Roger Lowenstein develops three case studies of retirement benefits gone awry, where the cost of the benefits became disastrously unsustainable. As the title suggests, the examples presented are pension plans sponsored by General Motors (GM), the New York City Metropolitan Transit Authority, and the City of San Diego. Although each of these institutions and their circumstances are unique, Lowenstein describes an identical and dreadful conclusion for each, stating, ‘All financial debacles have a human element – in this case the urge to delay that which we find unpleasant now’.
While America Aged delivers rich and detailed descriptions of the inner workings of each institution, characterizing the key players and the cultural environments that led to the ruinous, if predictable, outcomes. With more than 30 pages of footnotes, Lowenstein's book is thoroughly researched.
The book begins with a description of GM's dominance in the U.S. auto market, sporting a market share in the U.S. that peaked in the 1950s at more than one-half of all auto sales. Proceeds of this market supremacy flowed to the company's shareholders: from the end of World War II until 1965, GM stock grew eightfold. Ironically, it was during this time that 20th century labor icon Walter Reuther, as president of the United Auto Workers (UAW), negotiated a series of agreements with the Big Three – GM, Ford, and Chrysler – that fulfilled the key elements of labor's vision: job security, retirement security, and lifetime health care – but that would sow the seeds of GM's ultimate demise.
The factories that produce automobiles are enormous investments, and Reuther and the UAW understood the formidable cost the companies would incur were these engines of manufacturing halted due to a labor strike. Reuther leveraged the threat of strikes to extract concessions from the Big Three, often using the companies against one another in what Lowenstein describes as a divide-and-conquer strategy, by forging favorable deals with one company, then demanding the same terms from the others. If another of the Big Three failed to match the newly-minted deal, the UAW would threaten to strike, a costly scenario that likely would be exacerbated by the loss of precious market share.
The result for the auto companies was a dilemma of either agreeing to the workers' demands, thereby elevating short-term gratification above long-term costs, or biting the bullet today and avoiding even greater pain in the future. The auto companies usually opted for the former, capitulating to worker demands by agreeing to a combination of higher wages; better pension benefits; greater job security; and enhanced health care benefits for working or retired employees, or both. By agreeing to ever-greater future retirement obligations, these deals slowly but inexorably transferred de facto ownership of GM from its shareholders to its workers, a phenomenon termed by Lowenstein as ‘the great disenfranchisement’. This remarkable outcome is amply illustrated through the author's citation that from 1991 to 2006, GM paid $55 billion into its workers' pension plan, and $13 billion to its shareholders via dividends.
The finale of the GM story, played out after this book was published in 2008, is now famous: staggering under the weight of pension and retiree health care liabilities that it could no longer postpone, the company filed for bankruptcy in 2009 and was reorganized as a new entity, with the United States Government as majority shareholder. GM shareholders are likely to be left with nothing to show for their investment, and bondholders will receive a small portion of their initial investment.
Lowenstein's trilogy turns from Detroit to New York City for an account of a history of struggle and confrontation over retirement benefits for employees of the Metropolitan Transit Authority of the City of New York. These are the workers who make New York City's subways run, and who, according to Lowenstein ‘were as essential to the city's ordinary life, its healthy circulation, as were its police and fire services – on a daily basis probably more so’.
In certain respects, the story resembles the GM saga, of a labor movement that evolves from a struggle for basic recognition to strength, from members earning low wages and poor benefits to highly competitive wages and robust benefits. But the New York City story is enriched with local and state politics and a series of politicians and labor leaders playing out their struggles in public and behind closed doors. Another difference is that New York City transit workers did go on strike, more than once, in dramatic, high-stakes games of chicken, and the victims of such disputes were not shareholders, but regular citizens. Lowenstein's account brings readers up-to-date through the December 2005 transit strike, which culminated in a deal that made critical reforms to the pension plan. In the case of New York City's transit workers, higher taxes and higher subway fares notwithstanding, New York City did appear to succeed at resolving the thorny issue of the cost of employee pensions.
The final segment of While America Aged focuses on the City of San Diego, where Lowenstein describes union successes at ‘wringing higher benefits from weak politicians’, but also cites the ‘moral hazard’ at work in which government intentionally passed on the cost of benefits to future generations. ‘Enron-by-the-sea’ had become a popular term used by the media to describe the San Diego financial debacle, due to a lethal combination of self-serving public employees and politicians unwilling to raise taxes to pay for the higher cost of benefits. As Lowenstein states, ‘[I]n San Diego, the abuse was deliberate and repeated in the face of mounting evidence that the retirement system was in trouble’. As with the stories of GM and New York City, readers again are treated to a rich description of the city's political culture and its principals.
The San Diego story includes an added element of allegations of fraud regarding disclosures associated with a municipal bond issuance. An unsavory combination of generous benefits, conflicted retirement board members and city officials, a low-tax culture, and a determined labor union, conspired to obfuscate and postpone disclosing the true cost of the city's pension benefits and obligations. The result was a city deep in debt and denied access, albeit temporarily, to credit markets.
Lowenstein finishes by acknowledging the important role pensions play in providing workplace stability to public employers, contending that at least in the public sector, ‘they still make sense’. He also wisely acknowledges that pensions, in the public sector anyway, are not the problem, but rather, the problem is the way pensions are treated: their sponsors often fail to adequately fund them. Lowenstein concludes with a sound recommendation that every state, and indeed the federal government, should mandate that required pension contributions be paid every year.
