that “the remarkable new products of recent decades compensate for stagnating wages.”20 In spite of the fact that middle-class families can afford these new products, they were pushed up against the wall when the slowdown in wage increases caught them in the crunch.The crunch entailed the rapid rise in the cost of education, health care, drugs, housing, and key consumer products that created problems for those whose incomes had risen only slightly. On the political front, it is now clear that the United States is witnessing a centralization and nationalization of politics.This is unprecedented in our history. Political operatives and moneyed special interest groups have had a strong hand in contributing to this current state of affairs and their actions are threatening our economic well-being, our dignity, and our democracy. This development is rooted in the influence of technology on campaigns and how they are waged, the rise of the highly lucrative political consulting business, as well as the fierce competition for power between two polarized political parties. The Republicans, who won control of the House of Representatives in 1994, effectively turned a centrist president, Bill Clinton, into a Republican. But history has suggested that once a political party achieves sweeping power, it only takes a matter of time before the power engulfs their reason for being. The result is an all-consuming political mechanism for solely winning elections in order to distribute the largess that this power
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provides.The largess could include earmarks in today’s vernacular or the pork barrel in days gone by for specific projects in a legislative representative’s home district that would inure to the benefit of the officeholder in the eyes of his or her constituents as well as to the folks who are awarded the contract to perform the project. We have witnessed one of the most incredible eras of this abuse at the public trough over the last seven years. The Democrats, on the other hand, the national party that was for the most part of the last century America’s dominant force appears rudderless with an ill-defined, failed, and poorly articulated vision in this new century. Typically, the Democrats react to things and no longer initiate bold programs in this new world of politics. In fact, both parties’ legislative leaders have begun to look more and more like their wealthy fundraisers. This state of affairs in both leading parties raises the fundamental question that Matt Bai raised—“what role, if any, a political party should play in 21st century American life.”21 On many fronts, humanity is sitting on a ticking time bomb. Our failure to act relegates us to continue with our self-anointed, self-promoting leadership’s dictated path of mumbling and frivolous, narrow, and vacuous articulations about the need to act without their doing so. This leadership has the audacity, given their behavior and inaction, to say in effect to the rest of us, “I’ve got mine, now you go get yours.” The good news is that the electorate, when they are pushed to the wall, historically has punished leaders who become addicted to self-perpetuation by voting them out of office. November of 2006 was a clear indication that the voters had had enough. It is a reminder to all political leaders in Washington, D.C., a city loaded with unchecked egos, that they are vulnerable and must pay for falling in love with and embracing their own sense of entitlement. We have gotten nowhere in dealing with the lackluster and halfbaked efforts to reform and shore up our health care and pension systems witnessed by their devolution over the last four decades. Four decades of backslapping, glad-handing, blatantly deceitful behavior, and the wink of an eye on the part of our leaders in every segment of society have pushed this nation back into the dark ages of the Industrial Revolution of a century ago. There the schism between the haves, the have-mores, and the have-nots was horrendous. The only difference between then
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and now is the incredibly fast-paced technological change that devastated a generation of workers ill-equipped educationally to make the quantum leap into the new world of work. Now, as their aging bodies and battered, beleaguered, numbed minds tell them it is time to enjoy the fruits of their labor, they are abruptly and callously told that the retirement programs, which were designed to secure their financial wellbeing, as they prepare to walk into the sunset, are no more.These are the people who for all of their lives did the right thing. They played by the rules in all aspects of their lives and then someone threw away the playbook and they are left naked and vulnerable. The sad reality is that the baby boomers, convinced they would stay young forever, are nearing retirement age economically ill-prepared. Although boomers like to think of themselves as unpredictable and individualistic, their behavior patterns, especially as they have related to economic, financial, and social activities, have been highly predictable. On January 1, 2006, the first of the baby boomers turned age 60. Throughout 2006, nearly 8,000 Americans hit this milestone every day and will continue to do so for the next 18 years.22 This group accounts for 42 percent of all U.S. households and control approximately 50 percent of all consumer spending.23 Nationally, 28 percent of boomers have college degrees and 10 percent have graduate degrees.24 Twenty-three percent have household incomes above $100,000.25 Baby boomers’ buying power is substantial: Although they comprise only about one-third of the U.S. population, they control three-fourths of the wealth.26 Their buying power, then, is significantly larger than the coveted 18-to 34-yearold demographic. The baby boomers are living longer, better, and spend $2.1 trillion annually on goods and services.27 As they move from asset accumulation to distribution, the magnitude of this phenomenon will be profound for financial, real estate, and consumer markets for those with adequate assets. It will be unsettling, however, for pensioners without robust retirement funds and could have profound and potentially debilitating longterm macroeconomic consequences for America. With regard to Social Security and Medicare, Alan Greenspan, the former Chairman of the Federal Reserve Board, said in December 2005:
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Because the baby boomers have not yet started to retire in force, we have been in a demographic lull. But this period of relative stability will soon end. In 2008 . . . the leading edge of the babyboom generation will reach age 62, the earliest age at which Social Security retirement benefits can be drawn. And in recent years, about half of those eligible to claim benefits at that age have been doing so. Just three years after that, in 2011, the oldest baby boomers will reach 65 and will thus be eligible for Medicare.28 Today, three and one-quarter workers contribute to the Social Security system for each beneficiary. By 2030, the ratio of covered workers to beneficiaries will be down to about two. Greenspan went on to predict that “The pressures on the budget from this dramatic demographic change will be exacerbated by the anticipated step upward trend in spending per Medicare beneficiary.”29 When this generation first appeared in 1946 and continued until 1964, their impact on the U.S. economy was significant. Their shear numbers had a massive effect on many aspects of both markets and society in general. They affected financial markets, industries, and companies. Their numbers were responsible for skyrocketing diaper and baby-food sales and the growth of pre-K, grade school, high school, and college enrollments. They had a very profound effect on the national culture. With a generation that is living longer and staying healthier than past generations, the financial challenges are enormous. Thus far, policymakers have not connected the dots to really understand the long-term implications for society from the tidal wave of aging baby boomers. The reality is that the number of Americans older than 65 will have doubled since 2000 to 71.5 million by 2030.30 These aging boomers will overwhelm many U.S. communities with their special needs such as handicapped access and long-term care. Only 46 percent of communities surveyed have begun to plan for the effects, according to a report from the National Association of Area Agencies on Aging and the MetLife Foundation. According to Sibyl Jacobson, president of MetLife Foundation, “The aging of the population will have a dramatic impact on America’s cities and counties. . . . [b]y taking action now, communities
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can avoid problems and improve the quality of life for all citizens as well as for older adults.”31 Today pension plan coverage remains under 50 percent of the private sector workforce.32 Coverage that does exist continues to shift from traditional defined benefit plans to 401(k)-type defined contribution plans, the bulk of which have only very modest account balances. These pension trends represent the erosion of a system that has provided stable retirement benefits for decades.33
The Failure of Retirement Plans Means People Must Work Longer According to the “Life Events Scale,” which ranks 42 life events from most stressful (death of a spouse) to least stressful (minor law violations, such as a parking ticket), retirement ranks tenth.34 The psychology of retirement presents serious realities of this probable event and the multitude of decisions that the prospective retiree will have to make as they begin to approach the day when they wake up to not having to go to the office, the plant, or to their workplace of any kind. The challenges are even more arduous since the retirement system is a skeleton of itself. Social Security will weaken with scheduled declines. The retiree community is growing. People did not or are not saving enough. Health care costs keep rising. What this means is that today’s workers, even those close to traditional retirement age, will have to work longer. They may never be able to retire. Many may have to work until they drop. This is the full-blown, in-your-face reality that most people never envisioned and for which our society is ill-prepared. This is the face of the new retirement paradigm, which is all about managing transitions, both financial and psychological. Even the population of Generation X, 61 million people born between 1965 and 1979—our kids—will be hard-pressed to save for retirement. Obstacles to financial well-being, that range from the personal (student loan obligations) to the national (budget and trade deficits, the war in Iraq, energy prices) will force this generation to swim against a rising tsunami of debt. Dramatic, bold steps must be taken to change existing policies. These financial burdens have made the United States
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the only industrial nation with a negative balance of savings. We have become a nation of Olympic-style consumers who live on credit card margins. This means problems for many boomers and coming generations. Our elected congressional representatives and other policymakers have been reluctant to tackle these difficult national issues and make the hard decisions necessary to steer the nation in the right direction. They have abandoned the ideals upon which this country was founded that “all men are created equal.” Rather than deal with historic problems, they fall lockstep behind financial benefactors who insist that markets should define the path to economic well-being. The reality is that unfettered markets have failed to make good on the promises of their advocates. This failure has made for a bleak outcome that we will face in the not-too-distant future. This failure is compounded by an apparent, egregious willingness to exploit the plight of working people buried in economic hardship—for the purpose of putting millions of dollars into political action committees as well as the portfolios of wealthy individuals and corporations. There is no mystery that political elites have been influenced to a great extent by corporate America and the well-heeled financiers of Wall Street. The latter are complicit in doing away with the social contract that once permeated our society—and from the get-go, when the boomer generation was in its early stages. The partisanship that has been instigated by greedy, snake oil peddler corporate lobbyists has resulted in little incentive for Republicans and Democrats to do the nation’s business—a poisonous and destructive scenario.Their dance cards are already filled by the hucksters and spinmeisters from K Street. Their behavior is such that it occasioned Jared Bernstein to remark, “If you landed here from Mars and looked at Congress’s agenda, you’d think that the problem in America is that rich people don’t have enough money.”35 Senator Hubert Humphrey, in one of his last poignant speeches, said, “[Y]ou can judge a society by the way it treats its citizens in the dawn of their lives (the young), those in the shadows (the poor, unfortunate and disenfranchised) and those in the twilight of their lives (the elderly).”36 On its surface, it may not appear that our society is suffering. But if you drill down a bit, you will find that it is. It is facing dire consequences precipitated by those in Congress and the business community who have
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lost their moral compasses. They have obviously forgotten the words of this compassionate, thoughtful, and socially committed American. Is it possible that no one saw this train coming? Or is it that the lapdog policymakers in Washington were willing to watch it speed down the track, mowing down the expectations of a significant portion of a generation that anticipated living out their golden years with some modicum of financial well-being and dignity? The rippling effect of this failure to act will also carry over into the next generation. Perhaps it is time for Americans to face the truth about our electoral system. It is both archaic and controlled by money and self-interest. Our legislative branch, created and designed to define, effect, and promote democracy, has failed. In their book Deliberative Choices: Debating Public Policy in Congress, Gary Mucciaroni and Paul Quirk examined the accuracy of 18 claims made by lawmakers in 43 separate House and Senate debates. They determined that the claims made by our Congressional leaders in only 11 of the 43 debates had been largely substantiated by the facts. An additional 16 were deemed to be “unsubstantiated.”37 This is not very reassuring. It makes me recall a scene in Michael Moore’s film Fahrenheit 911 in which Moore queries Congressman John Conyers about a particular piece of legislation. Moore asks how this legislation got by and Conyers responds, “Young man, you don’t think we read these bills, do you?” Well, why are we paying them $165,000 per year plus perks for a part-time job? Is there something that I am missing? Until we as a people realize that some legislators are mediocre at best, we will continue to get the congressional leadership that we apparently deserve.This is especially true as more Americans disengage themselves from their civic responsibility rather than expressing themselves at the ballot box. Perhaps it is time to think seriously about term limits in Congress. If you haven’t done anything legislatively significant in eight years in the House or 12 years in the Senate, then it may be time to move on. E. J. Dionne Jr. had it right when he wrote,“Polls show that America’s cultural values are a mix of liberal instincts and conservative values, but the obvious preferences of Americans don’t get expressed in our politics. There are more ideas that unite us than divide us, but politics doesn’t reflect that.” All over the country, Americans are deserting the political
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process.Voter tallies are dwindling. Only 59 percent of the baby boomers voted in the 2000 presidential election. Many of these people were the young activists of the 1960s who actively opposed a similar cadre of misguided leaders. Where is that passion to address the burning issues of today? How and why did it disappear? Can we resuscitate it?
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Chapter 8
A Time for Change We must be the change that we wish to see in the world. —Mahatma Gandhi
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ditorials and media commentators mourn the increasing voter apathy. Larger numbers of American citizens grow more disenchanted, more disengaged, and angrier about the failure of their elected officials to address the issues facing this nation. Substantive, thoughtful campaign discussions and debate have been permanently replaced by smear tactics, finger-pointing, personal attacks, name-calling, and covert campaign operations. Our political process has become a can of worms. It is no surprise that so many Americans hate politics and have withdrawn from a game of smoke and mirrors. I believe that the voters have developed a keen eye and ear in recognizing the gap between prediction and reality. The only winning strategy for the political campaign is to restore confidence
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in government rather than the denial of the problems facing this nation. For decades we have listened to reasons why we need solutions for the health care and pension debacle—as well as energy independence, global warming, income inequality, to name a few. Yet there has been no substantive, engaging debate. Nor has any serious progress been made in dealing with these issues. Consequently, many Americans are discouraged, disappointed—and vulnerable. Now is the time to redirect the mindset of our policymakers, give them a swift boot where it counts, and rivet their attention on the problems. Elected officials react when they feel the fury of their constituents. Why was the Sarbanes-Oxley Act passed by one of the most conservative legislative bodies in our nation’s history and signed into law by the most probusiness president in the land? Pure and simple—because our Congress and the president responded to the fury of voters despite their ideological opposition to regulatory legislation. All must become activists if we hope to have a society that is not a vacuous and hopeless league of millions of retirees in what eventually will be a grotesque parody of “the land of the living dead.” I dread the thought of older Americans anxiously staring into the abyss. Will that come to a reality before we can shame our congressional representatives into action? Or do we have to threaten them with millions of gray-haired citizens locked arm in arm with hordes of Generation X’ers demonstrating in the streets of America and storming the voting booths to make their voices heard to extricate the do-nothing leadership? Our representatives, along with the Wall Street titans and corporate America, have manufactured a culture of deceit. They hope that Americans won’t notice. No disinformation campaign will hide Congress’s staggering failure to lead.
Government, Business, and Labor Used to Work Together Historically, in the post-Depression and post–World War II eras, the captains of industry, prominent national labor leaders, and the secretaries and representatives of Treasury, Labor, and Commerce met to deliberate over our nation’s long-term industrial policies. White papers were circulated
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and discussed and, when appropriate, enabling legislation or social and economic policies were skillfully crafted for America’s corporations and workforce. It was the capstone of the social contract—developed by congressional bipartisanship and unbiased cooperation. This tripartisan initiative strengthened the United States and its industries and enabled the country to thrive during the economic boom of the late 1940s, ‘50s, ‘60s, and into the early 1970s bringing people out of poverty and creating our robust middle class. Unfortunately, this tripartite approach to industrial policy died during the Carter administration. I was reminded by a colleague, who had worked closely in 1979 on labor law reform with George Meany, the president of the AFL-CIO, about a story of that era. Meany had been summoned to the White House for a meeting with President Carter. When he returned, he remarked that he had no problem with a businessman being the president but, he blurted out, “A small businessman!” The seeds for the inequality in this country were sown with the end of discussions about the direction of our nation’s industrial policies. Had this dialogue among the major labor, industrial, and government leaders of our country continued, what policy initiatives might have developed— especially in regard to globalization? I marvel at our elected leaders’ failure and unwillingness to recognize how this black hole of inequality will contribute to the demise of our democracy. The stagflation of the mid- and late 1970s preceded the early 1980s. Then corporate America took on new, dynamic characteristics. Up until that time, it was the Big Three automakers, a telephone company, Big Steel, and a handful of giants in every industry. Their financing came from large commercial banks and Wall Street bluebloods. The loyalty of the workers and their employers was a given. It went hand-in-hand. As for consumers, they took what they paid for in products and services. No one was the wiser.The age of the enlightened, high-quality, discountdriven consumer had not yet arrived. Then regulators began to trim the red tape and pull down barriers that protected established firms from upstarts. Tax law was changed to inspire entrepreneurial risk and new lenders emerged to seed the beginnings of the new economy. Privatization and deregulation were the law of the land. Anyone who raised objections was chastised for wearing
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blinders and not being in sync with what was commonly referred to as the new economic order. A new business ideology had been created and upheaval followed. Corporations and industries moved from the industrial corridors in the Northeast and Midwest, leaving behind a Katrina-like path of destruction and damage that devastated jobs, families, and communities— creating the Rust Belt. They left to set up shop in the South to escape unions, occupational safety and health regulations, successful employeremployee relations, higher wage rates, and comprehensive health care and retirement plan coverage. This was the first major frontal attack on the deinstitutionalization of benefit programs. The consumer began to experience price breaks, longer retail hours, fresher fare, and new products and services as companies became “leaner and meaner.” Evolving technology and the early stages of globalization and fierce international competition pushed the revolution forward, ultimately, accelerating to a breakneck, destructive pace. At the same time, the growth of institutional investors took place in both the private and public sectors. Trading activity, capital flows, sophisticated financial instruments, and the management of these assets became pervasive and sophisticated. The growth of pension assets spawned investment management firms that spun away from the banks that historically managed trust accounts. This was followed by a large support industry of asset-consulting firms, ratings agencies, research and brokerage firms, financial planners, and custodians. Portions of these large pension fund assets were invested in many transactions.These set off destructive social and economic policies under the guise of getting the best bang for the investment buck.This new culture of financial transactions led to the dismantling of the rock-solid business base. It led to a new, alienating, and unrecognizable culture in the workplace. The people charged with being the stewards of other peoples’ money, whether elected or appointed, were besieged by the need to adhere to the prudent man rule. Meanwhile, in the private sector, enabling legislation guided those stewards to embrace the new legal environment with more fiduciary responsibility as they moved through this maze of fund administration.The asset allocation of these funds began to change and the landscape of Wall Street and Main Street went through a tectonic shift.
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The era of the 1980s introduced new terminology and behavior in the corporate boardroom, in the financial markets, on the shop floor, and at the negotiation table. Leveraged buyouts, poison pills, merger arbitrage, and the like were discussed outside the concrete canyons of Wall Street. The behavior of corporate moguls, investment bankers, private equity, and leveraged buyout firms, along with the growing cadre of institutional investors, redefined a new era characterized and dominated by the financial players who referred to themselves as the masters of the universe. Many of them behaved more like the masters of destruction. Collective bargaining between management and labor developed a new nomenclature and a new world-of-work era was born defined by “concessions,” “give backs,” “contingent workers,” and “two tiers of employees.” Wages became discretionary bonuses rather than traditional wage increases, or variable pay. If no compromise could be reached, plant closings were put on the bargaining table. Labor union members feared that the company would hire replacement workers—scabs—if they struck. They feared workplace shutdowns and seeing their jobs move to more accommodating locales in the South—or to the maquiladoras on the Mexican border, to China, Indonesia, the Philippines, and elsewhere around the world.
The Need for New Employment Legislation Clearly, the employment laws enacted in the 1930s are inappropriate for the workplace of the late 20th and early 21st centuries. The threat was real and the workforce and their representatives folded under the changing dynamics of doing business in a highly competitive, globalized world. For many years, I have listened to labor union leaders stating that their work was no fun anymore. Fun is no longer the operative word in the world of work. Dramatic and contentious financial transactions on Wall Street were recited time and again in the popular literature that was published in the early 1990s. Books with ominous titles such as Den of Thieves, Barbarians at the Gate, Predators’ Ball, Liars’ Poker, and Short-Term America dominated the bestseller lists and engaged the unsuspecting American population. I say unsuspecting because these well-written and harrowing books had a common
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theme: This cast of characters were creating, fostering, and manipulating transactions to get their hooks into your pension fund money. Ordinary working people did not realize that megafinancial transactions had changed the world of finance and influenced their lives in places that would hurt and hurt dearly.The 1980s were characterized as the decade of greed. The turmoil that ensued from deindustrialization sent the traditional family life of bygone years into a tailspin and many of the boomers were right in the middle and on both sides of this epic story. Over this same period global trade and information had grown from approximately 20 percent of world gross domestic product in the 1970s to about 55 percent today. Since World War II, world economic growth has been at the highest pace ever recorded. In countries that are exportoriented, there is a reduction in poverty and a convergence per capita income at levels near those of industrial countries. In India and China, globalization has lifted the incomes of more than 1 billion people above the levels of extreme poverty. There are obvious beneficiaries—and there are obvious losers in the globalization of economies. One measurable result of this drive to globalization has been the dramatic increase in cross-border merger and acquisition activity since the mid-1990s. Merger mania gripped the business world then, when oil industry titans Exxon and Mobil came together. Several months before this merger, Amoco was acquired by British Petroleum. Citicorp merged with Travelers Group. BankAmerica joined with NationsBank to create two enormous financial services conglomerates. In the telecommunications industry, AT&T bought TCI. Ameritech was purchased by SBC Communications. Bell Atlantic Corp. merged with GTE. This wreaked havoc with corporate structures and employees were laid off by the thousands. John Bogle, the founder of the Vanguard Funds and author of The Battle for the Soul of Capitalism (2006), addressed the changes that were occurring during this period on Wall Street. He refers to this evolution in the financial world as having moved from a profession of stewardship to a profession of salesmanship. He characterizes the last two decades as a “pathological mutation of capitalism” manifested by behavior of the players. He went on to contend further that the business standards of America, its investment industry, and of its mutual funds have declined.1
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The winners, during this highly energized roller-coaster ride, have been the corporate executives, the financial intermediaries, investment bankers and brokers, and the investment managers, and mutual funds. The losers have been the great American public—the shareholders spread throughout the land—whose individual investments are commonly referred to by some of Wall Streeters as the dumber money. This was the “creative destruction,” characterized by the economist Peter Schumpeter.2 It unfolded throughout the industrial heartland. It resulted in poverty wages, dire factory conditions, evisceration of downtown shopping districts, and making the environment someone else’s problem. Our rogue-like and self-anointed and self-designed royalty in Congress are partly responsible. They developed a close conspiratorial bond with corporate and Wall Street lobbyists and together they began to reverse the protective legislation and safety nets created during and after the Depression era. The new ideology has been characterized by Jared Bernstein of the Economic Policy Institute as the age of “YOYO—you’re on your own.”3 The social safety nets became unraveled with millions of people falling through to the unknowns that awaited them. The new dictum was embraced by probusiness, free-market Republicans and Democrats who caved and signed on. Both parties recognized that democracy, in its most warped and twisted interpretation, was a commodity and they decided that they could sell their vote at a premium—the common good be damned. They promoted their perverted actions without disgrace and no compunction as being good for the well-being of society. Most unsuspecting souls were spoon-fed by their leaders and in many instances ate it up. American corporations are reeling from globalization, technological change, and hypercompetition that have rocked their financial foundations for the last two decades. The looming retirement of the baby boomers will rock their world even more. What happens to those who leave the workforce is the hard-nosed reality that living on a fixed income is a challenge in a world where prices for many things have skyrocketed although inflation is comparatively low. I spoke to a 70-year-old friend of mine who is financially well off, but who told me a story about a gentleman that he met recently in the
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local drugstore of the neighborhood where he lives. This retired gentleman, a former building tradesman, had $300,000 in a fund when he retired a few years ago and that money was now down to $120,000 due to market conditions. Naturally, he despaired over what he would do when his money ran out. With such stories becoming part of everyday conversation, it will be no surprise that as we move closer to the 2008 presidential campaign, retirement security will have more clout as an issue. It will grab the attention of the handful of people who declare their candidacy. Workers today, whether they are in the private or public sector, are under siege.They will demand more answers than ever before from politicians about their plans on how to deal with the erosion of pension coverage. Senator Chuck Hagel, Republican of Nebraska, held a press conference at which he said the country is “experiencing a political reorientation, a redefining and moving forward toward a new political center of gravity” and of problems that are “overtaking the ideological debates of the last three decades.” He went on to state that “this movement is bigger than both parties.”4 Pension policy is only one very important aspect of the disenfranchisement that many citizens are experiencing today. Some have referred to what is commonly considered as voter fatigue or voter flight. The strength of our retirement system has been defined benefit plans. These are the traditional pensions, paid out to an employee in the form of a monthly annuity benefit check with a spousal option that provides a benefit upon the demise of the primary participant. The value is actuarially determined by a combination of an employee’s salary and length of service at the workplace. Private sector defined benefit pensions usually are financed entirely by the employer and are not portable from job to job. Defined contribution plans, on the other hand, are financed by the worker and/or the employer. The worker typically controls how contributions are invested, giving him or her more control over the funds but also exposes their assets to more risk. These benefits can be rolled over upon leaving a job. The most common plan is a 401(k) in the private sector and a 457 plan in the public sector. As we extend our view into the near future, it is a fairly safe assumption that defined benefit plans in the private sector (corporate plans) have a projected window of survival of no more than three to five years.
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This is a result of long-term, smart planning on the part of business to promote the agenda that it envisioned as the world began to change and the country went into the raging seas of globalization like a ship without a rudder, which I define as a substantive national industrial policy. The statistics show that the erosion of defined benefit pension plans has been going on for decades for a multitude of reasons. For example, the number employees with defined benefit plans decreased by more than 50 percent between 1975 and 2004.5 The data shows that employers can walk away from benefits for millions of workers. Many corporate pension funds went into default when the sponsoring companies were pressed into restructuring their businesses as a result of fierce competition and globalization. Some corporations that anticipated impending economic pressure changed their defined benefit plans to cash balance plans in order to circumvent having to pay the rising costs of meeting their retirement obligations. Cash balance plans combine elements of defined benefit and defined contribution plans. An employer contributes a fixed amount annually, based on an employee’s pay, and guarantees that the account will grow by a certain percentage annually. At retirement, workers can take the accrued amount either in a lump sum or an annuity. Cash balance plans are portable from job to job. The costs of maintaining such plans climbed sharply in the past several years because companies have been forced to put more money into pension funds to compensate for lower-than-anticipated returns on investments stemming from low interest rates and declines in stock market values.Yet, it wasn’t until recently that some people began to see this frightening sea change because they had been blinded by the short-term vision and mentality so many Americans have. They naively believe that they don’t have to worry about tomorrow because someone will be there to take care of them. Today anyone who has a guaranteed retirement plan provided by an employer is definitely in the lucky minority. The public sector has mimicked the private sector. As a result, I believe that, in the public sector, the window for the survival of defined benefit plans is five to eight years. In short order, there will be very little dignity in retirement for a good many Americans. That is a dramatic statement! Yet some people are reluctant to believe it. It is depressing to think of a world where the golden years are
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consumed with anxiety over their finances. Think about the long-term macroeconomic consequences on the U.S. economy as a result of a failed retirement system. Retirees, historically, have been great consumers. What happens when they can no longer spend and be part of our consumer-driven economy? Over the next 18 years, 77 million will be out of the workforce. For the sake of this country, I hope that their spending ability will continue to sustain the nation’s economic well-being. As this generation begins to enroll for Medicare benefits and draw Social Security, it will need to be funded. The federal budget will have to make way for this incredible draw on the nation’s financial resources.The fundamental fiscal issue to be decided by policymakers will be difficult choices among budget priorities. In a global sense, making these choices will be difficult from the set-asides for the AIDS epidemic, traditional foreign aid, corporate welfare, our nation’s aging infrastructure, man-made or natural disasters, and even military aid and appropriations. The challenges to our nation’s leadership will be overwhelming. New priorities have to be established that will not place a severe burden on our domestic economy as well as potentially spilling-over to the global economy. Just as we have witnessed a polarization of the American labor market, this same process will be a dramatically new dynamic for the millions of retiring workers ill-equipped economically to enjoy their years in retirement. It raises the question that is commonly heard today: Will you be able to retire? Write off another tenet of the American Dream and welcome to a two-class society. Our society is comprised of three types of people: those who make things happen, those who watch things happen, and those who say, “What the hell happened?” I know a fourth kind of person who resides, or did, in our nation’s capital. That is, the What-on-Earth-was-HeThinking caucus—Mark Foley (emails to congressional pages), Wilbur Mills (tidal basin), Gary Hart (monkey business), Bob Packwood (Senate elevators), Bill Clinton (Oval Office), and George W. Bush ($20 million set aside in the 2006 budget to celebrate the victory in Iraq and Afghanistan and now moved to the 2007 budget).
Where do you fit? Robert Maynard Hutchins, an educator, wrote, “The death of democracy is not likely to be an assassination from ambush. It will be slow
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extinction from apathy, indifference, and undernourishment.” This is the state of affairs in this country regarding pension policy—apathy, indifference, and undernourishment by corporate and political elites who influence and control public policy. This state of affairs did not result from an ambush but, rather, from an evolutionary process that has been in the making for 40 years and now has followed us into the 21st century with a vengeance. Experience shows that policymakers are perplexed or lack the will to deal with this issue head-on in a creative way. They are burdened with too many obligations to the folks who brought us to this place. Economic growth is critical to all societies, but sustainable economic growth with equity for all is imperative. Inequality should not be tolerated especially in an era of economic growth with the proportion and magnitude that this country has experienced.Yet we see it, for example, in the huge gap between outrageous CEO compensation and workers’ stagnant wages. We see it in the staggering differences between the erosion of pensions for working people and the explosion in gratuitous pension benefits for retiring or soon-tobe retired corporate executives. It was reported recently that, by agreeing to stay at the helm of Countrywide Financial Corporation, the U.S.’s largest mortgage lender, Chief Executive Angelo Mozilo was to receive an unusual sweetener: as much as $10 million to compensate him for the pension income he would have earned in retirement over the next three years. While at the same time, in the same week, the company announced plans to shed about 2,500 jobs, or 4.5 percent of its total workforce.6 This is the ultimate in corporate moxie—a CEO demanding that in addition to being paid for his service, he gets reimbursed for the retirement income that he would have received if he were to retire! How do the shareholders feel about giving this money away to the CEO while at the same time watching 2,500 disappointed people pushed out the door? There should have been an uproar. There wasn’t. Employees and retirees have had a wake-up call. It’s time to take care of themselves. Employers will no longer provide defined benefit plans. Nor will they provide health care coverage for current employees. Nor will they continue to provide long-term retiree health care coverage for retirees.The new reality is that employees’ personal savings, defined contribution plans, and health savings accounts will have to finance a major
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portion of retirees’ expenses later in life. The decline of old certainties has created disarray in a world already overburdened with fears and frictions. These include the fall and rise of interest rates, high energy costs, rising and cooling stock and housing markets, deep and pervasive economic disparity, religious chauvinism, prejudicial cultural clashes, political repression, ethnic bigotry, terrorism fears, and the creeping erosion of democracy. Personal optimism in the United States has hit a rough patch. Even during the height of the Cold War, Americans were buoyed by a post– Word War II economic boom that continued into the 1970s and circumvented any real concerns about the threat to their personal wellbeing. Perhaps their concerns were also masked by the more recent financial boom of the late 1990s. It is clear today that the widening gap between how rich and poor judge their personal progress correlates with widening income inequality and declining mobility.
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Chapter 9
How Did We Get Where We Are? History is not a guide for unprecedented events. —Thorton “Ti” Parker, author
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n the world of defined benefit plans, individuals who are elected or appointed to the board of trustees have a special responsibility. They become the stewards of capital for other people’s money—namely, the workers in the private and public sectors who are participants in these types of retirement programs. Individual trustees take on a serious fiduciary responsibility as they go about fulfilling their roles.The asset allocation responsibility of retirement plan trustees is the most critical in the administration and investment of these funds. Many trustees will tell you that the single most important decision to earn positive returns is asset allocation versus 103
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investment manager selection. The global and domestic financial and economic landscapes mandate close observation by trustees in order to assess how current events worldwide impact their asset allocation decisions. In his annual letter to Berkshire Hathaway shareholders, Chairman Warren Buffett wrote that by going beyond standard investment techniques, certain “perils . . . lurk in investment strategies [that] cannot be spotted by use of the models commonly employed today by financial institutions.”1 Asset allocation is both an art and a science. The implementation and aggregation of a mix of investment management strategies is complex. It is not an easy exercise. By and large, trustees of defined benefit pension plans rely upon the expertise of investment management consultants who conduct searches for prospective investment management firms that hail from the financial community. That process is time consuming and arduous and requires a great deal of study and attention on the part of the trustees. Once hired, it is incumbent upon the boards of trustees to oversee the performance of the managers and to measure their performance against appropriate benchmarks. If the managers do not perform well then the process starts all over again. There are a number of factors that have contributed to this current state of affairs outlined in the following sections.
The Paradigm Shift to a Conservative New Deal Historically, some strong-willed and myopic self-interested corporate chieftains with the support of like-minded political leaders made a decision over 40 years ago that, in the post-New Deal era, things would have to change and the seeds were sown to dismantle the safety-net society where government played a prominent role. They poured millions of dollars into the creation of conservative think tanks. They engaged likethinking academicians who crafted white papers and wrote op-ed pieces and books that were dedicated to redefining society in a multitude of ways. With respect to employee benefit programs, they engaged in campaigns, lobbying, and political fundraising to get through to sympathetic
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public policymakers in order to set the stage to eliminate the social safety net contract made between the government and the people and between corporations and their workers. What the “Captains of Industry” apparently did not consider was that there are a number of stakeholders in most businesses. There are the owners/shareholders, the directors and executive managers, the customers and, most importantly, the employees who do the grunt work to create the products or deliver the services. It is not exclusively about the manipulation of the companies’ stock prices and the CEOs’ inflated salaries. Poet and Kentucky farmer Wendell Berry wrote, “The corporate mind at work overthrows all the virtues of the personal mind. . . . The corporate mind knows no affection, no desire that is not greedy, no local or personal loyalty, no sympathy or reverence or gratitude, no temperance or thrift or self-restraint.”2 The rise of a conservative ideology in order to deal with a plan to reverse the programs of the New Deal created a broad chasm that began to take on a dynamic role in the redefinition of corporate and political responsibility. On the rise of the conservative, Arthur Schlesinger Jr., in 1955, wrote: No intellectual phenomenon has been more surprising in recent years than the revival in the United States of conservatism as a respectable social philosophy. For decades, liberalism seemed to have everything its way, but fashionable intellectual circles now dismiss liberalism as naïve, ritualistic, sentimental, shallow.With a whoop and a roar, a number of conservative prophets have materialized out of the wilderness, exhuming conservatism, revisiting it, revitalizing it, preaching it. . . .3 In the world that was created by Margaret Thatcher and Ronald Reagan in the period from 1979 until 2004, the right won the battle of ideas in the western world. Conservatives triumphed because they got two big issues of this era right: they were in favor of free markets and against communism. Now that those two world leaders are gone from the scene, conservatives are in disarray because they are on the wrong side of the two dominating issues in contemporary western politics: global
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warming and the Iraq war. The notion that the western formula for freedom and prosperity are exportable has proven to be fallacious.
The Changing Nature of Work The evolutionary fragmentation of corporate America from a manufacturing-based economy to a service-oriented one was accomplished with little thought given to national industrial policy, and millions of American workers.They face a tremendous number of economic and financial risks. In the corporate milieu, on the other hand, we witness more and more financial deals and transactions. In 2006 alone, the record was set for deal making—some $ 3.8 trillion worth worldwide. The primary beneficiaries of these megadeals have been the investment bankers and the CEOs. For those CEOs who got lost in the shuffle, they get beautifully crafted perks on the way out the door. Little if anything from the mountains of money in these deals trickle down to the employees. Meanwhile, the move to eradicate the so-called legacy costs of health care and pensions is in play. Many employees will be lucky if they hold onto their jobs after the back-slapping and chest-pounding of the Wall Street dealmakers and their celebratory cigar smoke and cognacs disappear.
The Portability of the Workforce With the dramatically rapid changes taking place in the workplace and the decline of the manufacturing sector and the increase of imports, millions of workers have been displaced. That workers must change jobs frequently and carry their pensions along with their lunch pails to the next new job was the new mantra of lawmakers, corporate leaders, economists, and the think tank officials. For those workers in the unionized sector of the economy, their numbers and strength dwindled. The once-powerful organized labor movement lost its effectiveness in organizing new workers and fell behind in the representation of existing members at the collective bargaining table. Compromises dominated the discussions, and concessions and givebacks are now a critical part of the package.The creation of two tiers
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or more of employees has also become part of the labor-management jargon. Unions were forced to merge to gain economies of scale. As one of the last vestiges for significant social change, their power is waning. To keep some semblance of the historical pension policy, the 401(k) defined contribution plan was created to be portable and to remove the risk for the employer. That plan along with all of the other elements of a reconfigured workplace and workforce changed forever the concept of work as we once knew it.The old notions of loyalty up and down the ladder in the workplace disappeared as employers downsized, outsourced, and restructured business plans and workers anxiously moved from one employer to the next in their quest for financial security and for a better slice of the American pie. However, the result was that the thought of trust as a major dynamic in the workplace on the part of employers eroded and, today, no longer exists.
Technology The introduction and sophisticated development of technology has dissolved the workplace’s boundaries of place and time. That along with the fast-paced digitization and the disaggregating of old business models are tearing down past practices and spilling millions of workers out of their jobs and into unemployment or into lower-skilled and lowerpaying jobs. This will continue unabated as each new generation of computerization and information technology is introduced and takes hold— leveling the workers who lack the skills and education to roll with the punches and enhance their opportunities in this fast-paced world.
The Wal-Mart Model Wal-Mart has been responsible for wringing out inefficiencies in nearly every consumer market in America. It has also changed the economic and social fabric of small businesses and their local communities throughout the nation. This company has redefined retail business practices worldwide. Shopper volume at its big box stores continues to soar to some 200 million customers serviced by approximately 1.3 million
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employees as the consumer searches for the best quality in goods at the lowest prices. As an aside, it is amazing to discover that twice as many Americans shop at Wal-Mart over the course of a year than had voted in the presidential election of 2004.
Pricing Pressure This has been initiated by the consumers who are relentless in their search for the best in quality of goods and services for the lowest price. This is the single biggest dynamic effecting corporate behavior worldwide and Wal-Mart, as mentioned above, is the master of this universe with many others following suit.
Voter Apathy The disengagement of the American voter from the political process has contributed to their unwillingness to put our elected officials’ feet to the fire. Thus, lawmakers are not compelled to address the burning issues of the day. The heart and soul of America is being fought over by two rival political parties. Neither party can expect to secure a majority of the voters any longer. Leaders do not stand for anything. They merely articulate platitudes and keep their fingers crossed that no one will notice. They fear that someone will jump into the race with new and creative ideas and shame them before their constituents. The fact is, consumerism has overwhelmed democracy and the people are too busy buying things than worrying about how we got where we are as a nation. Thus, the people have become vulnerable to the onslaught of the new world order—a world of floating exchange rates, open capital markets, fierce international competition, petrodollar investors, Asian central banks, hedge funds, and private equity funds layered on top of the absence of a cohesive national industrial policy program.
The Policymakers As a result of the lethargy of the American voter, policymakers have been asleep at the wheel and contributing to the demise of American
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workers’well-being and that of their families. Democrats have lost their vision as the party of the people. Republicans no longer value loyalty, hierarchy, deference above independence, and a private conscience as they once did. Instead, under the influence of powerful lobbying groups, both parties have pushed their corporate clients’ agendas. I recently participated in a tour of the Government Printing Office in the winter of 2007. There the Federal Register and the Congressional Record are produced. During the tour, it was pointed out that as a testament to the work ethic of our senators and congressmen in the 2005 109th Congressional Session, some 24,000 pages of the Congressional Record were produced, which, in turn, reflected their activities. It was also pointed out that in previous sessions of Congress, on average, 36,000 pages were produced. When the total number of the pages of the publication diminishes, there is a budgetary reaction that triggers the Congress to call for lowering the appropriation money for the GPO and in some corners it even initiates a call for layoffs because productivity has fallen. So we have the unproductive members of Congress calling for the GPO management to unload employees and downsize the GPO. What is wrong with this picture? Last year, the House and the Senate worked an average of about two days a week for their annual salary of $165,000.4 Is it any wonder that a mid-December 2006 Gallup poll showed that 74 percent of Americans disapproved of the how the Congress was fulfilling its responsibilities.5 Congress had better wake up and endeavor to do better and reverse those negative poll numbers and win back the support and trust of the American people. There is definitely a need for real and necessary reform.
Globalization Perhaps President Clinton was naively bedazzled by the notion that globalization would be powerful enough to bring an end to world conflict. Of course, the world would be a better place if trade crossed more borders instead of armies. What has accounted for the incredible growth of globalization? There are three major explanations. The first views globalization as a cyclical phenomenon brought about by a confluence
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of economic and political events and conditions. The second believes it is a political phenomenon driven by will and power. The third offers a structural explanation, seeing globalization as determined by the revolution in technology. Each one of these has contributed to the growth of globalization but let’s look at each one more thoroughly. 1. Cyclical Factors. Those who maintain that globalization is cyclical point to the 1990s as an unusual decade. The economy boomed, which led to increased economic activity and increased flows of trade and global investment. In this environment, there was a will that evolved from a group of world leaders that borders that contained obstacles to global commerce should be eliminated. As a result of collective cooperation concerns about the impact of trade and investment were minimized. The end of the Cold War also served as a stimulus to globalization, when millions of people who were removed from the communists’ bondage wanted to participate in the game of capitalism. Communication—the Internet and the media—played a major role in educating and enlightening people worldwide and contributed to the notion that the world was getting smaller with each passing day. This led to the opening of new markets, fearful security concerns declined, international travel increased and barriers to trade and investment were lowered. 2. Political Forces. In addition to the economic forces, political factors drove globalization forward.The fall of the Berlin Wall and unraveling of the Soviet Union as it began its transition from communism coincided with the internationalization of the Reagan-Thatcher revolution and their triumphs in aggressively promoting neoliberalism worldwide. The two leaders were in sync and on a mission to change the world by reinforcing capitalism over the decaying carcass of communism and state-controlled economies. Deregulation, privatization of industries and companies and opening of borders were widely accepted as being necessary for economic growth—and these contributed much to encourage the spread of globalization. Another crucial part of the prescription was the reduction or removal of barriers to trade and investment that lead to more formalized trade agreements between nations. In effect, these policies reflected
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the beliefs, influence and interests of the dominant economic powers and their leaders. 3. Structural Changes. The third explanation of globalization emphasizes the importance of structural changes that resulted from the revolution in transport and communication worldwide during the late 1980s and 1990s. The growth of shipping lane usage, containerization and port development and revitalization, telecommunications, including wireless telephony, and the emergence of the commercial Internet brought the global economy together. Technology facilitated globalization which yielded enabling cost advantages, outsourcing and the off-shoring of services, which increased the opportunity cost of autonomy and independence. The cadre of international bureaucrats ensconced in the bowels of the International Monetary Fund, the World Bank, and at the World Trade Organization who crunched numbers, made loans for economic development and wrestled over trade quotas played an instrumental role behind the scenes fostering the institutionalization of globalization. Thus, the borderless, fluid global economy has become increasingly integrated through the free-flow of trade, capital and people with the potential of compromises by “market failures” such as lack of information or transparency, incentives and conflicts of global financial players and moral hazard resulting in feverish competition. Indeed, corporations are challenged by globalization that forces decisions too fast and too furious and for those who cannot rapidly respond to these challenges, unfortunately, they are merely left behind. Competition according to the economist Paul Krugman, is “a dangerous obsession among U.S. policymakers.”6 Adam Posen, in the Financial Times, wrote that “in every decade, in all advanced economies, a focus on export competitiveness tends to erode living standards and distracts policymakers from a more beneficial emphasis on productivity.”7 I think that Krugman, in his role as a liberal with a conscience, is deeply concerned about those who become sidetracked by global competition and who can receive no support from policy makers who merely accept it as the law of the jungle with no apparent concern or solution to protect the disenfranchised. This is a dilemma that Krugman and others ruminate over.
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Globalization, which has been vilified and praised by opposing forces, is the process by which markets are opened worldwide for countless goods and services to cross borders. There are winners and losers in the global economy and the proponents of globalization are disposed to foster and promote their ambition to lift millions out of poverty in the developing nations of the world. Although, as I mentioned, it is much maligned and cursed, globalization is the new reality in its ever-changing iterations and will remain a hard fact of life. It is all part of what has been called turbocapitalism. There is absolutely no way that you can put that genie back into the bottle. When Ben Bernanke became the new chairman of the Federal Reserve System, the media emphasized the following array of challenges that he faced: rebuilding private sector savings, the need to be a true internationalist to face the daunting issues of globalization, the need for him to walk a delicate balance between domestic imperatives and the global economy, and to understand these events as the natural outgrowth of history. It is undeniably true that many of the people in developing nations of the world are beneficiaries of a growing, complex market system but a price is being paid by many who are on the low end of the economic spectrum in some nations. The reality is that the Cold War is over—but the horrendous events of 9/11 created additional global and domestic stress points that led to wars in Afghanistan and Iraq. Moreover, protectionist pressures are back. Western economies and new emerging economies such as India, China, and Brazil have been unwilling to compromise on trade issues. This was one of the major factors that all but killed the Doha round and oil price increases have led to a reemergence of petro-politics. So the consensus is that anxiety, uncertainty, and turmoil continue to set the stage. How we respond to this state of affairs will dictate the path for globalization. In the United States since 2001, the pay of the typical worker has been stagnant, with real wages growing less than half as fast as productivity. However, in the executive suite, if you look back 20 years, the total pay of the typical American executive at the top has increased roughly 40 times the average—the level for four decades—to 510 times the average now. A great deal of economic fallout is occurring in the process. The mix of technology and economic integration transforming the world has created unparalleled prosperity. Hundreds of millions of people
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in developing countries have won the chance to escape squalor and poverty. The problem is that workers’ share of the gross domestic product has fallen to historic lows, while profits are flying off the charts and corporate leaders and their shareholders are the primary recipients of globalization’s gains. The reaction by those who feel vulnerable is to cry for protectionism and, since 2005, some 27 pieces of anti-China legislation has been introduced in Congress by some sympathetic members alone. Globalization has entered the political world from the bottom as workers who are not gaining ground step up to express their fears, frustrations, and anxiety. Just look at Latin America—Venezuela, Bolivia, Ecuador, Nicaragua, Mexico, Peru—where populism has succeeded or caused a great deal of fractiousness over the Washington consensus which has espoused free-markets and open trade without yielding rewards to those workers at the bottom. Marta Lagos, the Executive Director of Latinobarometro, a polling firm headquartered in Santiago, Chile, stated, after conducting a regional survey on democracy, “A significant part of the population thinks that the conventional political system does not really hear them.”8 Here in the United States, we know that people feel this way and we could very well begin to see first political initiatives that have developed in Latin America. This is a phenomenon that will be a challenge for the United States and other nations to face for decades to come.
Unprecedented Economic Growth and the Resultant Productivity Gains Productivity growth has been fostered by the revolution in information technology, new business models, and the rationalization of production through the creation of global supply chains, which have played a critical role in this expansion. This growth by and large, unfortunately, has floated exclusively to the top of the income spectrum. It has not been passed along to the middle or the bottom. As a result, it has increased inequality worldwide. Since the 1990s, these productivity gains, the basic wellspring of our nation’s living standards, and the distribution thereof, have contributed to the gap between the workers’ share and the corporate share of those gains—all thanks to the fast-paced, 24/7 world of work.
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Enactment of Enabling Free-Trade Agreements They have been promoted by lobbyists, enacted by Congress, approved and promoted by presidents without the all important and appropriate human rights, labor rights, and child labor provisions and protections thus creating a cesspool in the global workplace for many who slave every day to eke out a living. The result is an environment ripe for fractiousness between the free traders and the protectionists. This unfolding debacle could tear apart our society even more dramatically than it has thus far today.
Robust Financial Market Gains of the Late 1990s The vigorous markets that performed so well from the 1980s and reached their peak in the late 1990s lulled most investors—individuals and institutions—to sleep. During this time, pension fund boards of trustees set higher actuarial assumption adjustments and raised benefits in complicity with their professional consultants—without raising contributions that were unrealistic and unsustainable in flat or down-market periods. This practice, was referred to as actuarial heroin. These consultants also, in response to the skyrocketing stock market, adopted and applied skewed asset allocation decisions with their desire to capture these enhanced returns. We learned that investing and gaining continuous and unabated high returns is not a sure thing. As passionately as we believe in markets, we are now more mindful of their deficiencies—even their dangers or as characterized by Alan Greenspan’s “irrational exuberance” statement. The implosion of the dot.com revolution wreaking havoc on equity markets and the more recent bursting bubble in the residential real estate market are clear examples of the potential jeopardy in financial markets. Stewards of other people’s money must remain ever vigilant.
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The Saga of Declining, Ruptured, and Volatile Financial Markets In the aftermath of the market meltdown in 2000, a new awareness of risk began to creep into the pension fund boardroom. It also became even more prevalent over the years in the post-9/11 world. Enterprise risk management, the creation of substantive risk measurement tools, and the establishment of risk budgets for pension funds became common business vernacular. Risk was an item that had to be addressed. In addition, asset allocation began to take on a new meaning as pension fund boards began to play catch up in an effort to recapture their losses from deteriorating markets. Trustees, intrigued with the notion of unprecedented gains, became engaged with the guidance of their investment management consultants in placing more esoteric and possibly riskier asset classes into portfolios to staunch the pension fund liability crisis. Whether trustees grasp the nuances of these alpha-producing asset classes is anybody’s guess. These alternative strategies have included real estate funds, private equity funds, hedge funds and infrastructure funds, and other types of investments that are noncorrelated to the traditional asset classes of U.S. stocks and bonds. The due diligence process and learning curves of individual trustees, administrators, and executive directors of funds will have to be elevated dramatically as they continue the search for new ways to increase performance and beat down the unfunded liability devils.
Demographics From 2000 to 2005, we have already seen a head-on collision coming with our aging population. Coming with this tidal wave is the historic pension and retiree health care financial obligations that have amassed both in the public and private sectors. This fact will have to weigh in heavily on any proposed reforms over the next several years. In the private sector, we have also seen the freezing or discontinuation of corporate defined pension plans and the conversion to cash balance and defined contribution plans. The onus is now on the individual
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to invest his or her money long-term and the benefits to be accrued, therefore, will be dramatically lower than the traditional defined benefit plans. The Pension Benefit Guaranty Corporation (PBGC), the quasigovernmental insurance agency created by ERISA, has absorbed the assets as a result of the termination of corporate plans, or their default, leaving it with a brutal liability and paying benefits to pensioners at the rate of 45 cents on the dollar. State, county, and municipal fiscal budget deficits or public pension fund short-falls with attending pressure to discontinue defined benefit plans for public sector workers is now part of the national debate. This issue will dominate political battles in the years ahead. A common term that has begun to surface—pension envy—which describes how private sector workers feel that public sector health and retirement benefits are protected when they are not. In the multiemployer, labor-management trust fund arena, the elimination of defined benefit plan contributions and health care benefit obligations is on the table during the collective bargaining process. “You’re on your own,” to repeat Jared Bernstein, in the new ownership society, which has more of the characteristics of a sharecropper society or debt-peonage society. The health crisis, and make no mistake that health care and pensions are joined at the hip, is a result of continuing rapidly escalating costs, a huge and growing number of working Americans without any coverage or with very inadequate coverage, and a concomitant epidemic with substandard, dangerous, and costly delivery methods. The system must be transformed, for no matter how grand a person’s monthly pension benefit is, the aging process and the inevitable ailing process will contribute to deteriorating health and the attending rising costs, and they will erode those pension benefit payments. To add insult to injury, most U.S. employers plan to further scale back health benefits offered to retirees as companies struggle with medical inflation. Ninety-five percent of primarily Fortune 500 companies anticipate further restricting retiree health plans over the next five years.9 In a survey of 163 companies, consultant Watson Wyatt found that 14 percent plan to stop providing coverage entirely.10 According to the Kaiser Family Foundation, roughly a third of U.S. employers offered current workers retiree coverage in 2005, down from about two-thirds in 1988.11
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A Standard & Poor’s study showed that retiree benefit plans at S&P 500 companies, excluding pensions, were only 22 percent funded.12 The picture is not bright. When will we begin to give serious thought to the long-term economic implications of a failed retirement system in conjunction with the constant erosion of our nation’s health care system?
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Chapter 10
A Call to Action As life is action and passion, it is required of a man that he should share the passion and action of his time at peril of being judged not to have lived. Oliver Wendell Holmes
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ill the slippery slope of deteriorating pension and health care trends reverse? Not unless each one of us becomes more of an activist. As the late economist John Kenneth Galbraith said, “If you can’t comfort the afflicted, then afflict the comfortable.”1 Each of us who cares about the world to come, about our children, must agitate for change. By reading this book, you will, I hope, have a better understanding of how your benefit programs have been negatively affected by social, political, and economic forces over the last 40 years. Many of those forces are, I recognize, out of your control. Still you should recognize the need
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to play a more significant role in your retirement and health care planning. It is in your own best interest; but it is also your civic responsibility to make your elected officials deal with these issues. For those who have been elected or appointed as trustees of pension and health care plans, they are the stewards of other people’s money and, therefore, they have an awesome responsibility. They must dance to a much different drummer and educate themselves to do a better job in this ever-changing world of pension and health care administration and investments. Pension fund trustees are charged with protecting and securing the future economic well-being of America’s pensioners and, collectively, they have become the crucial drivers in the global financial markets. In some instances, in the private-equity industry, for example, they are seeding the cycle of takeovers, restructurings, and selloffs that define that industry. Some would argue that this is part of the entrepreneurial spirit leading to the creation of new businesses and more job creation. I would argue that if we analyzed each of these deals, we would discover that pension dollars have contributed to the erosion of industries, jobs, and benefit programs—the so-called legacy costs. For this reason, we have skewed our country’s long-term economic instability? If trustees and their contracted professionals—actuaries, investment managers and investment management consultants—are supposed to be the best and the brightest, why do so many funds today have unfunded liabilities? Why do we read almost daily in our nation’s press about the shortfalls in our public pension and long-term retiree health care benefit programs? Why are so many private sector funds defaulting, yet the corporations who sponsored them experience robust profits? To regain these lost assets, pension boards play catch-up.Will we discover in the near future that the esoteric products that are being offered in the financial market today—which many funds clamor for in their quest for more robust investment returns—will be the undoing of our retirement funds? Will we lose financial stability because of some failure in oversight or some unknown crisis in global financial markets? Will there be another hedge fund debacle like the Long Term Capital Management meltdown of the late 1990s, which had a debilitating effect on high-net-worth individuals and potentially on the banking community? It wasn’t until the former president of the Federal Reserve
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Bank of New York, William McDonough, with the support of then Chairman Alan Greenspan of the Federal Reserve Bank beseeched Wall Street firms to step in and shore up the banking institutions with financial aid. This stemmed a potentially more serious banking crisis then. In the future, will we be able to shore up the pension industry funds should there be an implosion by Wall Street’s greedy indiscretions—or worse? Is it possible that our devotion to the gods of Wall Street and their financial product solutions to asset allocation be masked in such a way as to blind the stewards of capital? Why are politicians at state and local levels of government so willing to improve upon benefit schedules without providing the necessary contributions to public sector pension plans to fund those increases? Is it because their political coffers are filled by those institutions that represent the workers who benefit from the increases? Why are corporations allowed to freeze their defined benefit plans and roll them over to cash balance plans when studies show that, in doing so, CEO compensation rises shortly thereafter? Why aren’t more trustees taking an informed, proactive position on their boards with respect to pursuing shareholder derivative actions and instituting securities litigation on behalf of their beneficiaries’ funds? Why are they hesitant to initiate these claims? If a fiduciary embezzled millions from those funds, the perpetrator would be pursued and apprehended. Why not recapture assets that vaporized in lost value due to corporate misconduct? Monies lost by fraud or other types of corporate chicanery must be recaptured. Is it time for trustees to initiate litigation against signatory employers to contribute the necessary assets to negate and turnaround unfunded pension liabilities? Why do some boards of trustees still utilize the services of brokeroriented consultants who are driven by soft dollar commissions that are easily masked and thus the cost of their portfolio transactions, which can be quite substantial, are unknown to those trustees? Why are consultants still allowed to play the pay-to-play game with the apparent conflicts of interest? Perhaps it is the fact that many trustees are ill-prepared to perform their roles as financially sophisticated stewards of these pension assets and are unaware, unwilling or reluctant to admit it. Is it that the wizards of Wall Street feel compelled to expound like rocket scientists by design
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and in order to confuse their audience? The audience, namely the board of trustees, willingly pays the investment firms’ exorbitant management fees. Yet those money managers do not always have the capabilities to match or beat the appropriate indices. Some of the statistics show that between 70 and 80 percent of money managers do not beat the indices. Is there something to be gained by this obfuscation? In early 2006, a report was released by a group of Oxford University academician, entitled “Consistency of Decision-Making: The Effect of Education, Professional Qualifications, and Task Specific Training on the Probability Judgments of Pension Fund Trustee Decision-Making.”2 The study concluded that the average pension fund trustee in the United Kingdom lacks the education and qualifications to be an informed consumer of advice and decision making. I have worked closely with thousands of trustees in the United States over my career in the trust fund arena, both in the administration and investment of these assets. I would have to agree that the same conditions observed in this Oxford University study prevail to some extent in this country. It is critical that trustees devote more energy to their investment learning curves in order to more effectively fulfill their fiduciary responsibilities. So what are our options? Ed Koch, former mayor of New York City, used to say during political campaigns, “If you agree with 7 of the 10 items that I am proposing, then you should vote for me.” Then he added, “If you agree with all 10, then you should have your head examined.” For years late-night talk show host David Letterman has recited his hilarious and poignant Top 10 Lists. Here is Mackell’s Top 12 List. These are suggested activities or action statements that we should collectively do in an effort to address the deinstitutionalization of the major shift of risk of our benefit programs from organizations on to the shoulders of the individual. I am not asking you to agree with all that I have to recommend. But if you agree with the general theme—that things are not right with our retirement and health care systems—then it is critical for you to take some action. The real voice of the American people is the collective voice that protests freely. This is the greatness of our country. The protest is what keeps hope alive. 1. We should lobby hard for a new cabinet position in the next administration devoted exclusively to long-term demographics and their
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societal and economic implications. This was a missed opportunity in the Clinton administration well over a decade ago. The failure to foresee the implications of the impending retirement of the baby boomer generation and the profound effects that this would have on our society was a major oversight. Our aging population will have an incredible impact on retirement security, health care costs and delivery, the world of work and leisure, community and health care infrastructure, financial and real estate markets, and consumer psychology, behavior, and products to name just a few of the areas. Another aspect of demographics is the volatile issue of the growing immigrant population and its influence on our society. If our leaders cannot come up with a cohesive policy on this issue, perhaps that should fall under the domain of the Department of Demography. And, lest we forget, our kids, the millions of them in Generations X and M, hard-pressed to save for their retirement with all of the other financial obligations hurled upon them. The boomers, the immigrant community, and the X and M Generations would be well served within a department that is devoted to and focused on the issues surrounding their lives and society in general over the next two decades. 2. Trustees of benefit funds are the stewards of other people’s money. They must ratchet up their education in this volatile and complex world in order to know what kinds of reports and guidance they will need, the right questions to ask to fulfill their responsibilities and, hopefully, preclude any dramatic implosions within their retirement systems. The well-being of the plan participants’ future benefits programs is in their hands. Strong self-imposed educational programs have to become the norm. The formal creation of a self-evaluation methodology to measure trustees’ accomplishments may be the next order of business. Just as corporate directors are performing self-evaluation screening, perhaps we should introduce the assessment of trustees’ capabilities and accomplishments into the fund boardroom. 3. Trustees must also increase their shareholder activism. One part of the fragmentation of the American corporation is the campaign to do away with defined benefit plans in the private and public sector as well as neuter the board of trustees’ influence on corporate behavior. Institutional investors will then no longer be able to stick their
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collective nose under corporate director’s tents. More proactive involvement is imperative while institutional investors still have the ability to vote their shares while defined benefit plans still exist. Dr. Martin Luther King Jr. said, “When you impact the rich man’s ability to make money, anything becomes negotiable.” One day, as if by wizardry, that right will be taken away from institutional investors as more and more defined benefit plans are replaced by defined contribution plans and individuals, not institutions, will determine their own investment policies. It is a pretty safe bet that it will be extremely difficult to get the interest and collective activity of millions of people and motivate them to vote their shares and speak up for good corporate governance practices. 4. Challenge fund professionals. Jar them into reality and insist that they become more creative and make those relationships more interactive and productive. Investment managers must deliver their reports in a form that trustees can understand because, at the end of the day, the trustees are exposed and vulnerable to the potential failures of their fiduciary responsibilities. At the same time, all investment management consultants are not created equal. Seek out those who do have the resources and talent to provide you with topquality guidance to facilitate your decision making. Choose those who are out front with their independence and objectivity regarding their policies and procedures. Choose those who have an unusual breadth of expertise, who offer a unique franchise regarding best practices and the ability to do serious operations reviews. Choose those who have practical experience as fiduciaries making decisions on potential conflicts of interest and who also may have nurtured a good, professional relationship with the Department of Labor. The Department’s oversight is a critical aspect of private sector benefit administration. The world of the 1980s and 1990s was a different time with very different challenges, and there are completely new and incredibly more complex challenges that trustees face today. There is no longer any room for the same-old, same-old approaches manifested by mediocre consultants or, as one plan sponsor has put it, “fiduciary mediocrity.” Insist that actuaries and your investment consultants meet together in the same room with the trustees and speak the same
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language and get on the same page with regard to the objectives and pitfalls of the fund. 5. Trustees should assiduously and painstakingly monitor their portfolios for corporate fraud.This phenomenon will not go away.There will always be a cadre of people whose greed and avarice will, unfortunately, dictate their antisocial behavior and desire to squeeze out more from the corporate coffers than they are entitled to receive. Derivative actions and securities litigation are how pension funds boards can recapture lost or stolen assets that result from poor corporate practices or fraudulent activities. Class actions are not pretty and they are not perfect, but they are necessary for corporations and, when complicit, their bankers, accountants, and lawyers can be held accountable to some degree in cases involving fraud, misrepresentation, failure to disclose, and so on. The economic power of corporations and bankers dwarfs that of the individual investor and most institutional investors. The class action is virtually the only practical remedy available to most investors. The settlement of a few arguably baseless class actions is simply a business decision and a price to be paid for a somewhat balanced system. Judges can do better at dismissing truly groundless actions, at encouraging fairer settlements and at limiting attorneys’ fees. But class actions should not be restricted so as to make them no longer a practical remedy. The baby should not be thrown out with the bath water. It is hard to feel sorry for corporations that commit fraud and other wrong doing or for their guilty bankers, accountants, and lawyers. Any argument from corporations,Wall Street, the Bush administration, the U.S. Chamber of Commerce, and others that restricting class actions is necessary to make America more globally competitive should be looked at with suspicion. Arguments in favor should be examined carefully. 6. All of us should heighten our awareness to the counter movements that have grown to erode the benefit programs that are now under siege. For example, the cadre of individuals and institutions who appear to be hell-bent on destroying our benefit programs is proliferating. The recent wave of litigation initiated by corporations now suing retirees to take away long-term health care benefits is an effort
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to diminish the companies’ health care coverage exposure. Also, prepare for the impending battle between private and public sector workers’ vested interests as budgetary crises influence voters. The schism will have negative implications for society. It will pit those who are covered by public sector benefit programs—police officers, firefighters, teachers, sanitation workers, and others—against the other taxpayers who work in the private sector. The latter will be hard-pressed to agree to vote for increases in their taxes in order to continue to pay for benefit programs that they may deem excessive. Bear in mind, that the pension envy of those workers in the private sector who lost their health care, retirement benefits, and the like will be reluctant to continue those for their public sector counterparts. 7. Trustees should create risk budgets for their portfolios. The revolution in financial and capital markets over the last couple of decades has made it more difficult and convoluted for pension boards to quantify risk. Asset growth has been incredible over this period, however, the need to focus on and define liabilities and the use of comprehensive, appropriately designed benchmarks to assess investment managers’ performance, is an important imperative. The days of burying your head in the sand is no longer an option. Every potential move in the global financial marketplace possesses the risk of the wildcard, the surprise, the unforeseen. Markets are a function of greed and fear, two powerful forces that can create great value and see it disappear in an instant. 8. We should all hold onto some of our outrage. Sarbanes-Oxley was passed in July 2002 by an extremely conservative Congress and was signed into law by the most pro-business president in history because of the fury of the constituents. They could tolerate the notion of “creative destruction,” as defined by the Austrian economist Peter Schumpeter, that people lose their jobs through normal economic cycles. But to lose their jobs and their hard-earned pensions over corporate fraud activity was totally unacceptable. They mandated their legislative leaders take some steps to right those wrongs. Several years later over different issues, Senator Ted Kennedy implored his colleagues during the legislative session in spring 2006 on the floor of the Senate not to lose “the gift of outrage.” Our most
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powerful weapons are our ideas but they must be expressed consistently with commitment and passion. There is a Spanish proverb that observes, “When it becomes clear that no one else shares your level of passion, you are where you belong.” Let us not forget those important words. The current anti-Sarbanes-Oxley climate that has gained some momentum in 2007 was being stirred by those who argue that the Act has been a colossal failure. They maintain that the direct cost to companies of complying with the law have been widely estimated at $6 billion per year. They also argue that the indirect costs are even higher. The law, they say, diverts executives’ attention from maximizing shareholder value, increases risk aversion by managers, and criminalizes corporate mistakes. We should evaluate the movement to reduce the effects of the law and determine how best to preclude the corporate fraud that sticks to some executives like glue. 9. The movement known as the netroots—that amalgam of bloggers and online fundraisers—has grown more forceful and influential with every recent election cycle. This growing network could very well organize and redefine a multitude of political movements in the 21st century. Astute organizers, activists, and conscientious citizens could learn some very valuable lessons from this newly emerging force in how to influence decision makers in all walks of life in order to change their behavior. The Internet could be used as an extremely effective tool for significant social change by engaging millions of people for a cause. It may not be unrealistic to anticipate that these initiatives could erase the lines between the Democratic and Republican parties and turn them into historical relics in the political life of this nation. 10. Margaret Mead, the renowned anthropologist, once said, “Never doubt that a small group of thoughtful committed citizens can change the world; indeed it’s the only thing that ever has.”3 In Washington, D.C., there are 535 people who can change the world if they performed their responsibilities properly and worked for the common good. Unfortunately, the Republicans have functioned historically in an immovable, narrowly focused ideological bubble. The Democrats have become, as characterized by Ralph Nader, the “Republican lite” party, kowtowing to their corporate sponsors
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and benefactors for fear of drying up the contributions to their political coffers for their reelections. We should inundate them with emails, letters, phone calls, and meetings and force them to face the tough issues intelligently. If we are not successful in gaining their support, and if we can’t get their attention, then perhaps we should present the notion of creating a nationwide grassroots movement to take away their grandiose pension and health benefits. Perhaps then they will know how vulnerable the rest of us feel. At state, county and municipal levels, the same kind of short-term thinking exists amongst the leadership. It is up to individual voters to encourage their leaders to be more creative and encourage them to propose solutions to prevent demolishing a system that provides financial stability to retirees. Connecting the dots is a big part of the political process. It is only rarely remembered that the definition of democracy, immortalized by Abraham Lincoln in the Gettysburg Address, had been inspired by Theodore Parker, the abolitionist prophet. Driven from his pulpit, Parker said, “I will go about and preach and lecture in the city and glen, by the roadside and field-side, and wherever men and women may be found.”4 He became the Hound of Freedom and helped change America through the power of the word. Today we are faced with a similar story of the potential power of the word that we must share with others. It is the promise of America that we all have a responsibility to leave no one out of the American Dream or to dismiss or shunt anyone to the side regardless of their state in life. So I suggest that we go now to the people and shout it from whatever podium you can garner—cyber cafes, mountaintops, bridges, rooftops, in your cities, towns, and villages and the streets of the capitols of your states and of our great nation. From your cellphones and BlackBerrys—shout it. Shout it from the street corners, shopping malls, and from coffee shops, union halls, political clubhouses, and university campuses. Shout it, at your places of worship. Text it, write it, phone it, and shout it to every candidate for elective office, every corporate executive, union leader, academician, to every clergyman, or woman. Shout it to your parents, your children, and your grandchildren. Convey the message, loud and clear, that America has to change.
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11. Is there a methodology that will allow us to engage in a serious debate over health care reform? We need a forum for all of the vested interests working together for the collective good.We are past the point of no action. We need to look beyond our reality and develop a retirement hybrid program that mandates both employer and employee contributions into a newly created defined benefit plan.The new workforce should not be left unprotected if its participants don’t have the kind of wages that will enable them to set aside money for their retirement. Great minds and creativity should let us devise a viable solution. 12. When all else fails, perhaps we should follow the lessons of the 1930s and 1940s, when people took to the streets to protest over terrible workplace economic conditions. We should follow the example of the 1960s, when a new generation of young activists lined up with older activists and demonstrated for social and political changes.We should follow the example of spring 2006, when the immigrant community marched to express its frustration, anxiety, fears, and desperation with social and economic injustices surrounding its inability to gain legal citizenship and remain in this country. Perhaps we should take the issues to the streets in every city in America. Perhaps we need a movement of well-organized, peaceful demonstrations that draw attention to the anxieties and concerns of working American families over their deteriorating lifestyles. There is no question that this type of movement will get the attention of our elected leaders and may arouse them enough to deal with many unresolved matters. Observe what happened in early summer 2007, when an immigration bill was being hastily designed. The fury of the constituents preyed heavily on Congress, which abandoned efforts to pass a bill, and the legislators went off on summer recess. We can no longer afford to be led by people wearing ideological blinders, who cower at the thought of doing something bold.The degree of leadership and wisdom brought forth will determine how we successfully deal with these complex issues and how we embrace solutions to deal with the shortfalls in our retirement and health care systems. The America of the 19th century was a portrait of a growing nation coming of age. The 20th century, built upon that promising period,
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witnessed the blossoming of the American Dream and succeeded in providing great opportunity for the citizenry. But, today, in the early stages of the 21st century, we are a nation teetering on collapse. Growing economic inequality poses a terrible threat to our democratic society. In 2005, over 6.5 million Americans had more than one job just to try and make ends meet. During the Clinton administration, when job growth was accelerating, a common refrain was heard from workers. When asked about the robust job creation they said, “Yeah, I see the new jobs that have been created and I have three of them.” We must develop and institute a new collaborative way of thinking about how to address these issues. In spite of the multitude of think tanks and brainpower therein, there seems little intellectual curiosity among the population. Are most people too busy in their efforts to cope with their economic responsibilities that they fail to take the time or have the luxury of reflecting on the state of affairs? The think tanks appear to be little more than mouthpieces for their financial backers. The best think tanks should be researching, sifting through the policies, questioning them, and seeking ways to chart and navigate through new waters. America has always had a genius for its ability to translate the American Dream into practical reality. The New Deal created many safety nets. Other federal programs created over the years include the G.I. Bill for returning troops to provide them with the means to buy new homes and get an education, the Civil Rights Act of 1964 that dealt with racial injustice, the Occupational Safety and Health Act that dealt with safe and healthy working conditions. Innovation in creating entitlement programs or correcting economic and workplace wrongs that existed has always been a part of our culture.Yet something is lacking today.We need another burst of practical, popular idealism.We must, therefore, reach back into our nation’s history for other equivalent periods and, upon reflection, be innovative and creative, and craft a new New Deal. In the early 1970s, I met a retired longshoreman in San Francisco and spent an exhilarating evening conversing with him. He told me a great deal about his experiences working on the docks on the West Coast as a member of a strong and politically active and volatile union— the International Longshore and Warehouse Union. He also told me
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that as a young man he had joined the Abraham Lincoln Brigade in 1937 and had gone to Spain with some 3,000 U.S. citizens, who defied the government’s prohibition and went to fight the forces of fascism in the Spanish Civil War against the dictator Franco. One of the things that I remember most about our conversations then was his powerful and unwavering commitment to struggle and justice, which he characterized as being the “elixir of life.” I was distinctly impressed with the 74-year-old pensioner who still had not lost his enthusiasm for life, its challenges, and the fight as he continued to speak the need to take a stand on issues for the common well-being. His concern for the bigger picture was his analysis of the ongoing war in Vietnam and other world events at the time. From that short but enlightening encounter, I learned that we must never lose sight of our individual goals and the broader goals for the good of society and to always remember what kind of courage it takes to achieve them. Our expectations for life are critical to who we are and what we believe and how we define ourselves and, thus, our failure to stay on target is unacceptable. As a product of a parochial grade school education, I can remember well the adage that was drilled into us that, “If you don’t succeed at first, try, try again.” This book is my urgent plea to diligently pursue your goals until you accomplish and master them. I believe that most Americans yearn for a time when civic reengagement will put an end to the futile, poisonous divisions that have neutered the ability of our policymakers to make decisions and take back the process from those who have distorted it. I have not been a strong proponent of term limits. However, the more I observe how the government in Washington has become so isolated and remote, unresponsive, and ineffective, the more I feel compelled to jump on that bandwagon. Perhaps we should think about four terms (eight years) in the House and two terms (12 years) in the Senate. If a member of Congress has not been successful as a legislator and hasn’t accomplished anything of significant merit for the people whom he or she is charged with representing, then perhaps they deserve to be put out to pasture and let others in to take up the charge. A fresh approach to our daunting issues may just be what we need to revitalize the agenda for the common good and well-being of our nation’s people. Our democracy needs to be energized and revitalized.
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Policymaking suffers if governments are not urged and nudged to think the unthinkable and be held regularly to account by external scrutiny. The people currently in charge have not been up to the task. The Brookings Institution and the Cato Institute tell us in a joint report that since 1998 House incumbents have won more than 98 percent of their reelection races. There is no serious formidable opposition out there to challenge the incumbents. Following a course of least resistance is a formula for stagnation and we have lived in this vacuum for too long. The problems around us are too consuming and destructive. Americans have got to get back to feeling good about themselves, their leaders, as well as their place in the world at home and around the globe. Government and politicians that we assign to the task must be more open and responsive to the will of the people. New ideas, new players, and a reinvigorated, conscientious leadership may be the answer to reversing the increasing sense of disenchantment and unease that is pervasive today. What are the alternatives? The system is broken and is in serious need of repair. Look at the action taken by Congress in summer 2006 when their response to the immigrant community was to pass the Secure Fence Act, which authorized the construction of a 700-hundred mile, 15-foot wall along the Mexican border to put a barrier between these countries in an effort to prevent illegal crossings. How can we justify that kind of knee-jerk and thoughtless action of a Congress that was running scared from the images of millions of frustrated demonstrators in the streets during the previous spring? This barrier, which is being built, will bisect a border region that has some of the most ecologically diverse landscapes in the hemisphere. For decades after World War II, this nation and its leaders, as well as the leaders of other free nations worldwide, spent billions of dollars funding military arms build-ups, covert spying and overt operations, propagandizing, and fighting against the God-awful oppressiveness of the demonic and despotic communist leaders who slaughtered, maimed, and oppressed, physically and psychologically, generations of people behind the Iron Curtain that separated Eastern Europe from the rest of the world. Remember how the world rejoiced when the Berlin Wall was finally torn down by a free people and all of the symbols and remaining leaders of the Cold War era were tumbled down as well. We know
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the long-term effects of physically and mentally stifling generations of downtrodden people.The implications of that heroic event in 1989 have had a profound influence on world economic, political, and social conditions for almost two decades prior to the atrocity of 9/11. There is something terribly incongruous in our country today given that a fence—a curtain really—is being built in the face of immigrants who strive to become Americans. It blatantly represents a step backward. It is a very telling comment about where we are headed, unfortunately, as a nation. Let’s hope that when it comes time to appropriate the money to build the entire fence, cooler Congressional heads will prevail. There are better ways to protect our borders than building a wall that people will inevitably find ways around. Are these folks coming into our country to take advantage of us? Do we really think that anyone would sink every bit of their resources into a death walk through the desert if there were any other choice? The immigrant is as American as apple pie. Our nation was built on the backs of immigrants and our future depends on them too. If it is a crime to want to be an American, then why aren’t we all in jail? Federal lawmakers continue to delay comprehensive immigration reform as they straddle a political tightrope. At the same time, businesses continue to exploit workers, while social conservatives continue to exploit fears. Our policy concerning immigration ought to reflect that reality and not the stupidity and ignorance spawned by fear. Why not devote our energies to create a path forward as opposed to a wall that discourages their participation and blocks economic commerce and opportunity? Let’s embrace and welcome the immigrants, legalize them, and make them a productive element in the workforce and in our society. The lack of opportunity that a majority of the Latin American population faces is unbearable. These people have the same desires, hopes, fears, and expectations for themselves and their families as most Americans. Absorbing them into our economic system will mean an infusion of positive benefits. Immigrants have enriched themselves and the countries where they have settled. While the scale of today’s migration raises global as well as national challenges, history suggests it will benefit both the world’s migrants and their often reluctant hosts. Over the last two decades or so, American workers have refused to do much of the grubby and
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taxing labor that previous generations handled without any complaint. Americans’ refusal to do these jobs fostered the demand for immigrants, authorized and illegal, to pick up the slack. Today, it seems, workers have become even more selective, rejecting tough factory jobs, stressful positions in nursing, and rote careers in information technology. The gainful employment of immigrants will enhance our nation’s productivity growth, which we know is the mainstay of every national economy. The fruits of their legalized labor will infuse millions of dollars in contributions into our moribund Social Security, Medicare, and Medicaid systems and contribute to our tax-based economy, encourage consumerism, and participation in civic activities and responsibilities to enhance the overall well-being of our nation in a multitude of ways. They raise their own and the world’s income levels by moving from a low-productivity job in a poor country to more productive employment in a rich one. They gain because they earn more. The host country gains because immigrants spend money and create jobs, and the countries they left usually gain because immigrants send money back to their families. Like it or not, women, gays, and people of color make up 80 percent of the population. There is no room for social, political, and economic injustice characterized by identity politics in a society as diverse as America. We know that the members of our country’s immigrant community, so often disparaged, maintain a higher savings rate in spite of their despicable working conditions and wages than most native-born Americans whose collective savings rate today is below zero. As an example of their high sense of commitment and personal responsibility to their lovedones in their homeland, in 2005, $48 billion in savings by immigrants was sent home in remittances to Latin America alone. The Filipino immigrant community sent home $12 billion in 2005. The projections are that number will be $14 billion for 2007.This money is helping their families, who they were forced to leave behind, as well as substantially contributing to the rebuilding of the infrastructure of the hamlets, pueblos, and cities in their native lands. The Nation published an adaptation of remarks made by Bill Moyers before a gathering in New York in December 2006 sponsored by The Nation, Demos, the Brennan Center for Justice, and the New Democracy Project.5 Moyers referred to Ronald Reagan’s historic address to the
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Republican National Convention in 1980, at which Reagan told a simple story, one that had great impact. “The major issue of this campaign is the direct political, personal, and moral responsibility of Democratic Party leadership—in the White House and in Congress—for this unprecedented calamity which has befallen us.” He declared, “I will not stand by and watch this great country destroy itself.” Moyers said that it was a speech of: bold contrasts, of good private interest versus bad government, of course. More important, it personified these two forces in a larger narrative of freedom, reaching back across the Great Depression, the Civil War and the American Revolution, all the way back to the Mayflower Compact. It so dazzled and demoralized Democrats they could not muster a response to the moral abandonment and social costs that came with the Reagan revolution. The Reagan revolution was purely and simply a masterly masked apology by the “great communicator” for the modern day robber barons, which was effectively and very cleverly positioned as the freedom of the individual from government control. In reality, people had the freedom to accumulate immeasurable wealth without any social or democratic responsibilities as well as the additional license to buy the political system right out from under everyone else. That has led to the position we’re in today, in which we face a democracy that no longer has the ability to hold a free-market capitalist system accountable for the good of the whole. Too many of us were fooled by the Reagan administration’s rhetoric and actions. He promoted and reinforced the ideologies that have created the problematic issues that we face today.6
We have allowed the current administration to promulgate these ideologies and they have been taken to the extreme. Our current president “. . . hates to have to explain himself to the American people, members of his own political party, Congress, the federal judiciary. . . .”7 This is truly a sad state of affairs.
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Conclusion
As we look ahead, we must recognize that by continuing to ignore the growing inequality in our country, we could well be pointed toward a modern Dark Age. Is it possible that we will face a protracted period like the previous Dark Ages—between the fall of the American Empire and the resuscitation of a new crusade that could lead us back into an enlightened era—an era where the common good is reemphasized? The American people will not be able to tolerate indecision and inertia for too much longer. That pot of complacency is beginning to boil over. Our leaders must be responsive to their constituency. It is time to pit political virtue against what some believe is the beginnings of potential fascistic evil in this country. If you believe that the conditions in this country are exaggerated, then sit back and watch it change before your very eyes. But if you think that we face incredible domestic challenges, that many people are falling by the wayside, then ask yourself this question: How many gated communities, surrounded by moats of money and protected by a twisted political system, can we build in this country to protect an elite segment from those desperate souls who want in? Do we really believe that our society can absorb all of these dramatic changes that have truly eroded the quality of life for so
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many Americans without experiencing some significant social upheaval? Do we believe that those who are feeling disenfranchised will be deterred by a mere 15-foot wall around a gated community? If it didn’t deter those millions who suffered behind the Iron Curtain for almost 50 years, then why should we think that history will not repeat itself here in the United States of America? How can average Americans and, in particular, our elected leaders today forget the joy and excitement that we experienced when we watched those millions of people rejoice in the streets of their Eastern European cities as a result of their success in overcoming decades of horrendous oppression? Is Christopher Buckley’s Boomsday close at hand in America? As a nation, Americans have not traditionally adopted the class consciousness that European and Latin American societies have. Individualism has historically been our primary defining characteristic. But it is said that an individual is only nine meals away from painful hunger, awful desperation, and from committing a criminal act. Where is that one monumental, drastic catalytic event that pushes a person over the edge and then over the wall? In 1869, John Stuart Mill wrote, “He who lets the world choose . . . his plan of life for him, has no need for any other faculty than the ape— like one of imitation. He who chooses his plan for himself must . . . use observation to see, reasoning and judgment to foresee, activity to gather materials for decision, discrimination to decide, and when he has decided, firmness and self-control to hold to his deliberate decision.”1 We should all heed his words and act accordingly. Helen Keller said, “The world is moved along, not only by the mighty shoves of heroes, but also by the aggregate of the tiny pushes of each honest worker.”2 We must honor workers and their work over the adulation that has been given to the wealthy and their wealth. Let’s not wait for the attacks on retirement communities to become an all too common everyday event. It is time for all of us to become worthy and moral ancestors and strive to leave a better world behind before we are gone. We should remember the words of the late Senator Robert Kennedy, who said, “The future is not a gift, it is an achievement.” If we can live by that code, this world would be a better place.
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Appendix
The following references provide the names, email addresses, and locations of organizations that can help you gain more information on some of the topics that have been raised in the book: health care, retirement, 401(k) plans, aging, consumer debt, mortgage information, investor education, politics, eldercare, Social Security, and Medicare.
Aging The aged have been revered for centuries throughout civilization. Over the last decade or so the aging of populations have provided incredible challenges to governments, corporations, medical institutions, retirement programs and individuals worldwide. Society is now confronted with a very large segment of the population consuming more than they are putting back in and this could result in a backlash that could manifest itself into inter-generational warfare where the younger generation resents the elders. The websites and organizations listed will provide information to the reader about the multitude of issues facing the aging population and, hopefully, provide substantive information in order to cope with and understand these enormous changes and responsibilities. 139
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• • • •
Institute on Aging, University of Florida, Gainesville, FL. American Federation for Aging Research. www.infoaging.org. American Society on Aging. www.asaging.org. Institute on Aging. Albert Einstein College of Medicine, New York, NY. Aging, Health and Society, Case Western Reserve University, Cleveland, OH. Community Partnership for Older Adults. International Longevity Center—USA, Mount Sinai School of Medicine. www.ilcusa.org. Gerontology Research Group, UCLA, David Geffen School of Medicine, Los Angeles, CA. Institute on Aging, University of Florida, Gainesville, FL. University of Kansas, Center on Aging. Institute for the Study of Aging. www.aging-institute.org. Center for Productive Aging. Towson University. www.towson.edu. National Council on Aging (30 state-funded pharmacy programs). www.benefitscheckup.org. Generations Policy Program, Harvard University, Cambridge, MA. Global Aging Initiative, Center for Strategic and International Studies. www.csis.org. General Electric Center for Aging Research and Care. Aging Services of California. Department of Aging, State of Maryland. Annapolis, MD. New Mexico State Agency on Aging. Santa Fe, NM. National Association of Area Agencies on Aging. www.n4a.org. Alliance for Aging Research. www.agingresearch.org. American Association of Homes and Services for the Aging, Institute for the Future of Aging Services. Business Work Ageing. www.businessworkageing.org. New England Centenarian Study, Boston University, Boston, MA. Anti-Aging Medicine Associates. The Employers Forum on Age, London, England. MetLife Mature Market Institute. www.maturemarketinstitute.com. National Institute on Aging. Age Wave, LLC. www.agewave.com.
• • • • • • • • • • • • • • • • • • • • • • • • •
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American Federation of Aging. National Academy on an Aging Society. Adult Student Center. www.adultstudentcenter.com. Service Leader.org. www.serviceleader.org. National Investment Center for the Senior Housing and Care Industries. National Association of Consumer Aging Administrators, www. nacaa.net. Future Focus 2020. www.mba.wfu.edu. Career Planner.com. www.careerplanning.com. National Council on Seniors Housing. www.levinassociation.com.
Consumer Debt Consumer spending represents a significant portion of our nation’s gross domestic product. Consumerism drives the energy of our nation’s economic well-being. Unfortunately, too many Americans put themselves in financial jeopardy when they spend well beyond their means and put themselves at the mercy of credit card providers and others who offer financing for purchases. Thus, we have witnessed a horrible scenario for those families or individuals who have over-extended their credit lines. Much information is available to people to help them through the long road back to financial solvency. • American Savings Education Council. www.asec.org/ballpark. • Center for Consumer Freedom. www.consumerfreedom.com. • Consumer Federation of America Foundation. www.consumerfed. com. • Society of Consumer Psychology. • Money, Meaning and Choices Institute. www.mmcinstitute.com. • SRI Consulting Business Intelligence, Consumer Financial Decisions. www.future.sri.com/cfd. • Consumer Bankruptcy Project, Harvard University School of Law, Middle-Class Bankruptcies, Boston, MA. • Coalition for Responsible Lending, North Carolina. • Association of Credit and Collection Professionals.
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Eldercare Caring for the elderly will grow dramatically as the baby boomer generation ages. Families are hard-pressed to provide this care. This responsibility places financial, emotional, and psychological burdens on the providers as well as those receiving the care and assistance. Families will need much advice and assistance in dealing with these responsibilities. • • • • • • • • • • •
Elder Rage. www.elderrage.com. Retirement Living Information Center. www.retirementliving.com. Caring Connections. www.caringinfo.org. National Senior Services Corps. www.clintonx.nara.gov. Senior Care Action Network (SCAN). www.dhcs.gov. National Association of Home Care. National Eldercare Services Company. www.natl-eldercare-service .com. Neuroendocrinology Laboratory, Rockefeller University. American Association for Long-Term Care Insurance. Atria Assisted Living. New York University School of Medicine – Neuroscience Information. www.med.nyu.edu/research.
Health Care Health care and the provision thereof in a cost-effective manner has been a daunting challenge for many decades. Providers, recipients, and a multitude of federal government administrations have attempted to deal with the ever-accelerating costs without much success. Individuals are becoming more responsible for their health care coverage and need a great deal of guidance in the decision-making process. Information on health care is widespread and individuals must take it upon themselves to become more activistic in advocating their concerns about their medical well-being and the well-being of their loved ones. • John D. and Katherine T. MacArthur Foundation, Chicago, IL. • Institute for Behavioral Medicine Research, Ohio State University, Columbus, Ohio.
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• Long Island University School of Health and Public Administration, Brookville, NY. • California Healthcare Foundation. www.chcf.org. • National Community Pharmacists Association. www.ncpanet.org. • Microsoft Health Vault. www.healthvault.com. • Center for Life in Balance, Program in Integrative Center for Life in Balance, Program in Integrative Medicine, University of Arizona, Tucson, AZ. • Consumer Health Education Council. www.healthchec.org. • The People’s Pharmacy. www.peoplespharmacy.com. • Center for Corporate Community Relations, Wallace E. Carroll School of Management, Boston College, Boston, MA. www.bc. edu/schools/csom. • Center for the Study of Health Care System Change,Washington, DC. • Coalition for Quality Health Care, Washington, DC. • National Health Care Anti-Fraud Association, www.nhcaa.org. • National Institute for Health Care Management Foundation, Washington, DC. • National Institute of Mental Health, Bethesda, MD. • National Institutes of Health. www.videocast.nih.gov. • National Coalition on Health Care, www.nchc.org. • American Public Health Association, www.apha.org. • Institute for Healthcare Improvement,
[email protected], www.ihi.org. • America’s Health Insurance Plans, www.aahp.org. • Prescription Access Litigation Project, National Coalition-100 Consumer Organizations, www.prescriptionaccess.org. • International Foundation of Employee Benefit Plans. www.ifebp.org. • Pharmaceutical Research and Manufacturers of America. www.phrma .org. • United States Chamber of Commerce. www.uschamber.com. • The Commonwealth Fund. www.cmwf.org. • Center for Studying Health System Change. Washington, DC. • Health Futures Inc., Charlottesville,VA. • World Health Organization. www.who.int. • Medline Plus. medlineplus.gov. • Mayo Clinic. www.mayoclinic.com. • Health Scout. www.healthscout.com.
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• Healthfinder.gov.www.healthfinder.gov. • Clinical Trials.gov. www.clinicaltrials.gov. • Howard Hughes Medical Institute, Washington University, St. Louis, MO.
Investor Education The responsibility of determining one’s long-term asset allocation for the management of an individual’s 401(k) or defined contribution plan requires that he or she has more familiarity with the risk of investing as well as the potential returns that certain asset classes have been able to provide historically. Markets for stocks and bonds can be very volatile and erode those retirement assets if not watched and invested diligently. Individuals who have not been schooled in financial and investment education have an additional burden to seek advice and counsel for whatever pools of assets they may have amassed over their working careers. There are lots of organizations that can provide this education for a fee but the individual has to be wary and perform the necessary due diligence to ascertain who can provide them with the right kind of advice in order to protect and preserve those assets. • Pomerantz, Haudek, Block, Grossman & Gross, LLP. Securities portfolio monitoring and litigation. www.pomerantzlaw.com. • BNY ConvergEx Group. www.bnyconvergex.com. • International Senior Lawyers Project, The Open Society Institute. www.islp.org. • Alliance for Investor Education. www.investoreducation.org. • National Endowment for Financial Education. www.nefe.org. • National Association of Investors Corporation. www.investopedia. com/terms/naic.asp. • American Association of Individual Investors, www.aaii.org. • Behavioral and Neuroeconomics Laboratory, Claremont Graduate University. • The Scarborough Group, Alliance Company, Irvington, NY. • Securities and Exchange Commission. www.sec.gov. • CIFT, Financial Training Solutions. www.ciftweb.com. • Institute for Private Investors.
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• Coalition for American Financial Security. www.coalitionfor financialsecurity.com. • American Enterprise Institute. www.aei.org. • Securities Investor Protection Corporation. www.sipc.org. • The Investment Funds Institute of Canada. www.ific.ca. • Individual Investor – Corporate Governance Practices. www.finance .yahoo.com; www.thecorporatelibrary.com. • Society of Financial Services Professionals, www.financialpro.org. • Global Research Analyst Settlement. www.globalresearchanalystsettlement.com. • National Economic Challenge. • International Foundation for Retirement Education, Texas Tech University. www.infre.edu. • National Council on Economic Education (Tests high school students’ knowledge of economics and current events). • Investor Justice Project, University of San Francisco, School of Law, San Francisco, CA. • The Virginia Council on Economic Education, Richmond,VA • 2030 Center,
[email protected]. • Private Enterprise Research Center, Texas A & M University. • The Council on Economic Priorities. • The Institute of International Finance, Inc., www.iif.com. • Federal Trade Commission, www.consumer.gov. • The GreenMoney Journal, www.greenmoney.com. • Financial and Invest Management Group, Ltd., • United for a Fair Economy, Boston, MA, www.faireconomy.org. • CNN Money.com. www.money.cnn.com. • The Motley Fool. www.motleyfool.com. • Quicken. www.quicken.com. • Charles Schwab. www.schwab.com. • Internal Revenue, United States Department of the Treasury. www. irs.ustreas.gov. • msn money. www.moneycentral.msn.com. • Liberty Mutual. www.libertymutual.com. • Mass Mutual. www.massmutual.com/getthere. •
[email protected]. • E Trade Financial. www.etrade.com/maximize.
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• • • •
appendix
Northwestern Mutual Financial Network. www.nmfn.com. Genworth Financial. www.genworth.com TIAA CREF Financial Services. www.tiaa-cref.org. The Spectrem Group, Chicago, IL.
Medicare The Medicare system was created in the 1960s and has provided enormous help to the elderly for their health care needs for all of these many decades helping to keep people out of poverty. The continuous acceleration of health care costs has put an inordinate amount of pressure on the Medicare system that requires a serious review by Congress in order to protect the system to continue its mission for decades to come. Many organizations have been established to help the elderly and the aged with their requests for information about the system. • • • • • •
National Alliance for Caregiving. The Employers Forum on Age. www.efa.org.uk. Medicare Rights Center. www.medicarerights.org. Medicare Payment Advisory Commission. Washington, DC. Center for Medicare Education. www.medicareed.org. Center for Medicare and Medicaid Service. www.cms.hhs.gov.
Mortgage Information A significant part of the American Dream is for every individual or family to own their home. Most Americans strive for that aspect of the dream. Mortgages provide the vehicle for most Americans to realize that goal and the complexities involved in getting the appropriate information about applying for and qualifying for a mortgage are very complex. Most individuals have to rely on brokers, banks, attorneys, title insurance companies, and other financial institutions to provide them with the necessary information to apply for and obtain a mortgage loan. There are a multitude of organizations that exist that can help families work through this cumbersome maze.
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• National Investment Center for the Senior Housing and Care Industries. • National Reverse Mortgage Lenders Association. www.reversemortg age.org. • American Real Estate Society. www.aresnet.org. • National Association of Realtors. www.realtor.org. • Interfaith Center for Corporate Responsibility. www.iccr.org. • Citimortgage. www.citimortgage.com. • Wells Fargo. www.wellsfargo.com. • Fannie Mae. www.fanniemae.com. • Freddie Mac. www.freddiemac.com. • Bankrate.com. www.bankrate.com. • Chase. www.mortgage.chase.com. • Bank of America. www.bankofamerica.com/loansandhomes. • MyFico. www.myfico.com. • RealtyTrac. www.realtytrac.com. • Home Exchange.com. www.homeexchange.com.
Politics Politics drives the engine of our public policy system that enables and ensures that our government will be responsive to the needs of American citizens. Each citizen has a civic responsibility to participate in the workings of society in order to make our communities, towns, villages, cities, and states a better place for all. This is no easy task. It takes extra effort to participate and to make a meaningful contribution to our fellow citizens. Political leaders have a different call to be responsive to the needs of the citizenry by virtue of their elected or appointed positions and to enact and administer the laws and rules that govern society.There are lots of organizations that provide information and education to the people to help them understand the complexities of government, our institutions, and the responsibilities of each one to contribute to society’s well-being. • • • •
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60-Plus Association. www.60plus.org. Atlantic Council of the United States. National Coalition for the Homeless. VIP Forum, Washington, DC.
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• National Voting Rights Institute. www.nvri.org. • Center for International Trade and Economics, Heritage Foundation, Washington, DC. • National Center for Policy Analysis, Dallas, TX. • The Free Enterprise Fund, Washington, DC. • Independent Women’s Forum, Washington, DC. • Alliance for Worker Security, Washington, DC. • Cato Project on Social Choice, Cat Institute, www.cato.org. • The Campaign Finance Institute, www.cfinst.org. • The Center for Business Intelligence, www.cbinet.com. • The Madison Institute, www.themadisoninstitute.org. • The New School for Pluralistic Anti-Capitalist Education. www.new-space.mahost.org. • The People’s Opinion Project, www.thepop.org. • Issues Dynamics, Inc., www.idi.net. • Electronic Policy Network, www.epn.org. • American Federation of Labor – Congress of Industrial Organizations. www.aflcio.org. • Change to Win. www.changetowin.org. • Labor Research Association. www.laborresearch.org. • Center for Economic and Policy Research. www.cepr.net. • Institute for Women’s Policy Research. www.iwpr.org. • Roosevelt Institution, Stanford University, Stanford, CA. www .rooseveltinstitution.org. • Center for the Study of Working Class Life. www.sunusb.edu/ workingclass. • Center for Political Accountability. • New America Foundation. www.newamerica.net. • Campaign for America’s Future. www.ourfuture.org. • Demos: A Network for Ideas and Action. www.demos.org. • Center for American Progress. Action Fund. www.americanprogre ssaction.org. • Reason Foundation. www.reason.org. • Horizon Institute, www.thehorizon.org. • Center for Governmental Studies. www.cgs.org. • Progressive Policy Institute. www.ppionline.org.
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• Moving Ideas. www.movingideas.org. • Center for An Urban Future. New York, NY. • National Commission on Teaching and America’s Future, Washington, DC. • Institute for Alternative Futures, Alexandria,VA. • The Nation Institute. • Corporate Foresight Network. • The Da Vinci Institute. www.davinciinstitute.com. • Resources for the Future. Washington, DC. • Commission on the Future of Higher Education, Washington, DC • The Future Work Institute. • Growth Strategies, Inc., Washington, DC. • Institution for the Future, Menlo Park, CA. • Institute for the Future. www.iftf.org • Center for Communication Policy, UCLA, Los Angeles, CA,“Surveying the Digital Future.” • World Watch Institute. Washington, DC. • U.S. Business and Industry Council. Washington, DC. • Unionization.Com. www.unionization.com. • Center for Responsive Politics, www.opensecrets.org. • Cause. www.commonincauses.org. • Accuracy in Media. www.aim.org. • Democracy21. Washington, DC. • Fair Labor Association. www.fairlabor.org. • Committee for a Responsible Federal Budget, Washington, DC. • Center on Budget and Policy Priorities, Washington, DC. • Center for Strategic and Budgetary Assessments, Washington, DC. • Center for Public and Nonprofit Leadership. www.cpnl.georgetown .edu. • MoveOn.org. www.moveon.org. • Davenport Institute for Public Policy, publicpolicy.pepperdine.edu/ davenport institute. • Centers for Disease Control and Prevention, www.cdc.gov/travel • AgeVenture, www.demko.com. • International Forum on Globalization. Bainbridge, WA. • World Future Society, www.wfs.org.
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appendix
Retirement Retirement has been a natural progression in one’s life as an individual moves from his or her working career and looks to enjoy the so-called golden years to do the things that one lost the ability to do because of the responsibilities of daily work and the need to earn a living. However, over the last two decades the pension plans that provide the financial wherewithal to enjoy these magical years have been eroding. This has placed a great burden on those who are approaching their retirement but who lack the financial resources to kick back and enjoy them. In addition, medical technology has worked wonders with the human being and people are living longer and better lives well into their 60s, 70s, 80s, and beyond. The notion of retirement in the traditional sense is changing due to this kind of life-sustaining bonus as well as the inability of people with little retirement assets to sustain a financially sound retirement. The new dynamics of retirement provide a challenge to individuals and institutions going forward. A great deal of information is available to those who want to learn more about this new order. • Women’s Institute for a Secure Retirement. www.wiser.heinz.org. • Financial Freedom Senior Funding Survey. AARP Public Policy Institute. www.aarp.org. • North Carolina Center for Creative Retirement, University of North Carolina, Asheville, NC. • Dow Jones & Company, Inc., Market Watch – Retirement Weekly. www.marketwatch.com/retirementweekly/special. • Center for Retirement Research, Boston College, Boston, MA. crr. bc.edu. • Employee Benefits Research Institute. www.ebri.org. • Mercer – Managing Frozen Plans. www.timetocallmercer.com. • National Institute of Pension Administrators. www.nipa.org. • National Institute on Retirement Security. • National Jobs for All Coalition, www.njfac.org. • National Retirement Concepts. Chicago. IL. • Third Millennium, New York, NY The Pensions News ServiceFinancial Times, www.pensionsnews.com. • Kinder Institute of Life Planning. www.kinderinstitute.com.
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• National Association of State Retirement Administrators. www. nasra.org. • National Council on Teacher Retirement. www.nctr.org. • Council on Institutional Investors. www.cii.org. • State Association of County Retirement Systems. www.sacrs.org. • Louisiana Association of Public Employees’ Retirement Systems. www.lapers.org. • Missouri Association of Public Employees’ Retirement Systems. www.momapers.org. • Michigan Association of Public Employees’ Retirement Systems. www.mapers.org. • Florida Public Pension Trustees Association. www.fppta.org. • California Association of Public Retirement Systems. www.calapers .org. • Public Pensions, Online. www.publicpensionsonline.com. • Texas Public Employee Retirement Systems. www.texpers.org. • Pennsylvania Association of Public Employee Retirement Systems. secure.imn.org/Nconference • Connecticut Public Pension Forum. www.ctpublicpension.com. • Massachusetts Association of Contributory Retirement Systems. www.macrs.org. • National Coordinating Committee for Multi-Employee Pension Plans. www.nccmp.org. • Center for Work-Life Balance. www.worklifepolicy.org. • Texas Municipal Retirement System, www.tmrs.com. • Center for Retirement Research. • “The Future Of Retirement.” • Swiss Re, “The Risk Landscape of the Future” www.swissre.com. • Tiburon Strategic Advisors, “The Future of Advice” www .tiburonadvisors.com. • U.S. Department of Labor, Employee Benefits Security Administration. www.dol.gov/ebsa. • The ERISA Industry Committee www.eric.org. • USAA www.usaa.com. • Vanguard Center for Retirement Research. www.vanguardretire mentresearch.com. • The New York Times. www.nytimes.com.
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• • • • •
Fidelity.com www.fidelity.com. Pension Benefit Guaranty Corporation. www.pbgc.gov. www.seniorhousing.about.com. yourRetirementCompany.com. www.yourretirementcompany.com. Prudential.www.retirementredzone.com.
Retirement Health Care The single most serious concern for many retirees is the question as to how they will fund their health care needs as they continue the aging process. Corporations, public and private pension systems that offer retiree health care benefits are hard-pressed to calculate and sustain those long-term financial obligations. The dramatic number of workers who will be retiring over the next two decades will put an enormous burden on the health care delivery systems for elderly Americans. Many organizations are wrestling with this dilemma and will need lots of help as they make the hard decisions affecting millions of retired workers. Retirees will be required to be more informed about their options in order to protect their retirement assets. • Senior Care Action Network (SCAN). www.dhcs.gov. • National Association of Home Care. • National Eldercare Services Company. www.natl-eldercare-service .com • Neuroendocrinology Laboratory, Rockefeller University. • American Association for Long-Term Care Insurance. • Atria Assisted Living. • New York University School of Medicine – Neuroscience Information. www.med.nyu.edu. • Eldercare Locator. www.eldercare.gov.
Social Security The Social Security system has been in place for many decades and has provided the financial wherewithal to raise many elderly from the poverty rolls over that period. It is the desire that the system be sustained and continues to assist in the role of fulfilling a portion of the retirement
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financial needs of most American citizens. There has been much debate over the years about the sustainability of Social Security and the efforts that have been introduced by our elected leaders have entered the arena of bipartisan political ideology which has stymied the need to review the system and in order to make the right choices to sustain the benefit structure for many decades to come. As people begin to approach their normal retirement age they need as much information as they can get in order to help them make the right decisions about their retirement. • National Committee to Preserve Social Security and Medicare. www.ncpssm.org/contact/ask. • Social Security: www.socialsecurity.gov; www.socialsecurity.gov/ applyforbenefits; www.socialsecurity.gov/mystatement; www.social security.gov/oact/quickcalc/when2retire. • The Concord Coalition, www.concordcoalition.org
401(k) Plans 401(k) plans or defined contribution plans were created over twentyfive years ago in order to be more responsive to the changing nature of work as well as to the significant influences of globalization and international competitiveness.The creation of these plans has shifted the burden of providing retirement assets in the form of defined benefit plans from the shoulders of the institution on to the shoulders of the individual. Individuals now have to make the long-term investment decisions that will enable them to maintain and grow a pool of assets that will, hopefully, be their nest-egg for their retirement years. This is no easy task even for those who have a higher education. The dramatic changes in the financial markets as well as the volatility of markets mandate a clear understanding by individuals as to how movements in markets will affect their stock and bond holdings. There are many organizations that provide the necessary education to help people with these financial responsibilities but it requires perseverance and diligence in order to be successful. • Ihatefinancialplanning.com Poll. www.ihatefinancialplanning.com. • Ameriprise Financial. www.ameriprise.com.
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• • • • • • •
Annuity Truth. www.annuitytruth.org. Annuity Shopper. www.annuityshopper.org. Information on 401(k) Plans. www.401khelpcenter.com. Scarborough Alliance. www.scarboroughalliance.com Profit Sharing/401(k) Council of America. www.psca.org. Financial Planning Association. www.financialplanningweek.org. North American Securities Administrators Association (NASAA). www.nasaa.org. Foundation for Economic Education. www.fee.org. National Association of Variable Annuities. www.navanet.org The Hewitt 401(k) Index. www.hewitt.com/hewitt/services/401k/ index Raddon Financial Group. www.raddon.com. Wachovia. Wachovia.com.
• • • • •
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Notes
Preface 1. Joseph Nye, “How To Counter Terrorism’s Online Generation,”Financial Times, 13 October 2005, p. 19. 2. Maureen Dowd, “Oprah’s Bunk Club,”The New York Times, 28 January 2006. 3. Fred Barnes, Rebel-in-Chief: Inside the Bold and Controversial Presidency of George W. Bush, (Three Rivers Press: New York, NY 2006), p. 14. 4. Editorial, Bush Administration’s Telephone Snooping, Financial Times, 13 May 2006. 5. George Will, “Guaranteed Collisions,”Washington Post, 15 May 2005, B07. 6. Russ Banham, “The Best-Laid Financial Plan,”Wall Street Journal, 2007. 7. The Wall Street Journal, 16 October 2007, p. 1. 8. Editorial, “Clock is Ticking,”Santa Fe New Mexican, 19 October 2007. 9. Elizabeth Williamson, “America’s Crisis of Leadership,”Washington Post, 7 November 2006. Introduction 1. Paul Krugman, “Missing Molly Ivins,”New York Times, 2 February 2007. 2. “retirement,”Merriam-Webster Online Dictionary, 2006–2007. 3. Janet Lowe, Welch: An American Icon, ( John Wiley & Sons: New York, NY, 2001).
155
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notes
4. Amy Belasco, “CRS Report for Congress: The Cost of Iraq, Afghanistan, and Other Global War on Terror Operations Since 9/11.” Congressional Research Service, July 16, 2007. Available at: www.fas.org/sgp/crs/natsec/ RL33110.pdf. 5. Scott Walsten & Katrina Kosec, “The Economic Costs of the War in Iraq,” Working paper, AEI-Brookings Joint Center for Regulatory Studies, September 2005. 6. Andy Stern.The 2006 Nathan W. Levin Lecture on Public Policy: Making Work Pay in America. Speech delivered at the New School on September 20, 2006. 7. Jean Edward Smith. FDR. (Random House: New York, NY 2007). 8. Bob Herbert, “A Radical in the White House,”The New York Times, 18 April 2005. 9. “Theodore Roosevelt,”Quote DB, 2005. 10. Putnam Investments, “Working in Retirement: 7 Million Go Back to Work,” December 2005. Available at: content.mercerhrs.com/financial_advisor/pdf/ survey_whitepaper.pdf . 11. Richard Croker The Boomer Century: 1946–2046, (Springboard Press: New York, NY, 2007), p. 273. Chapter 1 1. Thrivent Financial for Lutherans, Baby Boomers and Retirement: A Generation’s Catch-22: America’s Largest Generation Faces a Large Gap Between Retirement Readiness and Expectations, (Minneapolis, MN, 2007). Available at: www.thrivent.com/newsroom/pdf/TFLResearchReportFINAL .pdf . 2. Ian McDonald, “The Costs of Living Longer: Swiss Re Finds Risks and Big Opportunities for Insurance Firms,”Wall Street Journal, 30 March 2007, p. C2. 3. Ibid. 4. Steve Kroft, “U.S. Heading for Financial Trouble?”60 Minutes, 4 March 2007. 5. Christopher Buckley, Boomsday, (New York: Hachett, 2007), p. 1. 6. Julia Vitullo-Martin & J. Robert Moskin (eds.) The Executive’s Book of Quotations (New York: Oxford University Press, 1994). 7. Sholnn Freeman, “Autoworkers Ready for a Fight: Union Members Dig In for Crucial Contract Talks,” Washington Post, 28 March 2007, D01. Chapter 2 1. John Whitesides, “Most Races for Congress Over Before They Start,” FairVote. org, 30 October 2000.
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2. Michael McDonald, “Five Myths about Turning Out the Vote,”Washington Post, 29 October 2006, p. B03. 3. E.J. Dionne, “The Lion of Liberalism,”Washington Post, 01 March 2007. 4. Associated Press, “Personal Savings Drop to a 73-Year Low: Development Comes as 78 Million Boomers Nearing Retirement,” 1 February 2007. 5. Damon Darlin, “Some More Numbers to Juggle in Figuring-Out Retirement,” New York Times, 13 March 2007. 6. William Branigin, “Consumer Debt Grows at Alarming Pace: Debt Burden Will Intensify When Interest Rates Rise,”Washington Post, 12 January 2004. 7. Jarrett B. Wollstein, “The Endangered Middle Class,” International Society for Individual Liberty Web site: December 1997. Available at: www.isil.org/ resources/lit/endang-middle-cls.html. 8. Bureau of Economic Analysis, National Economic Accounts, News Release: Personal Income and Outlays, 1 February 2007. Available at: www.bea.gov/ newsreleases/national/pi/2007/pi1206.htm. 9. Louise Sheiner, Daniel Sichel, & Lawrence Slifman, “A Primer on the Macroeconomic Implications of Population Aging,” September 2006. Available at: www.federalreserve.gov/Pubs/Feds/2007/200701/200701pap.pdf . 10. Government Accountability Office, Baby Boom Generation: Retirement of Baby Boomers is Unlikely to Precipitate Dramatic Decline in Market Returns, but Broader Risks Threaten Retirement Security. (Washington, D.C., GAO, July 2006).Available at: www.gao.gov/new.items/d06718.pdf . 11. William J. Scanlon, “Retiree Health Insurance: Gaps in Coverage and Availability,” Testimonty Before the Subcommittee on Employer-Employee Relations, Committee on Education and the Workforce, House of Representatives, Available at: www.gao.gov/new.items/d02178t.pdf . 12. Martha M. Hamilton, “Health Care Trends You Dare Not Forget,”Washington Post, 31 March 2007, p. F01. 13. Northern Trust, “Health and Wealth,” n.d., Available at: www.northerntrust. com/wealth/06-fall/healthandwealth.html. 14. Franklin Roosevelt’s Address Announcing the Second New Deal, October 31, 1936. Available at: www.fdrlibrary.marist.edu/od2ndst.html.
Chapter 3 1. Chalmers A. Johnson, “Republic or Empire: A National Intelligence Estimate on the United States,”Harpers Magazine, January 2007. 2. Ibid. 3. Ibid.
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4. Jeremy Gruber, “Louis Brandeis at 150: Democracy and Workers’ Rights,” 14 November 2006. Available at: www.brandeis.edu/jubilee/gruber.html. 5. Dennis Cauchon, “Pension Gap Divides Public and Private Workers,”USA Today, 21 February 2007. 6. Milt Freudenheim, “With Health Care Topic A, Some Sketches for a Solution,”New York Times, 25 January 2007. 7. Paul Krugman, “The Health Care Racket,”New York Times, 16 February 2007. 8. Ibid. 9. McKinsey & Company, “Accounting for the Cost of Health Care in the United States,” January 2007. Available at: www.mckinsey.com/mgi/rp/healthcare/accounting_cost_healthcare.asp. 10. HealthDay, “Record Number of Americans Lack Health Insurance,” 27 August 2007. Available at: www.nlm.nih.gov/medlineplus/news/fullstory_54117.html. 11. Robert Pear, “Without Health Benefits, a Good Life Turns Fragile,”New York Times, 5 March 2007. 12. Ibid. 13. Ibid. 14. Andy Stern. The 2006 Nathan W. Levin Lecture on Public Policy: Making Work Pay in America. Speech delivered at the New School on September 20, 2006. 15. The Pew Research Center for the People and the Press, “Global Warming: A Divide on Causes and Solutions: Public Views Unchanged by Unusual Weather,” 24 January 2007. Available at: www.people-press.org/reports/ pdf/303.pdf. 16. Julie Apppleby, “Employer-Provided Insurance Continues to Decline,” USA Today, 12 November 2007. 17. Ibid.
Chapter 4 1. Martha M. Hamilton, “A Reality Check On Debt Before Retirement,” Washington Post, 17 June 2007, F01. 2. Ibid. 3. Daniel Altman, “Planning: Ready to Quit, but Deep in Debt,”New York Times, 12 March 2002. 4. CNN Interview, “Ben Stein Discusses Retirement Saving,” 18 November 2006. Available at: transcripts.cnn.com/TRANSCRIPTS/0611/18/cnr.03. html.
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5. Jonathan Gruber, “The Middle Class Has a Higher Standard of Living Than Ever Before. Who Should Pay for It?,”Boston Review, September/October 2005. 6. Joe Lee and Thomas Parrish, “Banks Gone Wild,”New York Times, 13 January 2007. 7. Ibid. 8. Ibid. 9. Nick Timiraos, “ The Subprime Market’s Rough Road,”Wall Street Journal, 17 February 2007. 10. Ibid. 11. Ibid. 12. Vikas Bajaj, “For Some Subprime Borrowers, Few Good Choices,”New York Times, 22 March 2007. 13. Center for Responsible Lending. 14. Vikas Bajaj, “For Some Subprime Borrowers, Few Good Choices,”New York Times, 22 March 2007. 15. Ibid. 16. Peter Eavis, “Wall Street Playing With More Funny Money,”Fortune magazine, 12 November 2007. 17. Center for American Progress, “From Boom to Bust: Helping Families Prepare for the Rise in Subprime Mortgage Foreclosures,” 27 March 2007. Available at: www.americanprogress.org/issues/2007/03/foreclosures_numbers.html. 18. Editorial, “Mortgage Insecurities,”New York Times, 22 February 2007. 19. Ibid. 20. N.C. Aizenman & Pamela Constable, “Reasons for Delaying Retirement Vary,”The Washington Post,14 September 2007, B01. 21. Alicia H. Munnell, Steven A. Sass, & Jean-Pierre Aubrey, “Employer Survey: One of Four Boomers Won’t Retire Because They Can’t,” December 2006, Center for Retirement Research at Boston College. Available at: www.bc. edu/centers/crr/issues/wob_6.pdf. 22. Fidelity Brokerage Services, LLC, “Fidelity’s Retirement Index Findings,” March 2007. Available at: personal.fidelity.com/planning/retirement/content/ retirement_readiness_index.shtml?refpr=rrc83. 23. James M. Poterba, Steven F. Venti, David A. Wise, “401(k) Plans and Future Patterns of Retirement Saving,”American Economic Review. 88(2), May, 1998, pp. 179–184. 24. Sarah Holden and Jack VanDerhei, “401(k) Plan Allocation, Account Balances, and Loan Activity in 2004,”Investment Company Institute Perspective, 11(4), September 2005. Available at: www.ici.org/pdf/per11-04.pdf .
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160
notes
25. Denis Cardone and Christina Frederico, Scarborough Alliance, Presentation to the Association of Benefit Administrators, “Will You Outlive Your Assets?: A Better Strategy for Retirement Planning,” February 15, 2007, New York, NY. 26. Dallas Salisbury, International Foundation of Employee Benefit Plans 52nd Annual Employee Benefits Conference, October 9, 2006, Las Vegas, Nevada. Chapter 5 1. Eric Nordwall,“Health Care Spending to Double by 2016,”USA Today, 21 February 2007. 2. Roundtable Discussion during the Conference of Chairman meeting at the Federal Reserve Board, December 1, 2005. 3. Matthew Hollon, “Direct-to-Consumer Advertising: A Haphazard Approach to Health Promotion”Journal of the American Medical Association, April 27, 2005, pp. 2030–2033. 4. Agency for Healthcare Research and Quality, U.S. Department of Health and Human Services, “Cardiovascular Drugs, Four Other Therapeutic Classes of Drugs Dominate the Market,” 24 January 2007. Available at: www.ahrq.gov/ news/nn/nn012407.htm 5. Howard Markel, M.D., “How Two Rights Can Make a Wrong,”New York Times, 25 February 2007. 6. Ibid. 7. Ibid. 8. Ibid. 9. Charles Duhigg, “Aged, Frail, and Denied Care by Their Insurers,”New York Times, 26 March 2007. 10. Howard Markel, M.D., “How Two Rights Can Make a Wrong,”New York Times, 25 February 2007. 11. Alina Baciu, Kathleen Stratton, & Sheila P. Burke, eds. “The Future of Drug Safety: Promoting and Protecting the Health of the Public,” Institute of Medicine of the National Academies, 26 September 2006. Available at: grassley. senate.gov/public/releases/2006/09222006.pdf . 12. Howard Markel, M.D., “How Two Rights Can Make a Wrong,”New York Times, 25 February 2007. 13. Liz Szabo, “Patient, Protect Thyself,”USA Today, 5 February 2007. Chapter 6 1. “A Lot Can Happen in 25 Years;” remarks by John C. Bogle, Founder and Former Chairman,The Vanguard Group Before the 25th Annual Conference of
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Notes
2. 3. 4. 5. 6. 7. 8.
9. 10. 11. 12.
13.
14. 15. 16.
161
The Association of Investment Management Sales Executives, Boca Raton, FL, April 29, 2002. Available at: www.vanguard.com/bogle_site/sp20020429.html. Lynch, Jones & Ryan LLC, LJR News Update, 21(10), December 2006.Available at: www.ljr.com/pdf/2006-12%20LJR%20News%20Update.pdf . Steven Greenhouse, “Sharp Decline in Union Members in ‘06,” New York Times, 26 January 2007. Paul Angelo, FSA, The Segal Company, Speech at the Public Funds Forum, San Francisco, CA, 11 December 2006. Thomas L. Friedman, “The Taxi Driver,” New York Times, 1 November 2006. Ibid. Paul Brown, “Wireless Codependency,”New York Times, 17 February 2007. Amanda Lenhart, Mary Madden, & Paul Hitlin, “Teens and Technology:Youth are leading the transition to a fully wired and mobile nation,” 27 July 2005. Available at: www.pewinternet.org/pdfs/PIP_Teens_Tech_July2005web.pdf . Strategic Research Institute, The 2nd Annual Pension Funds in Crisis Conference, Renaissance Hotel, Washington, DC, October 18 and 19, 2006. Steve Kroft, “U.S. Heading For Financial Trouble? Comptroller Says Medicare Program Endangers Financial Stability,”60 Minutes,CBSNews.com, 8 July 2007. George W. Bush, Acceptance Speech, Republican National Convention, New York City, 2004. Jonathon Weisman, “The Politics of Social Security: Kerry to Use Study to Call Bush Plan a Wall Street Windfall,” Washington Post, 22 September 2004, p. A02. Franks Sesno, “Transition of Power: President-Elect Bush Meets With Congressional Leaders on Capitol Hill,”CNN Newsday, aired December 18, 2000. Transcript available at transcripts.cnn.com. Adam Cohen, “What is the Latest Thing to be Discouraged About? The Rise of Pessimism,” NewYork Times, 28 August 2007. E.J. Dionne Jr., “Behind Bush’s Rhetoric,” 22 October 2004, p. A25. Robert Samuelson, as cited in David F. Swensen, Unconventional Success: A Fundamental Approach to Personal Investment, (Simon and Schuster: New York, NY 2005), p. 5.
Chapter 7 1. Larry Rohter,“Paraguay’s Ruling Party Faces Threat of a Populist Bishop,”New York Times, 27 February 2007. 2. Robert J. Samuelson, “Farewell to Pax Americana,”Washington Post, 14 December 2006, p. A31.
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162
notes
3. Ibid. 4. David Horowitz, The Professors: The 101 Most Dangerous Academics in America, (Regnery Publishing: Washington, D.C., 2006). 5. Harold Meyerson, “ ‘Family Values’ Chutzpah,”Washington Post, 7 March 2007, p. A17. 6. Ibid. 7. Harris Interactive, “University of Michigan, Thunderbird, and ESADE Are Highest Ranking Business Schools Among National, Regional and International Categories in Sixth Annual Business School Survey by Harris Interactive and The Wall Street Journal,” 20 September 2006. 8. Lynda Gratton (2007), “Handling Hot Spots,”Business Strategy Review 18(2), 9–14. 9. Alexander Dorna quoted in Wolfgang Schivelbusch, Three New Deals: Reflections on Roosevelt’s America, Mussolini’s Italy, and Hitler’s Germany, 1933–1939 (New York: Metropolitan Books, 2006), p. 52. 10. Martin Luther King, Jr., I Have a Dream: Writings and Speeches that Changed the World (New York: HarperOne, 1992). 11. Source: John Connolly, President, American Federation of Radio and Television Artists, via email. 12. Greg Ip, “Income-Inequality Gap Widens,”Wall Street Journal, 12 October 2007. 13. Ibid. 14. Ibid. 15. Morris Berman, Dark Ages America: The Final Phase of Empire (Norton: New York, NY, 2006), p. 2. 16. David Cay Johnston, “Income Gap is Widening, Data Shows,”New York Times, 29 March 2007. 17. Challenger, Gray, & Christmas, as cited in Alan Murray, “Excerpt from ‘Revolt in the Boardroom,”USA Today, 16 July 2007. 18. John Nichols, “What Can Sherrod Brown Do For the Democrats?” The Nation, 2 October 2006. 19. Paul Schott Stevens, President, Investment Company Institute, Remarks at the Mutual Funds and Investment Management Conference, 20 March 2006, Phoenix, AZ. Available at: www.ici.org/statements/remarks/06_mfimc_ stevens_spch.html. 20. Jeff Madrick, “The Growing Wage Gap,”The Nation, 9 October 2006, pp. 4–5. 21. Matt Bai, “The Inside Agitator,”New York Times magazine, 1 October 2006, p. 57.
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Notes
163
22. Yuval Rosenberg, “Talking ‘Bout Our Generation,”Fortune, 21 June 2006. 23. Judith Nichols, “Boomers Control Three-Quarters of U.S. Financial Wealth,” 28 July 2006. Available at: www.causeplanet.org/articles/article.php?id=8. 24. Cecilia Kang, “Living Large, in the Capital of Boomer Nation,”Washington Post, 15 January 2007, p. D02. 25. Ibid. 26. Jim Gilmartin, “Generations Older Than the Baby Boomers Are Gaining in Consumer Power,” 13 June 2003. Available at: www.lifecoursenavigation.com/ press/20030613ttb.html. 27. “Experts Predict Top Trends in Marketing to Baby Boomers in 2007: Market gets attention due to its size - $2.1 trillion in spending power”, Senior Journal, 6 March 2007. Available at: seniorjournal.com/NEWS/Boomers/2007/7-0306-ExpertsPredict.htm. 28. Remarks by Chairman Alan Greenspan, Budget policy, to the Federal Reserve Bank of Philadelphia Policy Forum, Philadelphia, Pennsylvania (videotaped remarks), 2 December 2005. Available at: www.federalreserve.gov/boarddocs/ speeches/2005/20051202/default.htm. 29. Ibid. 30. AARP, “Reimagining America: AARP’s Blueprint for the Future: How America Can Grow Older and Prosper,” January 2006. Available at: www.aarp. org/research/blueprint/redefining/. 31. MetLife, “New Study Finds America’s Communities Are Not Prepared for an Aging Population,” press release, 27 September 2006, http://www.metlife. com/Applications/Cor porate/WPS/CDA/PageGenerator/0,4773, P250%255ES882,00.html. 32. Statement of Steven A. Kandarian, Executive Director, Pension Benefit Guaranty Corporation before the Subcommittee on Oversight, Committee on Ways and Means, U.S. House of Representatives. Available at: www.pbgc. gov/media/news-archive/testimony/tm14601.html. 33. Annamaria Lusardi, “401(k) Pension Plans and Financial Advice: Should Companies Follow IBM’s Initiative?,” n.d., Available at: www.dartmouth.edu/ ~alusardi/Papers/07-Lusardi_shortarticle.pdf. 34. Jan Cullinane & Cathy Fitzgerald, The New Retirement: The Ultimate Guide to The Rest of Your Life (Rodale: New York, NY, 2004). 35. Bob Herbert, “Deceit Beyond Bounds,” The New York Times, 10 August 2006. 36. Hubert Humphrey, Speech to the Democratic National Convention, 1976. 37. Gary Mucciaroni & Paul Quirk, Deliberative Choices: Debating Public Policy in Congress (Chicago: University of Chicago Press, 2006).
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164
notes
Chapter 8 1. John Bogle, The Battle for the Soul of Capitalism (Yale University Press: New York, NY, 2006). 2. Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction, (Belknap Press: Cambridge, MA, 2007) 3. Jared Bernstein, “The United States Goes Yoyo,”The Globalist, 06 July 2006, 4. Statement by U.S. Senator Chuck Hagel on his political future, SandHills PAC, 12 March 2007. 5. U.S. Department of Labor, Employee Benefits Security Administration, “Private Pension Plan Bulletin Historical Tables,” March 2007. Available at: www.dol.gov/ebsa/pdf/privatepensionplanbulletinhistoricaltables.pdf . 6. MoneyNews, “Countrywide Financial to Cut 2,500 Jobs,” 25 October 2006. Chapter 9 1. Warren Buffett, Letter to the Stakeholders of Berkshire Hathaway Inc., 28 February 2007. Available at: www.berkshirehathaway.com/letters/2006ltr. pdf . 2. Wendell Berry, The Way of Ignorance: And Other Essays, (Emeryville, CA: Shoemaker & Hoard, Publishers), p. 60. 3. Arthur Schlesinger Jr., quoted in E. J. Dionne, Jr., “A Historian Who Saw beyond the Past,”Washington Post, 2 March 2007, p. A13. 4. Ed Henry, “Do Congressmen Work Hard for the Money?” CNN, 24 October 2006. 5. Adam Nagourney & Janet Elder, “Poll Finds Most Americans Displeased With Congress,”The New York Times. 6. Paul Krugman, “Competitiveness: A Dangerous Obsession,” Foreign Affairs, 73:2, March/April 1994. 7. Adam Posen, “Faddish Export Promotion is a Heavy Burden for Any Economy,”Financial Times, 9 August 2006. 8. Marta Lagos, The Inter-American Dialogue’s Latin American Advisor, 1 February 2007, p. 3. 9. Kim Dixon, “Most Employers Cutting Retiree Health Care: Study,” Reuters, June 29, 2006. 10. Ibid. 11. Ibid. 12. Ibid.
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165
Chapter 10 1. Stephanie Flanders, “The Americans & International Economy: Prolific polemicist who revealed the human face of money and power,” Financial Times, 01 May, 2006. 2. Clark G L, Caerlewy-Smith E, Marshall J C, “Consistency of decision-making: the effect of education, professional qualifications, and task-specific training on the probability judgements of pension fund trustees,” WPG06-03, Oxford University Centre for the Environment, Oxford, 2006. 3. Margaret Mead & Robert B. Textor, The World Ahead: An Anthropologist Anticipates the Future (Oxford, UK: Berghahn Books, 2005), p. 12. 4. Sterling F. Delano, Brook Farm: The Dark Side of Utopia, (Cambridge, MA: Harvard University Press, 2004) p. 349. 5. Bill Moyers, “For America’s Sake,”The Nation, 22 January 2007. 6. Ibid. 7. Ruben Navarrette, Jr., “Power Vs. Persuasion,”San Diego Union-Tribune, 24 February 2006. Conclusion 1. John Stuart Mills, On Liberty, An Essay, 1869. Available at: www. economyprofessor.com/library/john-stuart-mill/essay-on-liberty-0.php. 2. Helen Keller, Optimism, (Whitefish, MT: Kessinger Publishing, 2003) p. 21.
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Index
Action Research for Thrivent Financial Retirement survey, 1 Agency for Healthcare Research and Quality, 41 Aging, references for information on, 139–141 Agricultural revolution, 7 America:Who Stole the Dream? (Barlett and Steele), 73 American Association of Retired Persons (AARP), 27 American debt crisis, 17–18 Federal Reserve Board study of, 17 American dream, the, 74–75, 130 American political system, corporatization of, 55–59 Armstrong, Jerome, 21 Bankruptcy, 17, 32 Bankruptcy Abuse Prevention and Consumer Protection Act, 32–33
Bankruptcy Reform Act of 1978, 32 Barlett, Donald L., 73 Barnes, Fred, x Berman, Morris, 71–72 Bernanke, Ben, 53, 112 Bernstein, Jared, 87, 97, 116 Berry, Wendell, 105 Bilmes, Linda, xxiii Bogle, John, 96 Bonhoeffer, Dietrich, 7 Boomsday (Buckley), 6, 138 Brandeis, Louis, 24 Brown, Sherrod, 77 Buckley, Christopher, 6, 138 Buffett, Warren, 104 Bush, George W., 56, 57, 58, 77 administration, ix–x, xiv, 19 percentage of popular vote in second-term election, 58 plan for domestic reform, 56
167
bindex.indd 167
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168 Camus, Albert, 64 Carter, Jimmy, 93 Cash balance plans, 99 Casey-Kirschling, Kathleen, xii Castellani, John, 25 Center for American Progress, 35 Center for Responsible Lending, 34 Change, time for, 91–102 employment legislation, need for new, 95–102 Civil Rights Act of 1964, 130 Clinton, Bill, 82 administration, 130 failed health care initiative of, 27 percentage of popular vote in second-term election, 58 Clinton, Hillary, 27 “Consistency of Decision-Making: The Effect of Education Professional Qualifications, and Task Specific Training on the Probability Judgments of Pension Fund Trustee Decision-Making” (report), 122 Consumer debt, references for information on, 141–142 Countrywide Financial Corporation, 101 Crashing the Gate (Armstrong and Moulitsas), 21 DailyKos.com, 21 Dark Ages America:The Final Phase of Empire (Berman), 71–72 Dean, Howard, 20–21 Debt crisis, American, 17–18, 31–37 Federal Reserve Board study of, 17 longevity, cost of, 36–37 subprime loan debacle, hidden problems of, 33–36 interest-only loans, 34 ninja loans, 34 no-doc loans, 34 piggyback loans, 33–34
bindex.indd 168
index Defined benefit plans, 98–99 destruction of, 48–52 Defined contribution plans, 98 Deliberative Choices: Debating Public Policy in Congress (Mucciaroni and Quirk), 88 Demographics, 115–117 Dent, John, 44 Dionne, E.J., 58, 88 Dodd, Christopher, 34 Dorna, Alexander, 67, 69 Drugs, 41–43 adverse drug events, 42 costliest classes of, 41 medication errors, 42–43 Dychtwald, Ken, xxix, 49–50 Economic growth, unprecedented, and resultant productivity gains, 113 Economic revolutions, 7–9 globalization, 7 Eisenhower, Dwight, percentage of popular vote in second-term election, 58 Elder care, references for information on, 142 Employee Benefit Research Institute, 26, 31, 37 Employee benefits, 39–46 ERISA era, 44–45 non-ERISA retirement systems, threat to, 45–46 rising cost of health care, 40–43 Employee Retirement Income Security Act of 1974 (ERISA), xi, 44–45, 116 Employment legislation, need for new, 95–102 Erlenborn, John, 44 401(k) retirement plans, 1, 4, 24, 47–48, 98 automatic enrollment in, 78
2/27/08 12:04:42 PM
Index average holdings in, 32 introduction and implementation of, xx–xxi percentage of workers with, 36 references for information on, 153–154 457 plan, 98 Fahrenheit 911, 88 Fidelity Investments Research Institute survey, 17 Finance, evolving glossary of, 9–10 Financial illiteracy, 56, 78 Financial market declining, ruptured, and volatile, 115 gains of the late 1990s, 114 Free-trade agreements, enactment of, 114 Friedman, Thomas L., 50 Furman, Jason, 71 G.I. bill, 130 Galbraith, John Kenneth, 119 Gandhi, Mahatma, 68 Generation X, 86 Geser, Hans, 51 Gettelfinger, Ronald, 8 Gingrich, Newt, 16 Globalization, 7–9, 109–113 contributing factors to growth of, 110–111 cyclical factors, 110 political forces, 110–111 structural changes, 111 Goolsbee, Austan, 57 Government Accountability Office report, 2006, 18 Government Printing Office, 109 Great Depression, 17, 19, 48, 63, 72 Greenspan, Alan, 84–85, 114, 121 Hagel, Chuck, 98 Harris, Herbert, 72 Health care
bindex.indd 169
169
costs ever-increasing, 76–86 shifting the burden to employees, 25–26 crisis in America, 26–28 elderly people, plight of, 42 references for information on, 142–144 rising cost of, 40–43 Hess, Thomas, 2–3 Hollon, Matthew, 40 Horowitz, David, 62 Humphrey, Hubert, 87 Hunnisett, Stephen, 3 Hutchins, Robert Maynard, 100 Industrial revolution, 7 Investment strategies, in managing risk, xxv–xxvi Investor education, references for information on, 144–146 Jacobson, Sibyl, 85 Javits, Jacob, 44 Johnson, Lyndon, percentage of popular vote in second-term election, 58 Kadar, Dwight, xiii Kaiser Family Foundation, 41, 116 Keller, Helen, 139 Kennedy, Robert, 138 Kennedy, Ted, 126 King, Dr. Martin Luther, Jr., 68–69, 124 Koch, Ed, 122 Krugman, Paul, 111 Lagos, Marta, 113 Leadership health care, ever-increasing cost of, 76–86 need for, 61–89 new, for American institutions, 63
2/27/08 12:04:42 PM
170 Leadership (Continued ) polarization of America’s, 70–72 retirement plans, failure of, 86–89 Life Events Scale, 86 Life expectancy, average, 19 Long Term Capital Management, 120 Longevity risk, xxv Mackell’s “Top 12 List,” 122–129 McDonough, William, 121 McKinsey & Company report on health care spending, 26 Mead, Margaret, 127 Meany, George, 93 Medicaid, xxii, 5, 75, 76, 81 reform of, 53 Medical mistakes, 43 Medicare, x, xxii, 5, 75, 76, 81, 84–85, 100 reform of, 53 references for information on, 146 Mercer’s National Survey of EmployerSponsored Health Plans, 18 MetLife Foundation, 85 Meyerson, Harold, 63 Mills, John Stuart, 139 Moore, Michael, 88 Mortgage, references for information on, 147 Moulitsas, Markos, 21 Moyers, Bill, 134–135 Mozilo, Angelo, 101 Mucciaroni, Gary, 88 MyDD.com, 21 Nader, Ralph, 68, 127 NAFTA, 8 “Nation at Risk, A,” 70 National Association of Area Agencies on Aging, 85 National Retirement Planning Week, 32 New Deal, xxi–xxii, xxiv, 72, 105, 130
bindex.indd 170
index Non-ERISA retirement systems, threat to, 45–46 Nye, Joseph, ix Occupational Safety and Health Act, 130 Operation Enduring Freedom, Pentagon spending on, xxiii Operation Iraqi Freedom, Pentagon spending on, xxiii Ownership society, xxiii Parks, Rosa, 68 Patton, Guy L., 17 Pension Benefit Guaranty Corporation (PBGC), xi, 44, 80, 116 “Pension envy,” 116, 126 Pension Funds in Crisis: The Future of Defined Benefit Plans after Pension Reform (conference sponsored by the Strategic Research Institute, 2006), 51–52 Pension plans, in the public sector, 4 Pension Protection Act of 2006, 77 Pension reform, necessity of, 2–3 Personal responsibility, xxiii Pew Center for the People telephone survey, 2007, 27 Pew Internet and American Life Project, 51 Policymakers, the, 108–109 Political reality, new, 13–21 American debt crisis, 17–18 Federal Reserve Board study of, 17 divide between the rich and everyone else, 15–16 retirement affordability of, 18–21 saving for, 17 Politics centralization and nationalization of, 82
2/27/08 12:04:42 PM
Index references for information on, 147–150 Posen, Adam, 111 Presidential election 2000, 14 2008, campaign for, 13–14, 43 Quirk, Paul, 88 Rayburn, Sam, 28 Reagan, Ronald, 19 address to Republican National Convention, 1980, 134–135 percentage of popular vote in second-term election, 58 responsibility for contributing to the demise of family values, 62 Republican National Convention, 2004, 56 Retiree benefits, changes to, xx–xxiv 401(k) retirement plan, introduction and implementation of, xx–xxi Retirees, working, xxviii percentage of people over age 55 who are, 54 Retirement affordability of, 18–21 crisis, 47–59 American political system, corporatization of, 55–59 defined benefit plan, destruction of, 48–52 health care, references for information on, 152–153 references for information on, 150–152 saving for, 17 shifting the burden to employees, 25–26 three-legged stool approach to, 3–4 Retirement plans 401(k) retirement plans, 1, 4, 24, 47–48, 98, 107
bindex.indd 171
171
automatic enrollment in, 78 average holdings in, 32 introduction and implementation of, xx–xxi percentage of workers with, 36 457 plan, 98 defined benefit plans, 98–99 destruction of, 48–52 failure of, 86–89 defined contribution plans, 98 Roosevelt, Franklin D., xxi–xxii, xxiv, 19 percentage of popular vote in second-term election, 58 Salisbury, Dallas, 37 Samuelson, Robert, 59, 61–62 “Sandwich” generation, 7 Sarbanes-Oxley, 75, 92, 126 Schlesinger, Arthur, Jr., 15, 105 Schumpeter, Peter, 97, 126 Secure Fence Act, 132 Securitization, 35 September 11, 2001, terrorist attacks, xi, 112 Sheiner, Louise, 17 Sichel, Daniel, 17 Slifman, Lawrence, 17 Smith, Jean Edward, xxiv Social Security, x, xxii, 5, 24, 75, 81, 84–85, 86, 100 first baby boomer to apply for, xiv future of, 4–7 as part of three-legged stool approach to retirement, 3–4 privatization of, 56, 57 references for information on, 153 reform of, 53 underfunding of, 52 Stein, Ben, 32 Stern, Andy, xxiv, 27 Stiglitz, Joseph, xxiii Stone, Linda, 50
2/27/08 12:04:43 PM
172 Subprime loan debacle, hidden problems of, 33–36 interest-only loans, 34 ninja loans, 34 no-doc loans, 34 piggyback loans, 33–34 Tauss, Roger, 77 Terrorism, ix, xxvii The Battle for the Soul of Capitalism (Bogle), 96 The Professors:The 101 Most Dangerous Academics in America (Horowitz), 62 The Twilight of American Culture (Berman), 71 The World Is Flat: A Brief History of the Twenty-first Century (Friedman), 50 Toynbee, Arnold, 27 Unionization, decline of, 48 United Auto Workers (UAW), 8
bindex.indd 172
index Voter apathy, 108 Wal-Mart model, 107–108 pricing pressure, 108 Walesa, Lech, 68 Walker, David, 5, 52–53 Will, George, xi Williams, Harrison “Pete,” 44 Work changing nature of, the, 106 and the workplace, new realities of, 23–29 health care costs, shifting the burden to employees, 25–26 health care crisis in America, 26–28 health insurance, the troubled world of, 28–29 Workforce, portability of, 106–107 technology and, 107 Wyatt, Watson, 116
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