Article | Playing Politics with Pensions

April 1, 2005

By Nicole Gelinas

NEW Yorkers will spend nearly $4 billion this year to fund pension benefits for city workers. But all that money isn't just so these workers can retire in style: Gotham's taxpayers are also unwittingly funding a well-orchestrated lobbying campaign against Social Security reform.

Actually, lobbying is too polite a word for what some pension-fund trustees are doing. Their tactic is closer to intimidation.

Many Americans remain in the dark about what Social Security reform could mean for them - and some pension-fund trustees are using their clout to keep it that way. The trustees want to muzzle any public comment on the topic by Wall Street investment banks and Fortune 500 companies.

Three union trustees of the New York City Employees' Retirement System (NYCERS) recently issued a threat to six top Wall Street firms: If JPMorgan Chase and its competitors support private Social Security accounts, or keep contributing to lobbying groups that do, the letter warned, the firms risk losing the hundreds of millions in fees they earn each year from managing public-pension funds.

"We are gravely concerned that apparent connections between your firm and organizations involved in initiatives that are potentially injurious to the retirement security of plan beneficiaries may be at odds with the duty to represent the best interests of our plan and its beneficiaries," the three trustees wrote, according to the Wall Street Journal.

The trustees are from the local chapters of the American Federation of State, County, and Municipal Employees (AFSCME), the Teamsters and the Transport Workers Union. They have plenty of clout on Wall Street - because city and state politicians have spent decades beefing up the pension funds for the public-sector employees who belong to these unions.

Yesterday, AFSCME - with 120,000 city employees - participated in a "National Day of Action for Retirement Security." The union is protesting financial-services firm Charles Schwab for the sin of trying to educate customers on how private Social Security accounts might affect their retirement planning.

AFSCME has also targeted Pfizer - warning the drug company to withdraw from a trade group that supports Social Security reform. The implicit threat? The union can lobby the pension fund to sell its Pfizer stock if the firm doesn't follow orders.

It's a free country - unions should be free to raise money from their members to advocate for a political cause. But the labor leaders don't want to argue this one on the merits. They want to shut down the national debate before it really begins.

They might succeed. Through their representation on public-pension funds across the nation, union bosses help to control $2.3 trillion in investment assets - the largest single special-interest bloc of money in America's capital markets.

Public-pension assets have grown seven-fold in 20 years, while private-pension fund assets have crept up more slowly, to $4.2 trillion - only about twice as big as the public funds, compared to three times as big two decades ago. (NYCERS alone controls $85 billion in investments.)

The public pension funds have long used their clout within corporate America to lobby for union causes: In the past decade, pension funds have fought the outsourcing of jobs to cheap-labor nations and have fought for "a living wage" standard worldwide.

Closer to home, they've fought privatization efforts: NYCERS has adopted a rule that prohibits private-equity investments in companies that provide private-sector services that could "have the potential of eliminating public-sector jobs."

But a push against Social Security reform could be the funds' biggest effort ever - because Social Security reform threatens their very existence.

President Bush's reform plan hinges on convincing Americans that they should control their own retirement accounts - not be dependent on a monthly government payout for whole decades of their lives. (NYCERS as a whole hasn't taken a position on the reform. But California's giant public-employee pension fund, CalPERS, is against private accounts.)

If Bush can convince Americans of this, the public pension funds, and the unions, will lose much of their clout. Such reform might persuade taxpayers that, in a world where most workers have 401(k) defined-contribution pension accounts - and where even Social Security has a defined-contribution element - there is no reason for public-sector employees alone to have rich defined-benefit pensions that are guaranteed by taxpayers regardless of how the markets perform.

It could even dawn on public-sector workers in New York and California that it might not be such a great idea to leave their retirement security dependent on future politicians keeping promises made by elected officials today - that it might be safer to accept a defined-contribution plan now, doing away with the need for the pension trustees.

Gov. Arnold Schwarzenegger is already calling to switch California's $300 billion public-pension system to a system of private accounts, similar to private-sector 401(k)s. This is partly to protect government workers from future benefit cuts - and partly to protect taxpayers.

Right now, taxpayers must make up any shortfalls in the public pension funds, so during bear markets, municipal governments must raise taxes or cut services to cover mushrooming costs. Gotham's taxpayers still must pay more than $1 billion each year to cover pension losses from 2001 and 2002.

Just when Americans would benefit from a no-holds-barred argument on Social Security, those same taxpayers can now observe that their billions in annual payments to the pension funds are enabling the unions to muzzle a debate about the nation's future.