Monday, May 23, 2005
Confronting New Realities on Pensions
by Bernard Wasow
Last week United Airlines dumped most of its pension obligations into the lap of the taxpayer. With court permission, United once more dodged the bankruptcy bullet by jettisoning some of the promises it made in the old days when airlines were a regulated oligopoly. This event is not the first time the public has picked up the bill for the airline industry. The Pension Benefit Guarantee Corporation already is responsible for pension promises of Pan Am, TWA, and US Airways. Nor is it a trend confined to the airline industry or to pensions. With union-contracted health care benefits under siege at General Motors, and the unionized segment of the retail industry giving way to non-unionized employers from Whole Food to Wal-Mart, the entire array of fringe benefits that were a standard part of contracts of the post-World War II decades appears to be crumbling away.
This benefit erosion is part of larger changes in the economy. Radical reductions in communication and transportation costs have made competition fiercer, requiring firms to watch their costs much more closely. The days in which big companies could count on semi-captive markets, and labor unions could win a share of the monopoly surplus for workers, is ending. As the days of generous fringe benefits draw to a close, it is essential that we redefine the roles of the private and the public sector in meeting the needs once met by pension and health care fringe benefits.
It is no longer reasonable for employees to look to their employers for future or even some current benefits. Competition not only has led to bankruptcy of such once mighty firms as Bethlehem Steel, Pan Am, and Polaroid, it has reduced the health and pension components of total compensation. As health care costs have skyrocketed, heath benefits have failed to keep pace. Many workers today have minimal or no employer-provided health insurance.
This trend will continue because it is profitable. When some employers (United) unload their pension obligations onto the general public, they gain a competitive advantage over employers who continue to bear those costs (Delta, American). Similarly, employers who leave health insurance to the public sector through Medicaid or emergency room walk-ins, are able to charge lower prices than companies that provide their employees with insurance. Since firms that offer lower benefits seem to continue to attract acceptable employees, there is no competitive pressure from labor markets to retain benefits at historical levels. We can expect one firm after another either to shed its obligations or to lose ground to competitors who have lower costs.
Ironically, the dilemma the United States economy faces is not unlike what the countries of the former Soviet Union faced with the collapse of socialism. Health care and other benefits (from child care to vacations) were organized around the firm in the former Soviet Union, so when competition forced firms to shed those costs, the safety net fell apart.
Most advanced capitalist countries place the responsibility for health insurance and pensions largely with the public sector. These systems require higher taxes than in the United States (some a bit higher, some much higher), but private firms can offer fewer fringe benefits, and the system is uniform across firms. The United States could continue to rely more than other countries on supplemental pensions and insurance purchased by firms and households. But the public sector needs to pick up some of the responsibilities private firms are shedding under pressure of competition.
The solution to the problem of declining fringe benefits is not to make them mandatory through regulation or to let health care and pension guarantees fade away. Insurance against poverty in old age or against catastrophic health care costs must be part of out basic safety net, applicable to employees in small businesses as well as in big corporations. Nor is the solution to try to win back the benefits through renewed unionization. Even if some big firms buckled to pressure and offered more substantial benefits, new entries to the industry would eventually replace firms that commit to high costs. What is more, as the United Airlines default illustrates, hard-won promises to deliver benefits in the future can dissolve in a day.
The solution to the erosion of fringe benefits is a solid social insurance system that guarantees everyone a minimum acceptable standard of health care and retirement income. Incentives to firms and households to supplement this minimum standard with additional insurance and saving should be part of public policy as well.
The failure of United Airlines to keep its pension promises underlines once again our collective responsibility to provide all Americans with a secure safety net to protect them from poverty brought about by old age and illness.
Bernard Wasow is a senior fellow at The Century Foundation.
Editor's Note-When their jobs are offshored, American workers are told, too bad, it's just the way it is in the new global economy. However, the U.S. is the only advanced country in which the government does not provide universal health care and is now attempting to dismantle Social Security. Consequently, American businesses are left holding the bag with the responsibility of providing these necessary benefits to their employees which, in turn, hinders them against foreign competitors that aren't throttled with this burden. So, Bush and Congress must be told, too bad, government providing universal health care and Social Security is just the way it is in the new global economy.
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by Bernard Wasow
Last week United Airlines dumped most of its pension obligations into the lap of the taxpayer. With court permission, United once more dodged the bankruptcy bullet by jettisoning some of the promises it made in the old days when airlines were a regulated oligopoly. This event is not the first time the public has picked up the bill for the airline industry. The Pension Benefit Guarantee Corporation already is responsible for pension promises of Pan Am, TWA, and US Airways. Nor is it a trend confined to the airline industry or to pensions. With union-contracted health care benefits under siege at General Motors, and the unionized segment of the retail industry giving way to non-unionized employers from Whole Food to Wal-Mart, the entire array of fringe benefits that were a standard part of contracts of the post-World War II decades appears to be crumbling away.
This benefit erosion is part of larger changes in the economy. Radical reductions in communication and transportation costs have made competition fiercer, requiring firms to watch their costs much more closely. The days in which big companies could count on semi-captive markets, and labor unions could win a share of the monopoly surplus for workers, is ending. As the days of generous fringe benefits draw to a close, it is essential that we redefine the roles of the private and the public sector in meeting the needs once met by pension and health care fringe benefits.
It is no longer reasonable for employees to look to their employers for future or even some current benefits. Competition not only has led to bankruptcy of such once mighty firms as Bethlehem Steel, Pan Am, and Polaroid, it has reduced the health and pension components of total compensation. As health care costs have skyrocketed, heath benefits have failed to keep pace. Many workers today have minimal or no employer-provided health insurance.
This trend will continue because it is profitable. When some employers (United) unload their pension obligations onto the general public, they gain a competitive advantage over employers who continue to bear those costs (Delta, American). Similarly, employers who leave health insurance to the public sector through Medicaid or emergency room walk-ins, are able to charge lower prices than companies that provide their employees with insurance. Since firms that offer lower benefits seem to continue to attract acceptable employees, there is no competitive pressure from labor markets to retain benefits at historical levels. We can expect one firm after another either to shed its obligations or to lose ground to competitors who have lower costs.
Ironically, the dilemma the United States economy faces is not unlike what the countries of the former Soviet Union faced with the collapse of socialism. Health care and other benefits (from child care to vacations) were organized around the firm in the former Soviet Union, so when competition forced firms to shed those costs, the safety net fell apart.
Most advanced capitalist countries place the responsibility for health insurance and pensions largely with the public sector. These systems require higher taxes than in the United States (some a bit higher, some much higher), but private firms can offer fewer fringe benefits, and the system is uniform across firms. The United States could continue to rely more than other countries on supplemental pensions and insurance purchased by firms and households. But the public sector needs to pick up some of the responsibilities private firms are shedding under pressure of competition.
The solution to the problem of declining fringe benefits is not to make them mandatory through regulation or to let health care and pension guarantees fade away. Insurance against poverty in old age or against catastrophic health care costs must be part of out basic safety net, applicable to employees in small businesses as well as in big corporations. Nor is the solution to try to win back the benefits through renewed unionization. Even if some big firms buckled to pressure and offered more substantial benefits, new entries to the industry would eventually replace firms that commit to high costs. What is more, as the United Airlines default illustrates, hard-won promises to deliver benefits in the future can dissolve in a day.
The solution to the erosion of fringe benefits is a solid social insurance system that guarantees everyone a minimum acceptable standard of health care and retirement income. Incentives to firms and households to supplement this minimum standard with additional insurance and saving should be part of public policy as well.
The failure of United Airlines to keep its pension promises underlines once again our collective responsibility to provide all Americans with a secure safety net to protect them from poverty brought about by old age and illness.
Bernard Wasow is a senior fellow at The Century Foundation.
Editor's Note-When their jobs are offshored, American workers are told, too bad, it's just the way it is in the new global economy. However, the U.S. is the only advanced country in which the government does not provide universal health care and is now attempting to dismantle Social Security. Consequently, American businesses are left holding the bag with the responsibility of providing these necessary benefits to their employees which, in turn, hinders them against foreign competitors that aren't throttled with this burden. So, Bush and Congress must be told, too bad, government providing universal health care and Social Security is just the way it is in the new global economy.
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