Saturday, February 05, 2005

Social Insecurity Appendix

Table of Contents

Top central bankers play down threat of global economic crisis

Stelco pension holiday called off
Canada Pension Plan Board Puts $470 Million In European Infrastructure Funds -CP
BMO Reveals Cost Of Top Pensions -Globe and Mail
Canadians Spared Pension Debate Under Way In U.S. -Globe and Mail

Will U.S. Reform Spark Stock Gains? -Globe and Mail
Social Security, the Stock Market, and the Elections- Monthly Review Editorial
Pension Crisis Prompting Companies To Change Their Plans - Deloitte and Touche
Privatizing Social Security Who Wins When We Lose? - Nomi Prins, Against the Current
The Enron Debacle And The Pension Crisis - Robert Blackburn, New Left Review (NLR)
The New Economy And After - Doug Henwood, Left Business Observer (LBO)
Can The U.S. Economy Escape The Law Of Gravity? - Gary A. Dymski
Robert Brenner On The Crisis In The U.S. Economy

Social Benefit Reform Poll -FOM
Russia On The Verge Of A Breakdown -Moscow News
Can Russia Defuse Its Pension Time Bomb? -Business Week
FOM Poll 2003 Pension Reform
Macroeconomic Consequences Of The Russian Mortality Crisis -David E. Bloom & Pia N. Malaney
The Consequences Of Pension Failure: The Russian Case -Robert T. Jensen

José Piñera is president of the International Center for Pension Reform and co-chairman of the Cato Institute Project on Social Security Privatization. As minister of labor and social security from 1978 to 1980, he was responsible for the privatization of the Chilean pension system.
A Chilean Model For Russia
Empowering Workers The Privatization Of Social Security In Chile
Free Trade Agreements And Social Security Choice
WWW.Pensionreform.Org- Caroline Nolan

ICC (International Communist Current)
Pension Reform: Stealing Humanity's Future
We Have No Choice But To Fight Capitalism's Attacks
The Dismantling Of Social Security

Capitalist Crisis

Top central bankers play down threat of global economic crisis
By Doug Saunders
Feb.5/05Globe and Mail

London — Two of the world's most powerful central bankers yesterday tried to reassure the world that they will be able to prevent an economic crisis driven by the United States' spiralling debts and China's unsustainable surpluses.

Alan Greenspan and Zhou Xiaochuan, addressing the finance ministers of the G7 nations on the eve of their summit in London yesterday, seemed to be addressing mirror-image crises: An unsustainable level of personal and public debt and a shrinking dollar in the United States, and a lack of domestic consumer goods consumption and a vast surplus of personal and public savings driven by an artificially weak currency in China.

People's Bank of China governor Zhou Xiaochuan stopped short of the pledge the G7 finance ministers had hoped to hear yesterday — a promise to stop pegging the yuan to the U.S. dollar, a 10-year-old policy that has given China a dramatically high current account surplus, attracted a flood of foreign investment and forced the euro to record highs.

The fixed-exchange yuan has been criticized by all seven G7 ministers, including Canadian Finance Minister Ralph Goodale, since a meeting in Boca Raton, Fla., a year ago during which they pledged to make the world's major currencies — especially China's — more reflective of economic realities.

But Mr. Zhou said China will have to make major changes to an economy that has become too reliant on exports, foreign investment and savings. Many observers saw this as a hint that the yuan will some day be allowed to float.

“We have a very big challenge, with an essential challenge in our economy: We have too much investment in our economy, and relatively weak domestic consumption,” Mr. Zhou said. “Probably it's related to the Chinese tradition, the Confucian tradition ... they save the money for old people; they save too much money. It's the contradiction of the situation in the United States.”

Indeed, the two nations seemed to be facing up to complementary crises. Mr. Zhou noted that China's personal savings rate has risen from 35 per cent of GDP 10 years ago to an astonishing 40 per cent today. “This means we need to reform our social security system to give households more confidence to spend money,” he said.

In contrast, Mr. Greenspan noted that the U.S. personal savings rate has fallen from 9 per cent in 1993 to only 1 per cent today. This, combined with large public sector debts incurred by George W. Bush's low-tax policies and a historically high dollar that has only recently begun to fall, has made the United States highly dependent on imports and has created an enormous current account deficit, currently at 6 per cent of GDP.

Mr. Greenspan said economic and political factors will help prevent the U.S. current account and trade deficits from rising further.

“The voice of fiscal restraint, barely audible a year ago, has at least partly regained volume,” he said. “If actions are taken to reduce federal government dissaving, pressures to borrow from abroad will presumably diminish.”

“The U.S. current account deficit cannot widen forever,” he said, but “fortunately, the increased flexibility of the American economy will likely facilitate any adjustment without significant consequences to aggregate economic activity.”

His words immediately caused the U.S. dollar to rise. It closed yesterday at just under $1.25 (Canadian), up 0.72 cents.


Stelco pension holiday called off
Ontario wants funding issues resolved during the firm's financial restructuring

By Greg Keenan,Steel Reporter
Globe and Mail,Friday, February 11, 2005 - Page B1

The Ontario government played its ace in the hole yesterday in the high-stakes poker game for Stelco Inc., eliminating a pension holiday that saved the steel maker hundreds of millions of dollars -- a move that shows it's insisting the pension issue be solved during the company's financial restructuring.

James Arnett, the government's special adviser on the steel industry, told Stelco that when it emerges from protection under the Companies' Creditors Arrangement Act, it will no longer be entitled to the holiday from pension payments it was granted in 1996.

That holiday permitted Stelco to stop funding its pension plans on a solvency basis, but finance them instead on a going-concern basis and pay into the province-wide Pension Benefits Guarantee Fund.

The difference in costs between those two ways of financing is substantial. Stelco said its cash contributions to pension plans last year were $64-million, but would have been $353-million if the regulation had been changed last year.

If the government simply revokes the legislation that allowed Stelco to take the pension holiday, the solvency deficiency -- which stood at $1.3-billion on Dec. 31, 2004 -- would have to be paid back over a five-year period. Mr. Arnett's letter to John Caldwell, a Stelco director and chairman of the board's restructuring committee, said the government is prepared to be flexible about how it requires the firm to address the funding deficiencies.

The government's position has been communicated to Stelco's management and the bidders, Mr. Arnett said, but "it seems not to have been taken into account in various statements attributed to company representatives . . ."

Stelco was able to avoid solvency funding payments on the basis that it was too big to fail, he said.

"By filing for CCAA protection, Stelco gave notice that it was not 'too big to fail,' " he noted.

The government's move is a clear signal to Stelco and the companies bidding to take it over that it wants a pension solution now so the steel maker doesn't come back to the government in two years with an even bigger problem.

It comes just days before the Monday deadline for the five companies or groups that are assessing whether to make bids for Stelco to complete their due diligence examination of the steel maker's books and make a binding offer.

Algoma Steel Inc. bowed out of the bidding earlier this week citing unspecified "risks and obligations" it would face if it took over its larger rival. Sources familiar with the saga said Algoma was scared off in part by the pension shortfall and the government's refusal to participate in a bailout of the funds.

Hap Stephen, Stelco's chief restructuring officer, said in a statement that Stelco has consistently stated that the pension issue is crucial for both the company and the bidders.

"The bidders are well aware of the issue, of our view and of the court's stated assumption that they will keep the issue in mind in making their bids," Mr. Stephen said.

The 1996 decision by Stelco to seek an exemption from solvency funding infuriated members of its largest union at the company's Hilton Works in Hamilton and is at the root of the union's distrust of company management nine years later.

Rolf Gerstenberger, president of that local, number 1005 of the United Steelworkers of America, said he was intrigued by the government's move.

"The plot thickens," Mr. Gerstenberger said. "This is certainly upping the ante."

"We're certainly glad that the province has finally stepped in," added Bill Ferguson, president of USWA local 8782 at Stelco's Lake Erie Works. "It's going to be an issue that must be addressed."

A Stelco investor who did not want to be identified said the government's announcement is not necessarily bearish for the stock. That's because all the bidders would have known the pension issue has to be cleaned up before the company could emerge from bankruptcy protection.

"All the government is doing is reminding people that it's a stakeholder," the investor said. "So you can't go out and do a deal without consulting the government first. It's signalling the status quo arrangement [on the pension] is not acceptable."

The pension repair plan, he said, may include assigning some of the pension liabilities to the government and stretching out the pension-funding payments. Air Canada achieved something similar last May, when it agreed with pension regulators to fund its $1.2-billion pension deficit over 10 years, twice the five-year legal maximum that had been in place.

Stelco shares fell 5 cents to $3.07 in trading on the Toronto Stock Exchange.

The potential bidders left in the game are United States Steel Corp.; Sherritt International Corp. and the Ontario Teachers Pension Plan; OAO Severstal of Russia; and the TD Securities arm of Toronto-Dominion Bank teaming up with an unidentified U.S. buyout firm.

There are reports that Mittal Steel Co. of London has dropped out.

With files from reporter Eric Reguly


James Mccarten Canadian Press January 25, 2005

TORONTO (CP) - The Canada Pension Plan Investment Board bemoaned a shortage of opportunities at home Monday as it announced plans to spend $470 million on infrastructure projects half a world away.

The board said it has committed 200 million euros to the Macquarie European Infrastructure Fund, which invests in European utilities, railways, airports, toll roads and other assets - low-risk, long-term opportunities tailor-made for the CPP.

"Infrastructure, which is a relatively new asset class for us, has higher expected returns than bonds and is a good hedge against inflation," said David Denison, who took over last week as the board's president and chief executive.

"This is the type of regulated asset we are ideally looking for and are disappointed that there are so few domestic opportunities that meet our investment criteria."

It's becoming a familiar refrain: pension fund managers making pointed statements about how few investment opportunities there are in Canada's public sector despite persistent warnings about the country's disintegrating infrastructure.

Last August, when the Ontario Teachers' Pension Plan revealed it was part of a consortium planning to invest in gas distribution networks in Scotland, vice-president investments Robert Bertram admitted the fund was forced to look outside of Canada "because that's where we are finding good opportunities."

Teachers spokeswoman Lee Fullerton said the Scottish regulatory environment was far friendlier to institutional investors than anything Canada can offer.

"They have the experience, they have a regulator there who works closely with investors, and they found that there was an openness for private investment, along with a regulatory environment that supported it," she said.

"We don't have that here yet."

The $79-billion Teachers fund invests pension earnings on behalf of 252,000 retired and active teachers in Ontario.

The CPP commitments announced Monday raise the fund's infrastructure commitments to $670 million; it entrusted $200 million last year to Macquarie Essential Assets Partnership, which invests in North American assets.

The CPP Investment Board held $75.2 billion in its reserve fund at Sept. 30 - $35.6 billion in bonds and money market securities, and $39.6 billion in stocks, private companies, property and infrastructure.

The CPP board is also investing 66 million pounds in the Wales & West natural gas distribution network in Wales and southwest England.

Proponents of public-private partnerships, or P3s, say Canada doesn't have the economic regulatory framework to make such investments attractive, and therefore has few projects worth investing in.

"The projects do not exist in this country; that's the problem," said Jane Peatch, executive director of the Canadian Council for Public-Private Partnerships.

"There are just no opportunities here of any kind."

Peatch pointed to the chaos that erupted Sunday in Toronto - a broken water main flooded a transfer station, knocking out power to much of the downtown core - as an example of what Canadians may have to get used to in coming years.

"Governments have got to get their heads around this," she said.

"There is not a day in the foreseeable future that we'll have more public money to spend, and all of these pension funds are lined up and ready to put money in Canadian infrastructure once those structures exist to do so."

Peatch said pension managers love P3s because they're stable investments with a respectable upside that usually involve 25 or 30-year terms - perfect timing to avoid impairing pension payouts.

"They understand this is a perfect match for their money," she said. "More importantly, from a public policy perspective, a lot of that pension money comes out of public sector jobs, so reinvest it into the community that funded it in the first place."

Opponents of P3s, however, portray the partnerships as the leading edge of a push towards privatization, making them a political liability - the last thing a pension fund manager is interested in putting money in.

Governments are also wary of being stung, said Alex Murphy, a Toronto strategic consultant who's advised provincial governments and pension funds alike on P3 deals.

"The guys have gotten a little greedy on the private-sector side, and the governments have all backed away," he said.

"I think there's an issue of what governments expect out of these public-private partnerships. The government people aren't always as sophisticated about these things as are the private-sector guys they're negotiating with."

© The Canadian Press 2005

By Sinclair Stewart
Globe and Mail January 25, 2005

Bank of Montreal has become the first major Canadian financial institution to disclose pension expenses for its top executives, estimating it will cost roughly $19.6-million to fund the retirement of chief executive officer Tony Comper.

A flood of companies are expected to begin revealing this information over the course of the coming months, thanks largely to intensive lobbying by shareholders who want greater clarity on executive compensation. There have been concerns that companies could quietly increase pay packages for their top brass through pension plans, where disclosure has been relatively murky.

The remaining Big Six banks, except for National Bank of Canada, are expected to provide similar details on executive pensions when they begin issuing their annual proxy circulars this week.

While investors welcomed the information, they also questioned the need for such lucrative pension packages in an industry already awash in rich compensation. Mr. Comper made approximately $12.7-million this year through a mixture of salary, bonus and restricted share awards, in addition to cashing out stock options.

Bill Mackenzie, president of shareholder advocate Fairvest Corp. in Toronto, said executive compensation at the banks is getting "crazy."

Mr. Mackenzie suggested that if CEOs are already getting stock options and restricted share awards based on performance, they shouldn't be collecting fat pensions at the same time.

"I mean, if you're going to talk about stock options and all that sort of thing, then that's your nest egg, baby -- better make it work," he said. "When push comes to shove, they don't need them. They're all well-enough paid, and it's just more drag on the company of . . . fixed costs that don't contribute to the bottom line."

According to BMO's circular, Mr. Comper's annual retirement benefits are estimated to be $1.74-million, while the cost of his pension in 2004 was just over $1.2-million. BMO's accrued liability for Mr. Comper's pension increased by $2.8-million last year to $19.6-million, as of Oct. 31, 2004.

Mr. Mackenzie said he may begin exploring other ways of "hammering" at the banks for their compensation practices, including withholding votes from boards or their compensation committees.

"Somehow it just seems to build on itself and create momentum," he said of executive pay. "The board doesn't seem able to stop it."

The Ontario Securities Commission issued new guidelines last week for pension expense disclosure in an effort to bring some consistency to how companies report the information. Many large corporations have been grappling with the issue in light of increasing shareholder demands. A group of investors at Manulife Financial Corp., for instance, succeeded last year in its proposal for the insurer to begin detailing pension expense.

The cost of funding pensions for BMO's top five executives, including Mr. Comper, is more than $32.8-million, according to the company's circular.

Mr. Comper made $1-million in salary, collected a $2-million bonus, and received $2.8-million in restricted share units last year, all unchanged from 2003. He also cashed in $6.5-million in options this year, leaving him with $30.6-million of exercisable options and an additional $12.8-million worth that have not yet vested.

National Bank of Canada decided not to break out costs associated with executive pensions. Spokesman Denis Dubé said the Montreal-based bank was not comfortable estimating accrued pension liabilities or the cost of funding retirement benefits because the calculations contain so many variables. He says the bank's disclosure meets current regulatory guidelines.

"It could be dangerous to present figures since it depends on the time of retirement, the amount of compensation, and interest rates," he explained. Nevertheless, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Royal Bank of Canada, and Toronto-Dominion Bank are expected to detail pension expenses in their circulars.

According to National Bank's proxy, released yesterday, CEO Réal Raymond made $7.1-million in 2004, a combination of salary, long-term incentives, and converted stock options. Mr. Raymond cashed in $3.4-million in options last year.

Jean Turmel, stepping down as the bank's president of financial markets, treasury and investment bank, was the next most highly paid executive, with $6.7-million in total compensation in 2004.

By John Ibbitson
Globe and Mail, Thursday, February 3, 2005

In last night's State of the Union address, President George W. Bush proposed major reforms of America's troubled Social Security system. This would be a good time for Canadians to congratulate themselves.

Mr. Bush is pushing a plan that would permit younger workers to divert a portion of their Social Security payroll taxes to personal accounts. He sees it as the best response to the looming shortfall in Social Security that threatens to deprive pensioners of their government benefits in coming decades.

Fortunately, far-sighted actions by Canada's finance ministers in 1998 corrected a similar imbalance threatening the Canada Pension Plan. As a result, Canada is one of only three countries (the others are Britain and Australia) whose citizens can have full confidence that their pensions will be available for them, no matter how young they are or when they plan to retire.

Government pension plans are influenced by two factors: the average age of a population (which itself is influenced by birth rate and immigration policies) and the contributions of workers and businesses.

Japan, because of its low birth rate and restrictive immigration policies, is the country with the most heavily aging population. The nations of Europe come next, followed by Canada, which has the most aggressive immigration policy, and trailed by the United States, which has the highest birth rate in the developed world.

In the 1980s and '90s, it became increasingly clear that the contributions of workers in developed countries would not be sufficient to finance their pension plans well into the 21st century. Since the solution was either to raise payroll taxes or cut back benefits, most politicians ignored the problem.

But in Canada, then-finance-minister Paul Martin and his English-Canadian provincial counterparts agreed to steeply increase premiums paid by workers and companies. (Quebec operates its own pension plan, which is in equally good shape.) Our contributions rose by 70 per cent, but, as a result, the CPP is taking in more than it is paying out, and will continue to do so for years to come, leaving it with a solid surplus for those years when the size of the work force is insufficient to sustain the needs of retirees.

The Americans have largely ignored their looming Social Security deficit. So serious is the problem that analysts such as conservative British historian Niall Ferguson believe that America is set to implode from the weight of its fiscal, health-care and pension deficits.

Because Republicans have taken up this cause, arguing that partial privatization of Social Security is the solution, Democrats now maintain that there is no real crisis in Social Security, that the fund won't run out of money until 2040, and that the solution is to increase payroll taxes on upper incomes. And so a vital component of public policy becomes a partisan political football.

This, at least, is one debate we are spared. Canadian business and Canadian workers accepted that their payroll taxes were going to have to go up if the CPP was to be saved, and now we enjoy both the security and the competitive advantage of a fully funded pension scheme.

"This is one of the success stories for Canada," says Jean-Claude Ménard, the chief actuary at the Office of the Superintendent of Financial Institutions.

Mind you, we shouldn't be too complacent. Supplemental programs, including Old Age Security and the Guaranteed Income Supplement, are funded from general revenues, and therefore vulnerable. Company pension plans are in many cases less solvent than their government counterpart. And few of us are doing all we can to save for our retirement.

Mr. Ménard also suggests that the time may have come for governments to look at making the CPP more flexible, allowing people who keep working after 65 to receive partial benefits.

But at least Canadians won't have to spend the rest of this decade wrangling over whether and how to save the government pension plan from bankruptcy. Good on us.


Globe and Mail Thursday, February 3, 2005 - Page B19

Trillions of dollars would flow into the stock market as a result of U.S. President George W. Bush's proposed reforms to the U.S. social security system, but don't count on much of a lift for your portfolio.

Stock prices could rise marginally under a proposal that would have Americans invest a piece of their annual contributions to social security on their own, while bonds could be hurt in the early going. This is simple supply and demand -- more demand for stocks could push up stock prices, while bonds would suffer as the U.S. government issued more debt as part of its restructuring of social security.

That's the theory, anyway. Some experts believe that in real life, none of this will be tangible to investors.

"Were an investor to ask me what he should do on the back of these proposed changes, my answer is: nothing," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, N.Y. "There is not going to be a sharp change in market valuations in either stocks or bonds. The U.S. stock and bond markets are global phenomena, and there are a lot bigger forces at work than machinations in the social security system."

Changes to social security are by no means set, but Mr. Bush's preferred course seems to be the adoption of individual accounts that would allow people to invest approximately one-third of the funds they contribute to social security each year through payroll taxes.

An analysis by Merrill Lynch indicates that assets in private accounts would grow to $1.3-trillion (U.S.) in the next 20 years and $12.3-trillion in 75 years, assuming two-thirds of those eligible participate in the voluntary program.

Rather than buying individual stocks or mutual funds, investors would be required at first to put their money in index funds, which mirror the holdings of widely followed stock indexes. If the index is an American one, U.S. stocks would benefit. If the index were global, then Canadian stocks could also benefit.

"If there's cash going into that type of an indexed product, then that should translate into some kind of increased demand for Canadian stocks, whether they're traded on U.S. exchanges or Canadian exchanges," said Andrew Pyle, head of capital markets research at Scotia Capital. One caveat: Canada's stock market accounts for only 2 to 3 per cent of the global total.

One complication in assessing the impact of social security reform is the aging of the massive baby boom generation. Lawrence Kryzanowski, who holds the Ned Goodman chair of investment finance at Concordia University in Montreal, believes baby boomers will start reducing their exposure to stocks in a decade or so and moving into more conservative investments. So the additional stock market investments they buy now for their social security private accounts could be sold down the line.

"Longer term, I think there could be a negative impact on the stock markets," Prof. Kryzanowski said.

Investment dealer Goldman Sachs issued a report this week saying the transition would force the U.S. government, which is expected to run a $450-billion deficit this year, to borrow an additional $100-billion. This is where concern about the bond market comes in. If the supply of bonds issued by the U.S. government grows rapidly, it could outpace demand and thereby drive the government to offer higher interest rates.

Mr. Shepherdson of High Frequency dismissed this risk. "In the past couple of years, we've had a very clear demonstration of what drives the bond market and it isn't the budget deficit. It's the inflation outlook, and what the Fed does."

Social Security, the Stock Market, and the Elections
Monthly Review Editorial, October, 2004

PENSION CRISIS Prompting Majority Of Surveyed Companies To Change Or Consider Changing Their Plans
Burden Is Increasingly Shifting To Individuals To Fund Own Retirement

Published: 4/27/04

CHICAGO, April 27, 2004 – More than half (52 percent) of 125 companies polled are considering changes or already have made changes to their pension plans in the past year, according to a survey by Deloitte Consulting LLP, one of the nation’s leading professional services firms and a global leader in human capital consulting.

Buffeted by increased costs due to falling interest rates and investment returns and by continued pressure from financial analysts to limit future risk, more companies are opting to move away from defined benefit plans. Among those respondents that have changed their plans, the single most common shift (among 38 percent) was freezing their pension plan and moving to a defined contribution plan. Two-thirds of respondents that made plan changes cited cost savings as the primary driver, with 63 percent also seeking to reduce cost volatility.

“The pain is increasing rather than diminishing when it comes to defined benefit plans,” says Brian Augustian, the Chicago-based Deloitte Consulting LLP principal who oversaw the survey. “One year of strong investment returns has not bailed out companies from their huge unfunded pension liabilities. Add to that the ruling from one federal court that found cash-balance plans to be age-discriminatory and the possibility of that specific company facing retroactive damages of $6 billion or more, it’s no wonder that 58 percent of respondents indicated their pension plans are a more significant business issue now than a year ago.”

Only 14 percent of respondents offering cash balance plans now intend to make changes to their retirement programs. But if court rulings make it impossible for them to maintain their cash balance plans, 52 percent have already determined they would switch to defined contribution plans.

More tellingly, if respondents had the opportunity to create a retirement program from scratch, only 10 percent would offer annuity-based pension plans and 21 percent would offer account balance pension plans (either cash balance or pension equity plans—assuming age-discrimination issues can be resolved). “The risks for defined benefit plans continue to grow, pushing more and more companies to defined contribution plans,” notes Michael Fucci, U.S. managing director of Deloitte Consulting LLP’s Human Capital practice. “As a result, the burden is increasingly shifting to individuals to manage their retirement income.”

About the Survey

Deloitte surveyed senior human resources executives from 125 companies with median revenues of $1 billion and an average of 4,000 employees. Respondents represented all industries, with 36 percent in manufacturing and 12 percent in financial services.

Against the Current -ATC #114 [Volume XIX Number 6] (January/February 2005)
by Nomi Prins

OVER THE YEARS, there have been numerous attempts and proposals to privatize the social security system. It was a key Republican platform item in the 2000 election. The idea was subsequently thwarted by the small matter of the stock market bust that wiped out $8 trillion of market value, and caused a 60% drop in the NASDAQ over the first two years of Bush's first term.

Once the market appeared healthier and Bush had another election under his belt, however, privatization got put back on the table. The main underlying argument posed by the administration is that individual retirement money would be better off invested outside the system.

This reasoning is meant to appeal not to the future economic well-being of retirees, but to the new sense of "individualism" or the "ownership society" as promulgated by Bush. As he gushed so eloquently at the Republican National Convention, "In all these proposals, we seek to provide not just a government program, but a path, a path to greater opportunity, more freedom and more control over your own life." Gee, thanks George.

This is doubly ironic coming from an administration that has consistently increased the number of governmental agencies and indiscriminately paid for its favorite policies by borrowing from the future in deficit and debt terms.

The debt cap that stood at $2.4 trillion when Bush took office has been raised repeatedly, culminating in the most recent increase on November 18th, which took it to $8.2 trillion. The annual budget zoomed from a $127 billion surplus when Bush took office, to the current $413 billion deficit.

It's not just individuals who would suffer economic uncertainty if social security were partially privatized—it's the entire U.S. budget. The transition cost alone has been estimated between $1-$2 trillion. Yet the administration is spinning the idea that any American individual with an Internet connection and an eager (and supposedly objective) financial advisor could do better on his or her own then either the social security system or the government.

But not even the agencies already designed to handle pension funds, like the Pension Benefit Guaranty Corporation (PBGC), are managing to stay firmly afloat. The PBGC, created in 1974 to insure employee pensions and funded by corporate premiums, posted a $23.3 billion deficit for 2004. Although PBGC still has cash reserves of $39 billion, it owes its current retirees $62.3 billion for the life of their plans—that's if no other firms go under.

Unfortunately, the PBGC doesn't have the legal means to protect itself from growing pay-outs resulting from mounting corporate frauds and bankruptcies. Only Congress has that ability and Congress isn't budging. This doesn't bode well for how it would act to secure individual retirement funds in the future.

Aside from individualism, there are well-placed, constantly churned fears about future depletion of the system. Fear, of course, is something this administration is so adept at evoking.

Currently, the social security tax per each employee is 6.2% (up to $87,900). In addition, another 6.2% is paid into the system by all employers, thus every dollar in earnings up to $87,900 is taxed 12.4% (half paid by employer, half taken out of the employee's paycheck).(See note 1)

Under Plan I of the Commission to Strengthen Social Security (CSSS), 2% of employee's taxable wages, or one-sixth of the current incoming amount, could be privatized. Plan II allows 4% of employee wages up to $1,000 to go into a private account. Plan III states 2.5% would be eligible, up to $1,000, if they contribute an additional 1% of taxable earnings.(See note 2)

Financing the Deficit

Lost in the debate is the fact that the system is actually operating at a surplus. Thus we aren't in quite the crisis that the administration would have us believe. In fact, Bush is so unbothered by the current state of social security affairs that on December 10 he unequivocally denounced the idea of raising payroll taxes to save money for any future problems.

According to the 2004 OASDI Trustee Report, the total amount coming in is $632 billion and being paid out is $479 billion, representing a surplus of $153 billion.(See note 3) A little over half of that surplus represents interest payments the system is supposed to receive from social security bonds.

But that interest is not being paid back into the system. According to Ellen Frank, author of The Raw Deal, "The problem is that if you took away a significant portion of what's going into the system right now by pushing it into private (accounts), there wouldn't be any remaining surplus or cushion."

When President Franklin Delano Roosevelt originally signed the Social Security Act of 1935, as part of the New Deal, the tax rate was 2%. The Mission Statement of Act said its purpose was "to promote the economic security of the nation's people through compassionate and vigilant leadership in shaping and managing America's social security programs."(See note 4)

Over the next 65 years it was increased a total of 10.4% to help keep that socially responsible promise.(See note 5) That included a chunky hike in 1983. At the time, the Greenspan Commission, under Reagan, raised the social security tax from 8.05% to 12.4% to ostensibly save for baby boom retirement. However, the related savings was overshadowed by government spending and a growing deficit.

The form in which social security saved this money was through the issuance of bonds which represented the magnitude of the government's debt to the social security trust fund. Like any other collected tax money, these flowed into the general accounts of the U.S. Treasury Department, which in turn credited the social security trst fund by the additional amount. This left them free to use the actual cash elsewhere.

The same Alan Greenspan is leading the warning chatter about the social security system running too much debt, which is really an outcome of his 1980s proposed savings. In other words, the surplus of the social security trust fund was converted, by virtue of being accounted for in the same place, into a debt to the U.S. Treasury. Now he's pointing fingers to the more convenient debt that supports his cut-the-social-security-program policies.

In order to come up with the money borrowed at the time, it would have to be extracted from general revenues, in other words from taxes, more borrowing, raising the retirement age or cutting future benefits and cost-of-living increases.

The cost of restructuring the program reflects the losses that would be incurred by deflecting payroll taxes outside the system. The result would be an immediate rather than a future claim on the social security fund, which would grow rapidly as more people will be retiring.

According to Troy Daum, investment planner at Wealth Analytics, a wealth management and retirement planning firm, "Borrowing money is the simple solution for the government, but it mortgages our kids' future. The only other option would be to raise taxes."

Who Takes the Hit?

The impact of changing the system would vary according to age group. The first group is people already retired. Despite assurances to the contrary, they would likely see some benefits cut because the system would face an immediate shortfall as fresh money diverted to external accounts. Even if the cuts were in the form of smaller cost-of-living increases, they'd be felt.

The second group is comprised of those nearing retirement, between the ages 50 and 65. These pre-retirees would suffer the most. Many have already been hit with huge 401K losses and diminished health benefits. They simply don't have enough time to save for a major drop in future expected payments.

The third group, people in their 20s and 30s, are being heavily targeted by the administration and the business media with the heady concept of "financial individualism." The argument is that private account money could be managed in a way that exceeds the value expected to be received from social security. As Bush said, "We must strengthen Social Security by allowing younger workers to save some of their taxes in a personal account, a nest egg you can call your own and government can never take away."

And therein lies on of the biggest falsehoods in the debate over privatizing social security; the idea that somehow an individual will be able to get a greater return than the government could provide. The reality is that the fees alone involved in churning millions of tiny accounts would be individually higher than anything the government could capture more efficiently in bulk. Nor do either the stock or bond markets offer any downside guarantees. And we've certainly witnessed from Enron, WorldCom and other major debacles that brokers employed by large banks that fund those same corporations, have no problem giving out bad advice. Not only are average historical stock returns very volatile, but none of the current proposals insures individuals when things go south. There would be no contingency system if retirement money ran out due to fraud, no recourse for those who received misleading financial advice that destroys their nest eggs.

The Winners!

Additionally, none of the proposals include maintaining the disability and survivor benefits that the current social security system offers. Under a privatized system, this insurance would need to be obtained separately, likely at a greater cost, translated to profit for eager insurance companies.

Meanwhile, other financial service companies remain on stand-by to benefit from both the management and the administrative set-up cost of new retirement funds. So, the real winners are firms in the financial services industry that have short term profit, not long term retiree well-being at heart.

"Wall Street is banking on future dollars to invest," says Daum. "But you need to take Wall Street out of the equation."

Yet it's rather unlikely that super-banks and mutual fund companies will back off from this golden opportunity. This is particularly true since commercial bank conglomerates like Citigroup and JPM Chase-Bank One, which house individual checking and savings accounts, will probably find ways to link them to new private retirement accounts.

All of this will be made to sound like a good deal for customers. According to Austan Goolsbee, Professor at The University of Chicago Business School, the banking community would reap a $940 billion windfall in fees and other administrative charges for managing private accounts.(See note 6)

Just the costs of setting up the accounts would be equivalent to six months of increasing the retirement age. For the average worker, these fees would equate to wiping out 20 percent of their retirement value—and that's at fairly conservative estimates.

Warns Goolsbee, "In order to lower these expenses, you'd have to severely limit the scope of investment choices." Unfortunately, this kind of limitation flies directly opposite the administration's pitch about individual freedoms. "Still," says Goolsbee, "any privatized system should include appropriate cost controls." That would also not be a likely scenario given our bank-friendly Capitol Hill.

Other countries, like the United Kingdom, discovered egregious fees being levied on individual retirement accounts after implementing privatized systems without controls. Costs shot so high that caps to fees had to be implemented. This however, would also not jive with the modus operandi of today's Congress and regulatory bodies. In the end, privatizing the system, partially or otherwise, is hazardous for individuals and likely to increase debt for the government. Thus, it's really not a financially sound idea for either. The fact that it would offer a new pot of money to Wall Street, which could be invested in riskier assets at more lucrative fees, is not a reason to make the switch. But it's a very good reason to keep fighting it.


1. Social Security Online, Trust Fund Data: Social Security & Medicare Tax Rates.

2. "The Final Report of the President's Commission to Strengthen Social Security", Report of the President's Commission, December 2001. Available at

3. 2004 OASDI Trustee Report. Available at

4. Social Security Mission Statement, Social Security Online.

5. Social Security Online, Trust Fund Data: Social Security & Medicare Tax Rates.

6. Austan Goolsbee, "The Fees of Private Accounts and the Impact of Social Security Privatization on Financial Managers", University of Chicago Business School Study, September 2004.


What does the collapse of America’s energy conglomerate reveal about the mechanisms of financial intermediation? Crooked accountancy and plundering of employee pensions as badges of the Anglo-Saxon model that is conquering the landscape of capital today.

The collapse of Enron has cast revealing light not just on the venality of business leaders, auditors and politicians but on the contours of deregulated ‘Anglo-Saxon’ capitalism as it has emerged from the stock-market bubble. It has highlighted, too, the vulnerability of the broad layers whose pensions are tied up in the savings regime so integral to the neoliberal economy. The debacle has affected not only Enron’s employees but tens of millions of holders of 401(k) and defined-benefit retirement schemes. The greed of the Houston-based directors, and their willingness to cash in huge stock options as the company went down, was matched by many senior executives elsewhere—perfectly illustrating that the capital which they and other major shareholders dispose of possesses different rights and qualities to the savings of their employees. The impotence of Enron’s workers, and of all those whose pensions were tied up in the company’s shares and bonds, was part of the normal working of today’s savings regime.

Enron’s demise was significant not just because of its size—other concerns failing at the same time, such as K-Mart or LTV, had more employees and pensioners—but because it had represented the cutting-edge of neoliberal corporate strategy, living proof that financialization and deregulation were the wave of the future. It was this that made a tireless booster of neoliberalism such as Paul Krugman so proud to be on the company’s payroll (see below). Enron was far more interested in maximizing trading opportunities than in the unexciting business of producing electricity. Its momentum came not from productive investment, innovation or even skill in arbitrage, but from financial engineering. By 2001, however, the profits it was making even on its trading activities were being squeezed by rivals—the result, perhaps, of having been first in the business. Its relentless pressure for deregulation reflected a wish to escape competition by opening up new pastures.

Planned underfunding

Predictably, the Wall Street Journal’s enthusiasm for 401(k)s—‘one of the great inventions of modern capitalism’—remained undimmed as they sagged in the wake of the Enron debacle:

There are risks to any investment that seeks to benefit from America’s capitalist prosperity. The old fixed pension arrangements so favoured by the anti-401(k) brigades carry the risk that the entire company, or industry, can get into trouble. Those pension obligations then become ‘unfunded’, which is worse for workers who have no diversification choices at all. Just ask America’s steelworkers. [30]

Here the WSJ had a point, though it was cold comfort to the 40 million or so members of defined-benefit schemes. The plight of tens of thousands of US steelworkers, trapped in the rustbelts of West Virginia and Ohio, was at least as bad as that of Enron’s ex-employees. They found that the defined-benefit members’ claim on company assets was impossible to exercise in the one situation where they really need it—when their employer goes bankrupt. The US Pension Benefit Guaranty Corporation, established in 1974 to prevent company failures leaving their workers bereft, sometimes allowed companies in serious difficulties to delay or skip contributions to the pension fund—in a sense, an inferior species of ‘industrial policy’, enabling firms to survive a bad patch. In the eighties PBGC ‘tolerance’ probably did help companies to survive, temporarily saving jobs. But in effect such a policy also doubles employee risk and indulges failing management. By November 2001 twenty-five US steel concerns were operating under Chapter 11; in nearly all cases their pension funds were seriously low. LTV threatened, and then carried out, a bankruptcy that threw 7,500 workers out of their jobs and caused a loss of benefit to 52,000 retirees, as PBGC insurance does not cover all aspects of a company scheme. [31]

Industrial policy should not commit workers’ savings to keeping afloat businesses in a declining sector. In practice, defined-benefit schemes tend towards this situation almost as much as the employer-dominated 401(k)s. It is the assets of the sponsoring company that are supposed to supply the guarantee for a future pension linked to the employee’s salary. With many older firms, the pension fund is worth more than the business itself, so financing it has a large impact on the company’s health. When a firm looks as if it might go under, even quite tough trade unions and regulators will allow it to take a contributions holiday—the alternative would be to put it into bankruptcy and throw its workers out of a job. Yet the gap will inexorably lead to an underfunded pension scheme. This is the dilemma faced by US steelworkers and many others in private sector defined-benefit schemes.

The Steelworkers Union has urged that workers should have more control over their pension funds, and should be able to use the assets to diversify the economy of the rustbelt regions. [32] When a large business fails there is no reason why local homes and social infrastructure should also be abandoned—the judgement the market usually makes. Investing in a region’s education system, communications, research facilities and cultural endowment can enhance prospects for economic growth, as the experience of the Ruhr, Bavaria, Quebec, Catalonia and Emilia Romagna has shown. But increased workers’ control and social investment will not in themselves solve the problems that underlie the pensions crisis. The steep decline in employers’ contributions means that there is a clear lack of resources, on top of the flawed pension-management regime. Beyond this lies the overarching question of how both to pay a decent sum to today’s pensioners and to put enough by to provide for far larger numbers in the future.

Routes to privatization

The Enron bankruptcy would have had less impact if some 85 million other US employees had not felt personally exposed because of their own pension holdings. Coming just two weeks before publication of the report of Bush’s commission on Social Security, its demise was a major set-back for the privatization of the US public pension system—Enron’s ex-employees were now said to have ‘nothing but their Social Security’ retirement provisions to fall back on, and the insistence that even this basic pension should be exposed to Wall Street ran into popular resistance. Bush himself felt obliged to call for pension-plan safeguards, stricter accounting measures and tougher disclosure requirements in his post-Enron State of the Union address. However these measures, limited in themselves, are to be enforced by Harvey Pitt, the new director of the Securities and Exchange Commission (SEC), who worked as a lobbyist for the accounting industry when it defeated attempts to prevent accountants from receiving consultancy fees from firms they audited.

Ever since the 1994 publication of the World Bank’s Averting the Old Age Crisis, the standard neoliberal pensions strategy has been for privatization through what might be termed the tax-farming route, in which all employees are legally obliged to set up ‘Individual Accounts’ for themselves with a commercial supplier. But public resistance—certainly intensified by the Enron scandals—has made this politically problematic. An alternative course is now being canvassed in the UK, that of ‘implicit privatization’. In February 2002, a Financial Times editorial recommended the scrapping of the complex legislation which the British pensions minister had so recently placed on the statute book. Instead, it argued, the government should perform ‘radical surgery’: the second state pension should be eliminated, the qualifying age for the basic state pension should gradually be increased to seventy and its value raised ‘back to a level where it provides just enough to live on’. [39] This, the FT argued, would give everyone capable of doing so a powerful incentive both to save and to work. Bush, meanwhile, intends to press his plan to divert payroll taxes from Social Security to ‘Individual Accounts’. By weakening the public scheme this will lay the groundwork for later full privatization as recommended by the World Bank. But Bush’s Commission on Social Security also floated the possibility of cutting benefits by removing the earnings link indexation of the pension.

Finance capital in both the US and the UK might find such a scaling back of state provision—by raising the age of entitlement or, in the US case, weakening the link to earnings—an acceptable alternative to the World Bank mandatory approach, since workers would be obliged to save more in private plans and, if they could, to go on working throughout their sixties. ‘Implicit privatization’—congruent with the tradition of the ‘residual liberal’ welfare state—might deliver just as much business to the financial services industry in the end. To cut back on public entitlements in the context of a gathering pensions panic might seem politically unwise. But this is the sort of reform that could be encompassed in a succession of seemingly modest amendments, bypassing the voters, and might encounter less resistance than extending compulsory privatization. While ‘Individual Accounts’ remain in contention this could prove to be the fallback option. [40]

Some advocates of Social Security privatization in the US have tried to make a case for the supposedly superior return that private pension funds have generated in recent decades, in comparison to the ‘return’ on Federal Insurance payroll tax contributions. Their calculations usually employ a specific form of ‘generational accounting’, in which each age cohort’s taxes and benefits are subjected to elaborate discounting. [41] This is an accounts model similar to Enron’s, or to the British FRS 17. All exhibit a fascination with a flattened and financialized model of the world, in which the future is collapsed back into the present by means of discounting devices. Enron used the gain-on-sale approach to enter into its books discounted future revenues stretching many years ahead. FRS 17 was devised by the UK Accounting Standards Board to oblige all companies to ‘mark to market’ at current values their pension assets and liabilities, using—as we have seen—the bond yield as the discount rate for the latter. (British companies had previously been given more flexibility in choosing a discount rate, as American companies still are.) Leaving aside, if we can, the resort to shredding and fraud, the Enron accounting model, FRS 17 and ‘generational accounting’ represent a particular logic of capital that mercilessly reduces the possibilities of the future. But the Enron implosion and pensions panic show the systemic danger and popular anger that such a programme can provoke.

Sir David Tweedie, director of the ASB, is centrally involved in setting up an International Accounting Standards Board, with the remit of overseeing a new global accounting regime. It is believed to favour pushing the ‘mark to market’ approach as far as possible. Already supported by central banks, the IASB also raises money from large corporations. Last year one of its officers—Paul Volcker, former Federal Reserve chairman—approached Kenneth Lay, inviting a contribution from Enron towards the good work. [42]

What the generational accounting model fails to register is that pay-as-you-go pension arrangements do not need to be subjected to such treatment: many look on them as a method by which their parents’ pensions are financed and hope for their own to be covered by their childrens’ generation, in the same way. As an approach to a basic pension this is entirely valid and emerges unscathed from the generational-accounting critique.

By itself, however, pay-as-you-go does not ensure, in an ageing society, that the rising bill for secondary as well as basic pensions can be met. Finance capital throws a heavy shadow across the years ahead, staking large claims on future income—whether from capital or debt—and reducing returns for both employees and pensioners. Finding a way to pre-fund secondary pensions for all could help to minimize the claims of capitalists or rentiers on future output. If the investment policy of the funds helped to promote sustainability and social justice, then succeeding generations would be better placed to meet the costs of an ageing society.

The California state employees whose savings Calpers invests are lucky to be members of a public scheme with low management charges. Members of private schemes pay three or four times as much. In the UK, public authorities now talk about ditching their defined-benefit schemes, complaining about costs. The growing trend for large companies to abandon their DB schemes further exacerbates the funding problem. The crisis reflects problems stemming both from the post-bubble economy and from the inherent contradictions of grey capitalism. Even if regulatory standards were to be tightened in response to the post-Enron outcry, the irresponsible power of the financial services industry will remain.

The pensions panic reflects a dawning realization that employers have been bilking their workers on a huge scale. Exaggeration and alarmism aside, the funding dearth will be exacerbated by the ageing of the population. State pensions are only just above the poverty line—below it, for many older women—and only 50 per cent of employees have secondary coverage. That is why, in the medium and long term, the crisis can only be met by finding substantial alternative sources of finance. The ‘mass investment culture’ of the nineties seemed to some to promise a solution. Today those hopes have been cruelly dashed.

Also by Robert Blackburn

Banking on Death: Or, Investing in Life: The History and Future of Pensions



by Doug Henwood

LBO-Left Business Observer

delivered at the conference "Pension Fund Capitalism and the Crisis of Old-Age Security in the United States," sponsored by the New School University, September 11, 2004

Many people - inhabitants of random barstools, New York Stock Exchange press officers, and more than a few economists - think that the whole structure of finance exists to channel savings into investment. Finance does some of that, for sure, but less than many people think. The conventional illusion is especially the case when it comes to the stock market: when you buy a share of stock, you're somehow "investing" in the issuing company, or more grandly, as the NYSE likes to say, in America. In fact, you're almost always buying the stock from a previous stockholder. Or, as the quote from Shakespeare that's a staple of the corporate governance literature put it, a share is like Iago's purse: "'twas mine, 'tis his, and hath been slave to thousands."

Over the long haul, U.S. corporations have funded about 90% of their capital expenditures with internal funds, profits plus depreciation allowances. This is true of most other economies as well. And when firms do turn outside for cash, they go first to banks, then the bond market, and only last to the stock market. There are individual exceptions to this rule, of course; for some individual companies, a share flotation is a crucial coming-of-age ritual - though typically the proceeds are used to cash out the initial investors rather than funding investment and hiring. Occasionally, there are historical periods, like the late 1990s, when IPOs do channel large amounts of money to corporations. But even in the peak year of the recent gusher, 2000, IPOs totaled just 5% of nonresidential fixed investment. In the less frenzied environments of the 1970s and 1980s, they averaged just 1% of investment. But even during the bubble years, IPOs were massively overshadowed by retirements of shares, through buybacks and takeovers. For example, in the U.S. from 1994 to 2000, one of the most vivid periods in the history of stock markets, buybacks exceeded IPOs by a ratio of nearly five to one. Over the same period, mergers and acquisitions exceeded IPOs by a ratio of twenty-two to one. In other words, U.S. corporations were shoveling out twenty-seven times as much cash to shareholders as investors were supplying to corporations via IPOs. And I'll bet that more than few of those IPO buyers have come down with severe cases of buyer's remorse.

Venture capital does provide important funds to young firms, but the quantities are remarkably small - an average of 2% of nonresidential fixed investment (more like 1% if you leave out the bubble years of 1999 and 2000), and 0.2% of GDP.

All-in-all, U.S. nonfinancial corporations retired a net of $1.3 trillion in stock between 1982, when the great bull market began, and 2000, the year of the market peak. They've retired another $250 billion from 2001 onwards, for a total of $1.5 trillion over the last 22 years. Interestingly, private pension funds have been net sellers of stock over the last two decades - $534 billion worth from 1982 to 2000, and $93 billion since, a total of $627 billion. State and local government funds were net buyers, $351 billion over the last 22 years, but that's considerably less than their private counterparts sold, making the pension sector net stock sellers throughout the two decade bull market and its unpleasant aftermath.

Social security privatizers like to circulate the idea that prefunded pension systems raise national savings and investment rates (and public systems conversely lower them). And though often unstated, the privatizers rely on the assumption that a stock-market centered system is especially suited to the job. Robin Blackburn isn't a member of the evil party of privatizers, but he does seem to share some of these views, in his call for some kind of public prefunded system. But prefunded systems seem not to have that effect.

UBS recently issued a research note that gathered statistics from seven rich countries on the size (relative to GDP) and investment allocations of pension funds. When combined with World Bank data on savings and investment rates some interesting results emerge. A ranking of the seven countries (Australia, Japan, Netherlands, Sweden, Switzerland, the UK, and the U.S.) by pension fund size shows an unimpressive correlation of .35 with national savings rates, and just .03 with gross fixed capital formation. When ranked by the stockholdings of pension funds, the signs change: -.89 for savings and -.46 for capital formation: that is, the bigger the wad of pension money committed to the stock market, the lower the level of national savings and investment. The sample size is small, for sure, but it does make the economic case for prefunded pensions a little harder to prove.

As a form of worker savings (or deferred wages, if you prefer, since individual pensioners are likely to draw them down toward zero as they shuffle towards the grave), the pension fund looks like a relatively modern innovation, but the appropriation of such pools for the enrichment of professionals isn't really all that new. In thinking about pensions, it's worth keeping this unpolished observation of Marx's, from volume three of Capital, in mind: ""What the speculating trader risks is social property, not his own. Equally absurd now is the saying that the origin of capital is saving, since what this speculator demands is precisely that others should save for him."


LBO-Left Business Observer

Privatizers often make financial arguments against Social Security, presenting absurdly precise dollar estimates of just how bad a deal it is. Typically, a worker's contributions today are measured against the projected benefits in retirement, and the conclusion is that the stock market would be a far better deal. But that's a poor way to measure a public pension system's value. Social Security represents a deal across generations, with today's workers financing today's retirees on the assumption that the same deal will be offered when they retire. It offers not only an approximation of a decent retirement income -- Social Security keeps 42% of the elderly population above the poverty line -- it also includes disability benefits and coverage for survivors on the insured's death. Its formulas favor the poor over the rich, and compensate women some for their lower and more volatile lifetime incomes. A privatized scheme is almost certain not to match the disability insurance, and is certain to amplify, not offset, distinctions between rich and poor, and men and women. It's a program based on extremely unfashionable notions of solidarity and universality. Years ago, only right-wing ideologues wanted to privatize Social Security; now it's the entire American establishment.

Leading the charge is Wall Street, which would make a fortune out of privatization; no wonder financiers have been discreetly showering money on the privatization campaign. A few quick numbers will explain Wall Street's enthusiasm. Chile's privatized pension system, the enthusiast's favorite model, devotes about 30% of revenues to administrative costs, which means everything from paperwork to brokers' fees to marketing expenses. The U.S. life insurance industry is a bit more efficient, devoting about 10% of premium income to administration, which includes everything from paperwork to profits. Social Security's overhead is under 1%. About $430 billion flowed into the system's coffers this year; 10% of that would be a very pleasing $43 billion, and 30% would yield $130 billion, a windfall even by Wall Street's standards. Higher fees, lower benefits, greater gender inequity, and more risk -- no wonder privatization has to be sold with a cooked-up scare campaign.

This is an edited version of a talk given by LBO editor Doug Henwood at various places around the U.S. and in London in late 2003 and early 2004. It's drawn mainly from his new book, After the New Economy, published by the New Press, a book whose sales this text is intended to promote.

Bull Run

Which brings me to another issue, the most memorable feature of the period, the great bull market in stocks. When warming to the topic, it's often tempting to denounce the whole Wall Street racket as parasitical, which it can be, and utterly pointless, which it isn't.

Financial claims involve relations of ownership and power and appropriation of other people's money. Dividends on stock are disbursements from profits, which originate in the uncompensated labor of the firm's workers. Interest on corporate bonds comes from the same source, and on government bonds from taxpayers.

But financial power is about more than monetary transfer; financial claims confer real authority on their owners. Stockholders have demanded steadily higher profits, which kept corporations downsizing and outsourcing even in the best of times. Bondholders have pressured state and local governments to trim their budgets. Bankers and bondholders (in alliance with state institutions like the IMF) have forced severe economic restructurings on debtor countries.

Driving the great bull market was the great upsurge in corporate profitability from 1982 through 1997, after a long erosion from its 1966 peak. That's what drove the stock-market rally, promoted the exuberant mood, and provided the cash to keep things going.

It's not hard to figure out what caused the fifteen-year profit boom - a reversal of the forces that produced the sixteen-year bust that preceded it. The conventional story is that excessively stimulative and indulgent government policies led to a great inflation, compounded by the oil-price shocks of 1973 and 1979.

There's some truth to the standard story, but it needs to be translated into political language. The long post-World War II boom had fed the expansion of the welfare state. The sting of unemployment was lessened, and workers became less docile. Wildcat strikes were spreading, and factory workers were smoking pot on breaks and sabotaging the line. Internationally, the U.S. had lost the Vietnam war and discovered that its conscript army was an undisciplined horde that was not shy about shooting commanding officers. The Third World was in broad rebellion, demanding global wealth redistribution and a new world economic order.

Behind the economic concept of inflation was a fear among elites that they were losing control. That's not to deny the importance of accelerating prices. The inflation that peaked in 1980 didn't set any records, but its predecessors (in 1864, 1917, and 1947) were all during or just after major wars, when the economy is worked well beyond capacity to feed the military effort. The inflation upsurge that began in the late 1950s and accelerated in the 1960s and 1970s was unique in that it was not the by-product of a major war effort and that it looked more like a sustained increase than a temporary spike. It seemed that something structural had changed. Financially, that was experienced as miserable performance by the stock and bond markets.

What had changed structurally was the growth of the welfare state and the sustained low unemployment rates that came with it. In a classic 1943 paper, Michal Kalecki explored the reasons why economic policymakers would never tolerate this situation for very long:

[U]nder a regime of permanent full employment, the "sack" would cease to play its role as a disciplinary measure. The social position of the boss would be undermined, and the self-assurance and class-consciousness of the working class would grow. Strikes for wage increases and improvements in conditions of work would create political tension.

That would mean the loss of "discipline in the factories" and would put "political stability" at risk - which sounds a lot like the 1970s, from the factory floor to the global scene. It looked like a loss of discipline in the whole social factory.

That indiscipline was met with the rightwing ascendancy of the late 1970s, a massively successful campaign of wage cutting, union busting, and public sector austerity on a global scale.

It's ironic that the bull market became such a popular obsession in the late 1990s. The scores of millions of Americans who cheered as the Dow and the Nasdaq made their vertical ascent were really cheering a celebration of their own stagnant incomes and economic insecurity. It was a wonderful confidence trick, and a lot of people still haven't figured it out.

by Gary A. Dymski*

Here Kalecki argues that sustained full employment is impossible in advanced capitalist societies. His pessimism stems, in effect, from the dependence of capitalist accumulation on Marxian exploitation. He argues first that if unemployment falls too low, workers’ effort in production will decline, reducing the profit rate. So as unemployment falls, worker effort may diminish, and capitalists may feel coerced into providing jobs under terms and conditions that compromise profitability. In effect, profit levels are subject to a laboreffort/output tradeoff. This danger can be averted only if the economy is operated at sub-full employment levels; but a low -output state -- stagnation – also diminishes profits. Continued capitalist accumulation is especially threatened if workers unite in social democratic parties that demand full employment as a political outcome. For then the very legitimacy of the powers and rights of the owners of the means of production can be subjected to fundamental challenges. Capitalists’ loss of control leads them to capital strike and/or reduced investment,initiating the downturn.

There is also effectively a lower limit on growth. High unemployment levels are beneficial in some respects for capitalists: high labor effort is assured, wages are low, and their control over the production process is guaranteed. Low rates of capacity utilization may be problematic, especially for firms that have significant financial leverage. Another problem arises because of the influence of labor in the political sphere. If unemployment rises beyond some point, political agitation by the working class might trigger government countercyclical action.

This leads to the idea of a political business cycle, wherein macroeconomic growth fluctuates between the two limit points. As unemployment falls during the expansion, capitalists will use their power to withhold investment to regain control over government policies. In turn, downturn is checked when unemployment leads to government counter-cyclical action and low wages lead capitalists to reinitiate investment expenditures.

The U.S. economy has not returned to the big- government pattern after the disruptions of the 1980s; nor has it reverted to the small- government pattern. Instead it appears to be in a new phase, which we term the neoliberal era. The defining characteristics of this era are the systematic deregulation of financial intermediation and financial flows, relatively open trade
flows, and a shift in government’s role.

To borrow Kregel’s (1998) terminology, the “big government” role of counter-cyclical spending has largely disappeared; replacing it are government’s “big bank” mechanisms for stabilizing the economy (the central bank’s lender of last resort function and its use of interest rates to moderate inflationary and deflationarytendencies). The “capital-labor accord” that was implicitly struck during the Golden Age period is abrogated. Labor’s right to organize, to protect its real wages from erosion, and to negotiate directly with firm owners and managers is challenged; similarly, the use of government expe nditures to support the unemployed, the infirm, and the elderly is increasingly restricted.

Government is no longer envisioned as a guarantor or provider of security for individuals; instead, its more modest role is to police market relations, to insure that the rules of the game are fair. Indeed, authors that discuss the new global regime usually take as their theme the surrender of government control to market forces. The possibility of capital flight or disinvestment (or both) serves as a check on any government’s capacity to protect its citizens’ living standards or its firms’ cash flows.

LRB | Vol. 25 No. 3 dated 6 February 2003 |

The corporate account rigging now coming to light is the direct result of the economic boom of the late 1990s, driven by an almost unprecedented increase in equity prices. Its raison d'être has been entirely straightforward: to cover up the reality of an increasingly desperate corporate-profits picture. Between 1997 and 2000, just as the fabled economic expansion was reaching its apex, the rate of profit in the non-financial corporate sector was falling by a dramatic 20 per cent, initially as a consequence of overcapacity in international manufacturing. Under normal circumstances, this would have caused capital accumulation and economic growth to slow. As it was, however, stock prices soared, in information technology especially, even as corporate returns fell. Companies could thus access funds with unprecedented ease, either by issuing shares at highly inflated prices or by borrowing money from banks against the collateral of those overpriced equities. On the basis of this financial windfall, US corporations, especially in the IT industries, vastly stepped up their capital accumulation. The investment boom continued, with increasing growth of output and productivity. Even the staid academic economists of the Council of Economic Advisers, not to mention the chair of the Federal Reserve, celebrated a new synergy of technological change and freed-up financial markets that was ushering in an unprecedented era of progress.

The catch, of course, was that fast-rising profits are normally required to justify and support fast-rising stock prices, as well as rapid investment. Instead, as investment accelerated in the face of declining returns, overcapacity worsened, and the fall in profitability extended from manufacturing to major high-tech industries - above all, telecommunications. Faced with this patent failure of 'fundamentals', corporate executives were under mounting pressure to keep stock prices high by any means necessary, in order to maintain access to cheap finance and the investment funds required to compete; the fact that they had come to depend heavily on stock options for their own compensation naturally quickened the temptation. One after another great corporation falsified its accounts to exaggerate short-term earnings.

But the economy could defy gravity for only so long. From the middle of 2000, the reality of the profits crisis became apparent as a never-ending parade of corporations, including almost all the stars of the boom, were obliged to report increasingly dismal earnings. Share prices began a steep descent, and investors gradually awoke to the reality that they had been had. By this time the stock market was no longer stimulating the economy: on the contrary, as their equity prices collapsed, corporations were obliged to cut back on both borrowing and issuing shares, making capital accumulation more difficult. The huge mass of superfluous plant and equipment that was the legacy of the bubble-based misinvestment boom was now apparent to everyone. Corporations were left with little reason to accumulate new means of production, or labour, but with every reason to initiate price wars. The economy plunged into recession.

To grasp what drove the economy in the 1990s demands a longer historical perspective. The economic expansion during that decade took place against the background of the 'long downturn', the era of slowed growth in the world economy that followed the long postwar boom. Between 1973 and 1995 the growth of output, investment, productivity and wages was one third to two thirds lower than during the previous quarter century, while unemployment levels were several times higher (except in the US). What was mainly responsible for the extended slowdown was overcapacity and overproduction in the international manufacturing sector, which led, by way of incessant downward pressure on prices, to reduced profitability - and the failure of successive attempts made by corporations and governments successfully to respond to this. The problem originated in the later 1960s as a consequence of the intensification of international competition, which itself resulted from the stepped-up entry into the world market of lower-cost producers based in Japan, as well as Western Europe. During the 1970s, overcapacity and overproduction worsened as leading firms in advanced capitalist countries found that it made more sense to respond to their problems with competitiveness and profitability by stepping up investment in their own oversubscribed lines than by reallocating capital into new ones, thus reproducing the initial problem. Meanwhile, firms based in the developing economies, especially in East Asia, found they could enter certain lines at a profit despite overcapacity. Only ever greater doses of Keynesian deficit spending prevented the onset of deep crisis, but at the cost of runaway inflation.

In the early 1980s, led by Thatcher and Reagan, the US and the other advanced capitalist states introduced high interest rates and deep austerity in order to encourage the shedding of the high-cost, low-profit means of production that were holding down profitability, as well as to raise unemployment in order to reduce wage growth. But the immediate result was the outbreak of debt crisis in the Third World, accompanied by the threat of depression in the US. Keynesianism had to be reintroduced to keep the international economy turning over. The advanced capitalist states were clearly unwilling to sustain a severe depression of the sort that, in the past, served to eliminate superfluous means of production and labour and to provide the foundation for an upturn. But the price of economic stability was a rise in interest rates to record-breaking levels, which, in combination with still reduced profit rates, reined in capital accumulation and economic growth, which remained heavily dependent on government deficits until the end of the decade.

Appearances to the contrary, the long downturn was not transcended even during the 1990s. Between 1990 and 1995, the advanced capitalist economies suffered their worst half-decade of the postwar epoch. For the decade as a whole, their performance taken together was, despite the US boom, hardly better than that of the 1980s; which itself was down from the 1970s; which, in turn, had been much worse than the 1960s and 1950s.

It was against the background of a slow-growing global economy that the US launched its economic revival. Between 1985 and 1995, the US manufacturing sector used an impressive recovery of international competitiveness to achieve an increase in profitability that was responsible for bringing the profit rate in the private economy as a whole above its 1973 level for the first time since the end of the 1960s. By 1994, this rise in profitability had set the stage for the investment boom that would be the main source of economic dynamism in the later 1990s; US economic expansion had begun in earnest.

The means by which the manufacturing sector achieved its recovery of profitability were typically destructive. The Plaza Accord, imposed by the US Government on its leading partners and rivals in 1985, led to a 40-60 per cent fall in the dollar against the yen and the deutschmark over the following ten years, dramatically lowering the cost of US goods compared to those of its main competitors. Employers held real wage growth close to zero for the whole decade. The Reagan Administration slashed corporation taxes. While investment continued to stagnate until 1993, companies shed masses of high-cost, low-profit means of production and labour in order to raise productivity.

But the fact that the US's recovery of profitability was the result mainly of corporate downsizing and the gouging of workers, citizens and overseas rivals proved highly problematic for the two next largest economies, the Japanese and the German. For most of the period there was little growth in US aggregate demand. Demand for plant and equipment and for consumption goods both stagnated. Government demand fell, too, as from 1993, the Clinton Administration - going back on America's historical willingness to sustain deficits to stimulate the global economy - turned to balancing the budget. Meanwhile, US manufacturers' reductions in relative costs through wage restraint, productivity increase and dollar devaluation allowed them to appropriate world market share from their competitors in Japan and Germany.

The outcome was that during the early 1990s German and Japanese manufacturing profitability fell sharply just as the US was assembling the basis for its boom. This hydraulic pattern - by which the recovery of one manufacturing economy would find its counterpart in the crisis of another as the exchange rate shifted - reflected the system's slowed growth, and would be repeated time and again. From 1991 both the Japanese and German economies experienced their worst recessions of the postwar epoch. By 1995, there had still been no palpable recovery in the advanced capitalist economies as a whole. The long downturn was alive and well.

The first, and most consequential, effect of the dollar revaluation was to put an abrupt end to the decade-long recovery of US profitability. Between 1997 and 2000 the corporate manufacturing profit rate dropped by more than 15 per cent, so that the US economy lost what had up to this point been a major source of its momentum. This sudden increase in pressure on the rate of profit posed a threat not just to the US but to the entire world economy. To counter the long downturn, and the reductions in profitability that lay behind it, governments and corporations across the globe had been taking ever more stringent measures to reduce costs. But the unavoidable by-product of their offensive had been the shrinking growth of aggregate demand across the system, which now threatened to short-circuit international economic recovery. Wage and social spending increases had been cut back increasingly sharply over the 1970s and 1980s. In the run-up to monetary union, European governments had imposed even tougher austerity measures, and the Clinton Administration had followed suit.

In the context of increasingly sluggish domestic markets, the rest of the world was obliged to look to the US market to provide the export demand to keep their economies going. But with American wage growth flat and government demand rapidly shrinking after 1993 as the Federal deficit fell, dependence on the US market translated into ever greater dependence on the growth of US investment - which, it was hoped, would result in greater imports both of new plant and equipment and, by way of higher employment and rising wages, of consumer goods. With the new downward stress on the manufacturing profit rate deriving from the rise of the dollar, however, the capacity of the US to serve as the 'market of last resort' appeared under threat.

And yet, from 1996, US economic expansion took on a new dynamism, and carried the rest of the world along. What increasingly drove it was a stock market that soared to unmatched heights, despite the weakening of corporate profitability from 1997. Between the early 1980s and 1995, the rise of equity prices had been no greater than the rise of profits. Henceforth, a growing chasm would open up between the two. As the Wilshire 5000 Index soared 65 per cent between 1997 and 2000, corporate profits (after tax and net of interest) fell by 23 per cent.

What laid the basis for the stock market's dizzying ascent was a major, long-term easing of credit. This resulted, initially, from the same co-ordinated move in 1995 by the G3 powers to drive up the dollar that had brought about growing downward pressure on the US manufacturing profit rate. To push down their own currencies relative to the dollar, the Japanese - and other East Asian governments - bought US assets, especially Treasury instruments, in massive quantities. The resulting flood of money on US markets brought about a sharp reduction in long-term interest rates. Meanwhile, seeking to secure stability in the wake of the Mexican financial crisis, the Federal Reserve lowered short-term interest rates. Investors took advantage of the declining cost of borrowing to pour money into the stock market, driving up equity values. And with the dollar going up, stock prices automatically rose in value in international terms, which attracted more investment that, in turn, drove the stock market even higher.

What seems puzzling is that the process did not stop there, once the gap between share values and profit rates had begun to open. By late 1996, Greenspan was publicly expressing concern about the 'irrational exuberance' of share prices. But he was clearly even more anxious, in private, about the possible stumbling of the US economy, especially as economic growth at first proved hesitant in the face of his interest-rate reductions and as turmoil shook the East Asian markets in spring 1997. In this context, as he was well aware, the 'wealth effect' of a rising stock market could play a stimulating and steadying role, funding investment growth and consumer demand that could compensate for declining government deficits and the negative impact of the rising dollar on profit rates. If the prices of their equities rose, corporations would be able to access otherwise unavailable funds for investment, either by issuing over-valued shares or by borrowing from the banks. By the same token, households with rising paper wealth would find less need to save.

In undertaking the US's first essay in what might be termed stock-market Keynesianism, Greenspan, far from seeking to control the bubble, actively encouraged it. He not only welcomed the enormous increase in liquidity resulting from the influx of foreign money and his own reduction of interest rates, but also refused to raise the cost of borrowing from the beginning of 1995 until mid-1999 (aside from a lone quarter-point rise in early 1997) or to raise the required margin on share purchases to discourage speculation. He intervened vigorously by loosening credit whenever the equity markets threatened to swoon - most spectacularly in autumn 1998, at the nadir of the world financial crisis. As a result, from 1995 until 1999, the money supply (M3) increased at six times the rate it had from 1990 until 1994, opening the way for a gigantic wave of speculation.

US corporations, in particular, were quick to exploit the easy money Greenspan was pouring their way. Between 1995 and 2000, they increased their borrowing to record levels as a percentage of corporate GDP; not only to fund new plant and equipment, but equally to cover the cost of buying back their own stocks. In this way, they sidestepped the tedious process of creating shareholder value by producing goods and services at a profit, and directly drove up the price of their shares for the benefit of their stockholders and for corporate executives, who were heavily remunerated with stock options. Between 1995 and 2000 US corporations were the largest net purchasers on the stock market.

Still, the availability of easy money can provide only an incomplete explanation of the great equity price run-up. After all, the low cost of credit cannot make people borrow with the intention of speculating; yet speculation - by mutual funds, insurance companies, pension funds and other such institutions - was indispensable to the expansion of the bubble. To explain why money continued to pour into corporate equities even as corporate profits stagnated, one has to turn to the peculiar way finance works, and the tendency of its operatives towards herd behaviour. As equity prices began to rise strongly from early 1996, fund managers were under heavy pressure to buy, even if they doubted the long-term viability of their purchases. If they failed to do so, they risked falling behind their competitors and losing their jobs. On the other hand, if, in the long run, the assets they had purchased went sour, they could not be held responsible, since so many others had done the same thing.

As a result of the historically unprecedented ascent of their share prices, corporations were able to avoid facing up to the unpleasant reality of declining returns and to sustain the long expansion of the 1990s right through to the end of the decade. The magnitude of the wealth effect celebrated - and bolstered - by Greenspan and others was unprecedented. Historically, US corporations had been largely self-financing, paying for their investments largely out of retained profits. By the end of the 1990s, however, they were borrowing at record-breaking levels (compared to output) in order to fund investment, while also financing themselves by way of equity issues to a degree never remotely approached before.

Wealthy households also saw their on-paper assets rise astronomically. According to a recent Federal Reserve study, the top 20 per cent of wealth holders could account, by themselves, for the spectacular reduction of the US household savings rate from around 8 per cent in 1993 to zero in 2000. In so doing, they also accounted for the increase in the rate of consumption that took place during that period, helping corporations realise their skyrocketing investments on plant, equipment and software. In the words of one pundit, this was the first expansion in history underwritten by 'yuppie consumption'.

The fact remains, however, that a stock-market rise driven by speculation, far from discerning the most promising fields for expansion - as it does in the fables of the Federal Reserve, the Council of Economic Advisers and orthodox economic theory - was systematically misdirecting investment, because it was not based on rising rates of return. The rapid growth of expenditure on plant and equipment in new-economy industries took place against a background of falling profitability in manufacturing; that decline soon extended to information technology and telecoms. Productivity growth increased, but could not lead to a raising of the rate of return because it resulted from the same overinvestment that was simultaneously creating overcapacity and overproduction. The consequent downward pressure on prices benefited consumers in the short run; but by forcing down profits, it limited investment, growth and employment in the longer term. Between 1997 and 2000, as the boom peaked, the rate of profit in the non-financial corporate sector as a whole fell by a fifth.

The 'virtuous cycle' touted by Greenspan was little more than hype. What drove the economy during the second half of the decade was a vicious cycle that proceeded from rising equity prices to rising investment, in the face of falling profitability, which issued in increasing overcapacity that lowered profitability still further. It was the increasing defiance of gravity by both the booming economy and the bubbling stock market that opened the way to the corporate accounting scandals, the stock-market crash and the new recession.

This economic process worked itself out most dramatically in the IT sector and, especially, in telecoms. The high-tech frenzy was prompted by Clinton's 1996 Telecommunications Act, which deregulated the telecoms market. A phalanx of new entrants rushed in, hoping to capitalise on what they took for granted would be an unprecedented growth of demand, generated by the endless expansion of the Internet. By virtue of what they assumed would be their technological superiority, they also counted on wresting market share from such giants as AT&T, Sprint and Verizon. Their strategy was focused on the stock market and finance. By expanding through mergers and acquisitions with the greatest possible speed, they sought to win the approval of equity markets - dazzling them with size and growth, rather than profits. On this basis, they aimed to drive up share prices and thereby find the finance they required for further growth.

The emerging telecoms companies were soon laying tens of millions of miles of fibre-optic cable across the US and under the oceans, with the indispensable assistance of America's leading financial institutions - above all, its greatest banking conglomerates. These 'one-stop' financial supermarkets had emerged from an ever deepening process of financial deregulation, closely overseen and patronised by the Clinton Administration and a Democratic Party leadership determined to exploit the hugely increased fund-raising opportunities they knew would materialise from their embrace of the neoliberal programme and, in particular, the agenda of the great banks. Under the watchful supervision of Robert Rubin, who, having been CEO at Goldman Sachs, was made Clinton's Treasury Secretary in 1993, the already disintegrating barriers between investment banks, commercial banks and insurance companies - originally erected by the New Deal, in response to the 1990s-style excesses of the 1920s - were obliterated.

The climax came in April 1998 when Travelers Insurance, owners of the investment bank Salomon Smith Barney, merged with the commercial bank Citicorp to form Citigroup, in direct defiance of the still valid Glass-Steagall Act, the pivotal piece of New Deal legislation regulating finance. These giants were clearly confident that the Government would sanction the merger - and with good reason: Citicorp donated $4 million in campaign contributions during the 1996 and 1998 electoral cycles. The finance, insurance and real-estate industries spent over $200 million on lobbying during 1998 and donated another $150 million in the course of the 1998 electoral campaign. Above all, the newly merged mega-bank knew it could count on Rubin, and the Treasury Secretary didn't let them down. He made sure that Congress permitted their merger and was promptly rewarded when, five months after resigning his post in the Clinton Administration, he was appointed chairman of the executive committee of Citigroup, now the country's largest financial institution.

The banking monoliths that arose from the financial deregulation process were supremely well placed to garner the fees for underwriting the share issues, floating the bonds and organising the mergers and acquisitions of the newly deregulated telecoms industry. It was therefore only natural that they encouraged - and enabled - the telecoms firms' obsession with expansion. They were pleased, too, in their role as commercial banks, to lend their clients however much money they wanted (sometimes at below market rates), so long as they could secure, in their role as investment banks, these companies' underwriting business and the associated fees. They were all too ready, as well, to invoke the latest innovations in 'structured finance' to help their clients improve the appearance of their corporate balance sheets, keeping their equity prices soaring, their money-raising capacity unimpaired, and thus their demand for financial services expanding. In the half-decade after 1995, the top ten banks organised 1670 mergers and acquisitions valued at $1.3 trillion for telecommunications companies, receiving from them $13 billion in fees.

These same banks were also more than pleased to advise the ostensibly independent 'stock analysts' that they employed on how to value the shares of their client corporations, in the unlikely event of those analysts being mesmerised by the reality of their insufficient returns. Nor were they above straightforwardly bribing their corporate customers by handing their chief executives millions of dollars' worth of shares, often initial public offerings, in order to secure their financial business - this is not illegal unless it can be proved that forwarding the stock was an explicit condition for contracting the service. Meanwhile, the country's longest-established accounting firms, who had come increasingly to double as investment consultants for the very companies whose books they were supposed to be auditing, kept the game going by turning a blind eye to their clients' financial shenanigans.

Salomon Smith Barney, the investment-banking arm of Citigroup, played the vanguard role in this process, led by its communications analyst, Jack Grubman, who pushed his clients to cough up billions of dollars for fibre optics, saw to it that Salomon got to raise the money for them, then praised their shares to the equity-investing public. 'What used to be a conflict of interest is now a synergy,' he assured readers in a profile published in Business Week in 2000. After the passage of the Telecommunications Act, Salomon helped 81 telecoms companies raise some $190 billion in debt and equity. For its efforts, it received hundreds of millions in underwriting fees and tens of millions more for advice on mergers and acquisitions. Especially privileged were those heading Salomon's A-list of rising telecoms stars - WorldCom, Global Crossing and Qwest. Salomon raised $24.7 billion, $5.4 billion and $5.6 billion respectively for these three companies and received from them $140.7 million, $83.8 million and $34.4 million in fees. Although it was technically illegal, to smooth the way for these deals Salomon routinely rewarded the executive involved with the hottest initial public offering shares, handing Bernie Ebbers, the WorldCom CEO, IPOs that cashed out at over $11 million.

Such behaviour was emulated by all the other top investment banks and their communications analysts. Fund managers who stayed away from telecoms equities risked falling behind their competitors, with the result that institutional investors ended up buying shares as if there was no tomorrow, driving their values into uncharted territory. Meanwhile, manifesting the herd behaviour for which they are notorious, commercial banks showered the telecoms industry with more funds than it could sensibly invest, force-feeding expansion and insuring overcapacity. Time and again, Keynes's famous 'beauty contest' dynamic drove the inherently speculative process: to maximise profits, financiers had little choice but to base their investment decisions on their best guess as to what assets everyone else would be deciding to buy and sell in the short run, not on their own evaluations as to the intrinsic long-term worth of those assets.

By spring 2000, at the apex of the stock market's ascent, the market capitalisation of the telecoms companies (the value of their outstanding shares) had reached a staggering $2.7 trillion, or close to 15 per cent of the total for all US non-financial corporations - this despite the fact that they produced less than 3 per cent of the country's GDP. With such enormous apparent collateral, telecoms firms could borrow without limit. Between 1996 and 2000 they took on $800 billion in bank debt and issued an additional $450 billion in bonds. On this basis, they were able to increase investment over this period in real terms (i.e. measured in 1996 dollars) at an annual average rate of more than 15 per cent, and to create 331,000 jobs.

Even as their equity prices soared and their purchases of new plant, equipment and software escalated, the telecoms companies found it impossible to make a profit. Having reached a peak of $35.2 billion in 1996, the year of deregulation, corporate profits (after the payment of interest on company debt) in the communications industry sank to $6.1 billion in 1999, and then to minus $5.5 billion in 2000 as interest payments on their gargantuan debt shot up.

Against this background of falling returns, rising investment and growing debt, the pressure to sustain elevated equity prices in order to maintain the flow of finance became ever more intense, and the temptation to inflate profits via fraudulent book-keeping apparently irresistible. Here Salomon's stable of telecoms upstarts led the way. Global Crossing and Qwest began to 'swap' business as a matter of routine, one company leasing out its own lines to the other while leasing back equivalent lines for its own use, recording the returns from the former as income and booking the latter as if it were depreciation on plant and equipment over a number of years. By this method, both companies inflated revenue by at least $1 billion in 2001, an amount probably significantly greater than each one's recorded profits. Both companies are now facing criminal investigations, although it was only in August 2002 that the Securities and Exchange Commission explicitly outlawed such procedures. So much for government oversight.

But the crimes of Global Crossing and Qwest are peccadillos compared with the grand larceny carried out by WorldCom, which has effectively rewritten the book on corporate fraud. At the most recent count WorldCom had overstated its earnings between 1999 and 2001 by some $9 billion. It accomplished this largely (though not entirely) through the simple ruse of treating expenditures on day-to-day items like wages as if they were payments for capital goods. They could thus record them as depreciation and put off into the future their appearance as costs on the company's balance sheet.

When asked, in an internal audit just before the fraud became public (revealed in the Wall Street Journal, 16 July 2002), how he would justify the company's treatment of expense to the SEC, the WorldCom company controller, David Myers, acknowledged that he 'had hoped it would not have to be explained'. On the other hand, he countered, if WorldCom's reported costs weren't somehow reduced and its profits enhanced, 'the company might as well shut its doors.'

Crucial to this corporate dissimulation were Wall Street's accounting norms, which legitimate virtually any trick in the book to pump up 'pro-forma' earnings - those that are reported quarterly to stockholders and the financial community. It is only later that companies are obliged to own up to their real earnings, calculated according to strict 'Generally Accepted Accounting Principles' (GAAP), to the Securities and Exchange Commission. Needless to say, this system of dual reporting invites abuses - for instance, exaggerating short-term earnings just long enough to sustain equity prices while corporate insiders unload their stock. To give an idea of the scale of misrepresentation involved: a recent study by revealed that, for the first three quarters of 2001, the Nasdaq 100 companies reported pro-forma profits of $19 billion to their shareholders, but GAAP losses of $82 billion to the SEC. Microsoft, Intel, Cisco Systems, Oracle and Dell, taken together, overstated their profits for the same period by a factor of three.

The reason the scandals have hit the stock market and the economy so hard is that they have confirmed investors' worst suspicions about plummeting corporate returns. The revelation of WorldCom's fraud shook the markets because it became perfectly clear that what had appeared to be one of the most successful companies in the telecoms business had made no profits in either 2000 or 2001 (and quite possibly not in 1998 or 1999 either). WorldCom, as one analyst told Fortune in July 2002, 'seemed to have some kind of secret formula for producing decent margins where rivals couldn't'; when this formula was understood the last bit of air went out of the telecoms bubble.

Still, it should not be thought that the entrepreneurs behind the great telecoms bust were so clumsy as to get caught up in the financial carnage they left in their wake. Between 1997 and 2001, insiders cashed in some $18 billion in shares, unloading more than half this total in 2000, the year the price of telecoms shares peaked. But this only scratches the surface of the titanic redistribution of wealth achieved by US corporate leaders in the 1990s. Between 1995 and 1999, the value of stock options granted to US executives more than quadrupled, from $26.5 billion to $110 billion, or one fifth of non-financial corporate profits, net of interest. In 1992, corporate CEOs held 2 per cent of the equity of US corporations; today, they own 12 per cent. This ranks among the most spectacular acts of expropriation in the history of capitalism.

Robert Brenner is Professor of History and Director of the Center for Social Theory and Comparative History at UCLA. He is the author of Merchants and Revolution and the keynote contributor to The Brenner Debate, (on the origins of capitalism) edited by T.H. Aston.

In 1998 he wrote a special issue of the journal New Left Review: UNEVEN DEVELOPMENT AND THE LONG DOWNTURN: THE ADVANCED CAPITALIST ECONOMIES FROM BOOM TO STAGNATION, 1950-1998 (no. 229, may-june 1998, 265 pages), also known under the title of the cover: THE ECONOMICS OF GLOBAL TURBULENCE: A SPECIAL REPORT ON THE WORLD ECOOMY, 1950-98. Now out of print, photocopies are still available.

Other Brenner articles on New Left Review

His, THE BOOM AND THE BUBBLE: THE US IN THE WORLD ECONOMY was published (London, Verso, 2002, 303 pages).

See also: NEW BOOM OR NEW BUBBLE? The Trajectory of the US Economy

By Robert Brenner First Published - New Left Review 25 - Jan Feb 2004 [1]

See ROBERT BRENNER AND THE CAPITALIST WORLD ECONOMY for a collection of his articles and debate over his analysis of the decline of capitalist profitability

Also online in MP3 is the debate between Robert Brenner and Chris Harman of the SWP UK

SYMPOSIUM: Robert Brenner's Economics Of Global Turbulence




Updated: FEBRUARY 03, 2005

Since the new law replacing social benefits with monetary payments was enacted, people’s attention to the issue has naturally increased: today two-thirds of those surveyed (67%) say this issue is very interesting and disturbing to them, while among those who use social benefits, the number reaches 91%. Compared with data from November 2004, the share of people are interested in this issue has increased by 7 percent points (among benefit users, it has increased by 5 points).

The latest poll showed a noticeable growth in dissatisfaction with the new law: the share of negative statements increased by 9 percent points compared with November (from 44% to 53%), while the number of positive evaluations declined from 31% to 27%. As a result, the share of opponents is two times larger than the number of supporters of the law. Among benefit recipients, the share who feel negative about the reform has also increased, although by only 3 points, to 59%; the number who feel positive has held steady at 29%. Negative attitudes predominate among relatively well-to-do people and in big cities - negative evaluations grew by 13 points and 12 points, respectively. At the same time, among people who have maintained positive views (mostly the rural population and poor people), the number who support the reform has decreased by 10 percent points and 12 points, respectively.

Since the new law came into force, critical comments have increased in people’s daily conversations: the share of people who said they heard mostly negative statements on the issue has increased by 16 percent points since November, reaching 59%. Only 12% of those surveyed say they heard mostly positive statements about the new law (two months ago it was 19%).

In November, most people (54%) said they hadn’t heard official explanations about how the reform would work. Today, only 25% gave this response. We should note that personal interest is important here: among benefit recipients, only 17% say they haven’t heard official explanations, while among others, the number reaches 32%.

However, official explanations are not always clear to ordinary people. About one-quarter of those surveyed (23%) say the explanations were clear, while 25% say "some things are unclear", and 19% said they understood none of the official information on this issue. Moreover, many benefit users consider the officials explanations to be totally unclear (24%), or confusing to some degree (32%).

By Victor Yasmann, RFE/RL 3/2/05
Feb 5, 2005, 09:04

Hard on the heels of a humiliating political defeat in the presidential election in Ukraine, the Kremlin is now facing another serious crisis, this one even closer to home. For weeks now, the country has been wracked by growing social unrest in opposition to the government's reform to convert most in-kind social benefits to cash payments, which has been widely criticized as ill considered and poorly implemented. According to media reports, more than two-thirds of the subjects of the federation have seen protests and demonstrations by pensioners, the disabled, public-sector workers, and other benefits recipients.

In some cases, protestors blocked highways and rail lines or took over regional-administration buildings. In many cases, the protests were apparently spontaneous, but the Communist Party has claimed to be organizing the demonstrations. In addition, speaking to journalists in Moscow on 27 January, Communist Party leader Gennadii Zyuganov said that his party has collected the 90 Duma deputy signatures required to force the chamber's leadership to include a motion of no confidence in the government in the Duma's agenda, and other Russian media reported. Zyuganov said that in addition to Communist deputies, the Motherland faction is backing the initiative, as well as 15-18 independent deputies. Although a no-confidence measure has no chance of passing without the support of the pro-Kremlin Unified Russia party, which controls a majority of the seats in the chamber, holding such a vote would put Unified Russia in the awkward position of having openly to support the unpopular benefits reform, commented on 27 January. At a recent meeting of the government's Council on Competitiveness and Entrepreneurship, participants concluded that the main reason for the unrest and for the slowdown in economic growth generally is a crisis of confidence, a loss of public trust in the government, "Vremya novostei" reported on 28 January.

A similar view was expressed by Higher Economics School head and former Economy Minister Yevgenii Yasin, who was quoted by the daily as saying, "We are seeing a textbook example of how economic growth that seemed to be working so well can be destroyed." Economist and Institute of Globalization Director Mikhail Delyagin said he thinks the present situation, including the widespread unrest, is the result of infighting between the so-called siloviki, or people connected to the security apparatus, and such liberal ministers as Finance Minister Aleksei Kudrin and Economic Development and Trade Minister German Gref. Delyagin called the latter "liberal fundamentalists" in a 14 January interview with RosBalt. Delyagin added that the dismantling of the social safety net "is not only the result of liberal reforms, but also of the blind aggression of the silovik oligarchy, an aggression that is spreading from the business community to society as a whole." "It is an open secret that a considerable portion of those agencies that we more and more often call 'siloviki' and less and less often call 'law enforcement organs' perceive the citizenry of Russia as a legitimate target for looting," Delyagin said.

Delyagin said that the Putin regime has declared war not only on business and society, but also on the regional elites, which it has stripped of political influence without giving them anything in return. "I think the protests which are continuing all over the country are partly generated by regional administrations, which feel that they have been robbed by the benefits-reform process," Delyagin said. "Since they are afraid to confront Moscow openly, they pretend that the protests are only the voice of the people and are in no hurry to silence it." National Strategy Institute Director Stanislav Belkovskii told APN on 27 January that the unrest is evidence of a systemic crisis confronting the Putin regime. He said the protests demonstrate how illusory and ephemeral the Russian system of power is, and prove that the authorities can neither govern the people nor communicate with them. He added that the regime has already demonstrated this inability in the cases of the August 2000 sinking of the "Kursk" nuclear submarine, the October 2003 hostage taking at a Moscow theater, and the September 2004 hostage drama at a school in Beslan, North Ossetia. However, he added, the current unrest even more graphically demonstrates that the Putin regime is not unshakable.

Belkovskii added that the response to the protests proves that the regime fears only direct actions of this sort. It is not possible to outmaneuver the country's oligarchic-bureaucratic machine, but only to pressure it, Belkovskii said. Belkovskii said that in October, a member of the Communist Party of the Russian Federation told him that if Ukrainian presidential hopeful Viktor Yushchenko could bring at least 100,000 people out onto the streets of Kyiv, the issue of power in Ukraine would be settled regardless of other factors. Time has shown that he was right, Belkovskii said, adding that anyone who can bring 300,000 people out onto the streets of Moscow can similarly take power in Russia. Therefore, he concluded, the street will remain the main tool of the political struggle in Russia for the next two years. The government was unprepared for the protests and chose to treat its own citizens like "cattle," Belkovskii said. He quoted a Unified Russia Duma deputy as saying that "the tougher the laws are that the government adopts, the less people protest against them." Belkovskii said the regime placed its stake on public apathy and was convinced that there would be no massive protests. For this reason, the government is responsible for the crisis and should be dismissed. Belkovskii added, though, that President Putin does not consider the benefits reform itself a mistake.

Therefore, Kudrin, Gref, and Health and Social Development Minister Mikhail Zurabov will remain in government in one capacity or another. However, the president will most likely have to make some sort of gesture to quell the unrest, and the most likely victim will be the cabinet of Prime Minister Mikhail Fradkov. Demonstrators have already been seen carrying signs calling for Putin to resign and even bearing slogans such as "Putin Is Worse Than Hitler." Although Putin often tries to avoid tough personnel decisions, Belkovskii said, he will need to do something to appease the public. The most likely scapegoat will be Fradkov, Belkovskii said, not because of the reform fiasco itself, but because he has avoided taking public responsibility for the crisis and has thereby exposed Putin to criticism. 2004


By Jason Bush in Moscow
Business Week JULY 7, 2003

Starting next month, millions of Russians will find a big surprise in their mailboxes. Letters from the State Pension Fund will tell them that they are now the guardians of part of their own financial future, and that money has been deposited for them in new individual retirement accounts. The creation of the accounts -- Russia's answer to 401(k) plans in the U.S. -- is a crucial plank in President Vladimir V. Putin's economic reform agenda.

The Kremlin's goal is threefold: to give poverty-strapped retirees a decent income, head off a looming pension crisis for the Russian state, and create an asset-management industry that will invest its funds in the securities of Rus-sian companies and help spur economic growth. Similar programs in Poland, Chile, and Sweden over the past two decades have all paid off. If Russia can make its own plan work, the pension scheme will be one of the largest reforms ever attempted. "It's the last great privatization in Russia," says Elizabeth Hebert, CEO of Moscow-based Pallada Asset Management.

The program will be launched amid growing concern about the viability of Russia's pay-as-you-go pension system. Workers have little incentive to save for retirement themselves: Mother Russia is obligated to provide for them in their dotage. But it's done a poor job. High payroll taxes -- 28% on a worker's first $3,175, less after that -- help pay for government pensions, yet the average payment to pensioners is about $50 per month. That's $8 below Russia's official poverty level. With the pension burden growing each year as the population ages, the sustainability of the program is an issue that no longer can be ignored.

To deal with its pension time bomb, Russia has opted for semi-privatization. Under the new system being implemented by Economic Development Minister German O. Gref, employers of Russians under 35 have begun paying 10.7% of the payroll tax into individual pension accounts, now administered by the state. That will rise to 21.4% starting in 2005. Those age 35-50 will pay a third as much (the over-50 crowd is exempted). Workers will soon be asked to pick a private asset manager for their new accounts. By one estimate, the share of pension assets earmarked for private management will rise to $2.2 billion by 2005 (chart), or nearly a third of the total accumulated funds. "The impact on capital markets will be huge. You'll get this captive pension money that will be invested in Russian assets," says Roland Nash, research head at Moscow-based Renaissance Capital.

Yet the average Russian remains skeptical. In one recent opinion poll, only 7% of those surveyed say they'll choose a private asset manager over the state-managed fund. The investment advisory industry, however, is salivating over the opportunity to dip into the public pension chest. The first contracts to qualified pension-fund managers are expected to be awarded within the next few weeks. By 2010, some $17 billion could be available for professional investment, and that number should double by 2015, according to Renaissance Capital. Says Pallada's Hebert: "That's a lot of money from anybody's point of view."

Supporters of the reform point out the injection of privately managed pension money could add liquidity and stability to Russia's low-volume stock and bond markets. But critics complain there has been no serious attempt to explain the new pension system to citizens -- who are supposed to pick an asset manager by Oct. 1. "The lack of a proper public-relations campaign means the majority of the population is definitely not ready to make any choices," says Elena Zotova, a pension specialist at the World Bank.

One big concern is the lax regulation of Russia's fund-management industry. Another is that most pension investment decisions may not be made by workers themselves but by employers -- often members of the pervasive business oligarchy. In fact, each worker's choice of pension scheme must be approved by a public notary or -- more likely -- his boss. Neither option makes it easy for a worker to choose an independent fund. The operation of existing voluntary pension plans isn't encouraging: The two largest, run by oil and gas producers Lukoil and Gazprom, both invest their pension money almost exclusively in company assets.

For the reforms to work, the government must do more to increase public awareness and ensure average Russians are free to choose competitive funds. Russia, long a victim of its own financial mismanagement, needs a smart pension system more than it needs another botched financial opportunity.



David E. Bloom & Pia N. Malaney

This paper examines macroeconomic consequences of the Russian mortality crisis. Recent estimates indicate that between 1990 and 1995, some 1.3 to 3.1 million Russians died prematurely. These excess deaths represented 11 to 26 percent of total deaths during this six-year period. Corresponding to these excess deaths the life expectancy of Russians declined precipitously from 70 to 65 years.

The paper concludes with a discussion of other practical and theoretical implications of these results and suggestions for further work. As the excess mortality is likely to have implications for the distribution of economic well being in Russia and for the fiscal performance of Russia's pension system, we explore the direction and magnitude of such effects. We also discuss possible ways in which to model the linkages between health status and economic growth. While both country time series and country cross-sectional data have established that health status tends to increase with income per capita, economists have only recently begun to explore the impact of improved health status on subsequent economic growth. We argue that in the case of developing countries the interplay of these two effects can lead to a virtuous cycle with respect to both health and economic growth. However, a negative income shock, such as that which Russia's transition to a market economy seems to have caused, may have triggered a downward growth-health spiral.


Robert T. Jensen
John F. Kennedy School
of Government
Harvard University
and National Bureau of Economic Research
STICERD/London School of Economics and World Bank August 2000


By José Piñera
[Foreign Affairs, September/October 2000]
(José Piñera is president of the International Center for Pension Reform and co-chairman of the Cato Institute Project on Social Security Privatization. As minister of labor and social security from 1978 to 1980, he was responsible for the privatization of the Chilean pension system. He thanks Ian Vásquez, director of the Cato Project on Global Economic Liberty, for his help in preparing this report and for joining him in Moscow).

By José Piñera

A specter is haunting the world. It is the specter of bankrupt government-run social security systems. The pay-as-you-go system that reigned supreme through most of the 20th century has a fundamental flaw, one rooted in a false conception of how human beings behave: it destroys, at the individual level, the link between contributions and benefits-in other words, between effort and reward. Whenever that happens on a massive scale and for a long period of time, the final result is disaster.

Two exogenous factors aggravate the consequences of that flaw: the global demographic trend toward decreasing fertility rates and medical advances that are lengthening life. As a result, fewer workers have to support more and more retirees. Since increasing payroll taxes generates unemployment, sooner or later promised benefits have to be reduced, a telltale sign of a bankrupt system. Whether benefits are reduced through inflation, as in most developing countries, or through legislation, the result is the same: anguish about old age is created, paradoxically, by the inherent insecurity of an unfunded "social security" system.

In Chile, the Social Security Reform of November 4, 1980 introduced a revolutionary innovation. The Reform (mainly DL 3.500 and DL 3.501) gave every worker the choice of opting out fully from the government-run pension system and instead putting the former payroll tax (10% of wages) in a privately managed personal retirement account (PRA). Since 95 percent of the workers chose the PRA system, the end result was a "privatization from below" of Chile's social security system.

This same Reform introduced two important changes to the health system: a) it fully privatized the disability insurance system, which became an integral part of the so-called "AFP system" (the AFPs are the private companies that manage the PRAs on workers behalf); and, b) it allowed workers to opt out from the monopolistic government health insurance system with all their mandatory contribution (another 7% of wages), as long as they were willing and able to buy with that money a minimum health insurance plan in what became the "ISAPRE system" (the ISAPRES are the private companies that offer diverse health insurance plans).

After almost 24 years, this comprehensive Reform has changed dramatically Chile's economy and society. Six million workers (95% of the labor force) have a PRA and 1.5 million (almost 25% of labor force, and gradually increasing as higher wages allow their 7% of wages to buy the minimum health plan) have an ISAPRE plan, and they do not depend at all on the government for their retirement and health.

The PRAs annual average rate of return for more than two decades has been around 10% above inflation. Retirement benefits in the AFP system already are 50 to 100 percent higher-depending on whether they are old-age, disability, or survivors' retirement benefits-than they were in the pay-as-you-go system. The resources accumulated in the workers PRAs amount to $50 billion, or around 65% of Chile's GNP. According to William Lewis ("The Power of Productivity", 2004), total government expenditures in Chile as a percentage of GDP declined from 34.3% in 1984 to 21.9% in 1990, and of that 12.4 points decline, Social Security and Welfare changes accounted for half. By increasing savings and improving the functioning of both the capital and the labor markets, this Reform has been the single most important structural change that has contributed to the doubling of the growth rate of the economy in the 1985-1997 period (from the historic 3 to 7.2%).

How It Works

Under Chile's new social security system, what determines a worker's retirement benefit is the amount of money he accumulates in his PRA during his working years. Neither the worker nor the employer pays a payroll tax. Nor does the worker collect a government-funded benefit. Instead, 10 percent of his wage coming from the previous payroll tax is deposited, tax free, by his employer each month in his own PRA.4 The 10 percent rate was calculated on the assumption of a 4 percent average real return on a PRA during a whole working life, so that the typical worker would have sufficient money in his account to fund a retirement benefit equal to approximately 70 percent of his final salary. A worker may contribute up to an additional 10 percent of his wage each month also deductible from taxable income, as a form of voluntary savings. The return on the PRA is tax-free. Upon retirement, when funds are withdrawn, taxes are paid according to the income tax bracket at that moment.

A worker may choose any one of the private pension fund companies (called Administradoras de Fondos de Pensiones, or AFPs) to manage his PRA. A key provision is totally free entry to the AFP industry, for both domestic and foreign companies (foreign companies can own up to 100 percent of an AFP) in order to provide competition and thus benefit workers. Those companies can engage in no other activities and are subject to strict supervision by a government entity, the Superintendency of AFP, that was created to provide highly technical oversight to prevent theft or fraud.5

Each AFP operates five mutual funds, with different bond/share proportions (the original scheme allowed only one fund for each AFP). Older workers have to own mutual funds highly invested in fixed income securities, while young workers can have up to 80 percent of their funds in shares. Investment decisions are made by the AFP, but the worker can choose both the AFP and, within limits, the preferred fund. The law sets only maximum percentage limits both for specific types of instruments and for the overall mix of the portfolio; and the spirit of the reform is that those regulations should be reduced progressively as the AFP companies gain experience and capital markets work better. There is no obligation whatsoever to invest in government bonds or any other security. Legally, the AFP companies and the mutual funds are separate entities. Thus, should an AFP go under, the assets of the mutual funds-that is, the workers' investments-are not affected at all and only the AFP's shareholders lose their capital.

Workers are free to change from one AFP company to another, and from one fund to another. There is then competition among the companies to provide a higher return on investment, better customer service, or a lower commission. Each worker is given a PRA passbook (to use if he wants to update his balance by visiting his AFP) and receives a statement by mail every three months informing him of how much money has been accumulated in his retirement account and how well his investment fund has performed. The account bears the worker's name, is his property, and will be used to pay his old-age retirement benefit (with a provision for survivors' benefits).

As should be expected, individual preferences about old age differ as much as any other preferences. Some people want to work forever; others cannot wait to cease working and indulge in their true vocations or hobbies. The pay-as-you-go system does not permit the satisfaction of such preferences, except through collective pressure to have, for example, an early retirement age for powerful political constituencies. It is a one-size-fits-all scheme that may exact a high price in human happiness.

The PRA system, on the other hand, allows individual preferences to be translated into individual decisions that will produce the desired outcome. In the branch offices of many AFPs, there are user-friendly computer terminals on which a worker can calculate the expected value of his future retirement benefit, based on the money in his account, the life expectancy of his age group, and the year in which he wishes to retire. Alternatively, the worker can specify the retirement benefit he wishes to receive and determine how much extra money he must deposit each month if he wants to retire at a given age. Once he gets the answer, he simply asks his employer to withdraw that new percentage from his salary. Of course, he can adjust that figure as time goes on, depending on the actual yield of his pension fund or other relevant variables (for example, longer life expectancies).

All workers, whether employed by private companies or by the government, were given the opportunity to opt out of the pay-as-you-go system.6 Self-employed workers are not compelled to participate in the PRA system, as they were not in the government pay-as-you-go system, because of the practical difficulties in a country like Chile of enforcing any mandatory system for self-employed people. But the pension reform allows them to enter the PRA system if they wish, thus creating an incentive for informal workers to join the formal economy.

The social security reform system maintained a "safety net." A worker who has contributed for at least 20 years but whose benefit, upon reaching retirement age, is below what the law defines as a "minimum pension" is entitled to receive that benefit level from general government revenue sources once his PRA has been depleted. (Those without 20 years of contributions can apply for a welfare-type retirement benefit at a lower level.)

The government-run disability and survivors' program, a source of systematic abuse, given the nonexistence of incentives to control its fair use, was also fully privatized. Each AFP has to provide this service to its affiliated workers by taking out, through open and transparent bidding, group life and disability coverage from private life insurance companies. This coverage is paid for by an additional worker contribution of around 2 percent of salary, which includes the commission to the AFP for administrative and investing expenses.

A key feature of the reform was the change in the meaning of "retirement." The legal retirement age is 65 for men and 60 for women (those were the ages in the former pay-as-you-go system and were not discussed or changed during the reform process because they are not a structural characteristic of the PRA system). But in the PRA system, workers with sufficient savings in their accounts to buy a "reasonable annuity" (defined as 50 percent of the average salary of the previous 10 years, as long as it is higher than the "minimum pension") can cease working, begin withdrawing their money, and stop contributing to their accounts. Of course, workers can continue working after beginning to retire their money. A worker must reach the legal retirement age to be eligible for the government subsidy that guarantees the minimum pension. But in no way is there an obligation to cease working, at any age, nor is there an obligation to continue working or saving for retirement benefit purposes once you have assured yourself a "reasonable" benefit as described above.

Upon retiring, a worker may choose from three general payout options. In the first case, a retiree may use the capital in his PRA to purchase an annuity from any private life insurance company. The annuity must guarantee a constant monthly income for life, indexed to inflation (there are indexed bonds available in the Chilean capital market so that companies can invest accordingly), plus survivors' benefits for the worker's dependents (wife and orphans under the age of 21). Second, a retiree may leave his funds in the PRA and make programmed withdrawals, subject to limits based on the life expectancy of the retiree and his dependents; with this option, if he dies, the remaining funds in his account form a part of his estate and can be given to his heirs basically tax-free. In both cases, he can withdraw as a lump sum the capital in excess of that needed to obtain an annuity or programmed withdrawal equal to 70 percent of his last wages. And third, he can choose any mix he wishes of the previous two.

The PRA system solves the typical problem of pay-as-you-go systems with respect to labor demographics: in an aging population the number of workers per retiree decreases. Under the PRA system, the working population does not pay taxes to finance the retired population. Thus, in contrast with the pay-as-you-go system, the potential for intergenerational conflict and eventual bankruptcy is avoided. The problem that many countries face-huge unfunded government social security liabilities-does not exist under the PRA system.

In contrast to company-based pension systems that generally impose costs on workers who leave the company before a given number of years and that sometimes result in the loss of the workers' retirement funds-thus depriving workers of both their jobs and their pension rights (such as in the infamous Enron case in the United States)-the PRA system is completely independent of the company employing the worker. Since the PRA is tied to the worker, not the company, the account is fully portable. Given that the pension funds must be invested in tradable securities, the PRA has a daily value and therefore is easy to transfer from one AFP to another. The problem of "job lock" is entirely avoided. By not impinging on labor mobility, the PRA system helps create labor market flexibility and neither subsidizes nor penalizes immigrants. As PRA systems spread around the world, I envision portability between countries as well, which will help people who are more internationally mobile (such as professionals or unassimilated immigrants).

A PRA system also can accommodate flexible labor styles. In fact, some people are deciding to work only a few hours a day or to interrupt their working lives-especially women and youngsters. In pay-as-you-go systems, those decisions create the problem of filling the gaps in contributions and, in some cases, may entail no right at all to a retirement benefit, despite years of contributing to the system. Not so in a PRA scheme where stop-and-go contributions do not impinge on the right to get back the totality of (plus the return on) one's contribution.

The Transition

In countries that already have a pay-as-you-go system, one crucial challenge is to design and implement the transition to a PRA system. In Chile we set three basic policy rules:

The government guaranteed those already receiving a social security check that their benefits would not be touched by the reform. It would be unfair to the elderly to break the promises made. I stated this basic rule in this way: "Nobody will take away your grandmother's check."

Every worker was given the choice of staying in the pay-as-you-go system or moving to the new PRA system. Those who opted out of the former system were given a "recognition bond" that was deposited in their new PRAs. That bond was indexed to inflation and carried a 4 percent real interest rate. It was basically a zero-coupon Treasury bill maturing when the worker reaches the legal retirement age. The bonds can be traded in secondary markets, so as to allow the worker to use them to build the capital necessary for early retirement. The bond was calculated to reflect the rights the worker had already acquired in the pay-as-you-go system. The exact formula was in the law and was widely and simply explained to the people. Thus, a worker who had paid social security contributions for years did not have to start at zero when he entered the PRA system.

All new entrants to the labor force were required to enter the PRA system. This requirement ensured the complete end of the pay-as-you-go system once the last worker who remained in it reaches retirement age. From then on, and for a limited period of time, the government has only to pay benefits to retirees of the old system.

To give all those who might be interested in doing so an equal opportunity to create AFPs, the law established a six-month period during which no AFP could begin operations (not even advertising). Thus, the AFP industry is unique in that it had a clear day of conception (November 4, 1980) and a clear date of birth (May 1, 1981). Note that in this way we transformed May Day into a day celebrating the empowerment of workers through social security choice.

We also ended the illusion-artificially maintained by lawmakers around the world-that both the employer and the worker contribute to social security. As economists know well, all the contributions are ultimately paid from the worker's marginal productivity, and employers take into account all labor costs-whether termed salary or social security contributions-in making their hiring and pay decisions. So, by renaming the employer's contribution an additional gross wage, our reform made it clear, without reducing workers' take-home pay, that all contributions are paid ultimately by the worker and that he can control his own money. Of course, at the end of the day, wage levels will be determined by the interplay of market forces.

The financing of the transition is a complex technical issue that we addressed successfully without raising taxes and that each country must resolve according to its own circumstances. The key insight in this regard is that, contrary to the widely held belief, there is no "economic" transition cost, because there is no cost to GNP due to this reform (on the contrary). A completely different, and relevant, issue is how to confront the "cash-flow" transition cost to the government of recognizing, and ultimately eliminating, the unfunded liability created by the pay-as-you-go-system.

The implicit pay-as-you-go debt of the Chilean system in 1980 has been estimated by a World Bank study at around 80 percent of GDP. As that study states, "Chile shows that a country with a reasonably competitive banking system, a well-functioning debt market, and a fair degree of macroeconomic stability can finance large transition deficits without large interest rate repercussions."7

We used five "sources" to finance the fiscal costs of changing to a PRA system:

Using debt, the transition cost was shared by future generations. In Chile, roughly 40 percent of the cost has been financed by issuing government bonds at market rates of interest. These bonds have been bought mainly by the AFPs as part of their investment portfolios, and that "bridge debt" should be completely redeemed when the beneficiaries of the old system are no longer with us (a source of sadness for their families and friends but, undoubtedly, a source of relief for future treasury ministers).

Since the savings rate needed in a defined-contribution system, like the PRA, to finance adequate retirement benefit levels was lower than the existing payroll taxes, a fraction of the difference between them was used as a temporary "transition tax" (which was gradually reduced to zero, lowering the cost of hiring labor and leading to more employment).

In a government's balance sheet there are liabilities-such as social security and health obligations-but also government-owned enterprises, land, and other types of assets. Since we were also at that time privatizing government-owned assets, especially companies, that was one way to finance the transition that had several additional benefits, such as increasing efficiency, spreading ownership, and depoliticizing the economy.

The need to finance the transition was a powerful incentive to reduce wasteful government spending. Prior to the reform, the government deliberately created a budget surplus, and for many years afterwards the treasury minister was able to use the need to "finance the transition" as a powerful argument to contain the permanent pressure from all sources to increase government expenditures.

The increased economic growth fueled by the PRA system substantially increased tax revenues, especially those from the value-added tax.


Chile began in the 70s a successful experiment with free-market reforms. Now the country has moved forward again, this time with trade liberalization.

In fact, Chile will be the first South American country to have a Free Trade Agreement with the United States. It's a win-win, state of the art FTA - it not only slashes tariffs, it reduces barriers for services, protects leading-edge intellectual property, keeps pace with new technologies, ensures regulatory transparency and provides effective labor and environmental enforcement.

Now, why Chile? Specifically, why Chilean workers support free trade policies? Why this FTA enjoys such a total bipartisan support?

One crucial reason is the link between free trade policies and a system of personal retirement accounts.

All around the world, trade liberalization is cast as a battle between capitalists and workers, between "global elites" and the "common man." In Chile, however, market-invested retirement funds mean that every worker is a capitalist and has a visible stake in an internationally competitive economy. In Chile to be anti-globalization is to be both anti-capitalists and anti-workers.

A vast majority of Chileans benefit from free trade not just as consumers, but also as owners (or lenders) of the productive assets of the economy through their retirement accounts. Free trade is good for the economy, and what's good for the economy is good for investors. Thus there is a virtuous cycle of trade liberalization that has so far thrived regardless of the political party in power.

Chile already has a 6% flat tariff rate that is low compared to the rates of most countries and, more importantly, with the possible exception of four agricultural products, it is applied equally to all imports. The flat tariff decision taken in the 70s was critical. A differentiated tariff not only creates economic distortions that slow economic growth, but continually generates special interest pressures and opportunities for corruption. With a flat rate, a politician can't be bought on trade issues... because he has nothing to sell.

Since before the FTA with the US, Chile has signed this year an FTA with the European Union and another with Korea, and has several bilateral free trade agreements with countries like Canada and Mexico, complete free trade as at hand. The mere possibility of zero import tariffs is stunning in an economy that in the 1960s was one of the most protectionist in the world. In those days, Chile was a devoted follower of the misguided import-substitution proposals of the Santiago-based United Nations Economic Commission for Latin America. But in the mid 1970s, the country's trade policy turned around. Not only did Chile completely dismantle the system of quotas and other trade barriers, but under the so called "Chicago boys" liberal economic policies, the uniform tariff policy was adopted, and by 1979 that tariff was down to 1a of growth of the economy to an “Asian tiger” level of 7% a year for more than a decade.

Following the peaceful transition to democracy in 1990, some observers worried that beneficial economic reforms might be undone by the incoming center-left government, given that many in that coalition had initially opposed with as much passion as prejudice the free market reforms. But by the time the new government took office, it was abundantly clear that Chilean workers wanted an open, wealth-producing economy in which business, and thus individual retirement accounts, could flourish.

The Chilean experience provides a powerful lesson for free traders around the world. Trade liberalization does not take place in a vacuum; the proper overall economic and cultural climate is essential. Choice as implemented in Chile, between the government-run pay-as-you-go system and one of personal retirement accounts, not only has solved the Social Security crisis and delivered enormous benefits to workers, but also has made more possible trade and economic liberalization by linking the fate of the workers retirement funds to that of the overall economy.

With the generosity that is a trademark of the American people, Ambassador Robert Zoelick stated it this way in the press conference after the negotiations concluded last year in Washington:

"I want to emphasize one other point that I think has been part of this whole negotiation. I have discovered that there are a lot of members of Congress who, frankly, have a real pride in an association with Chile, because Chile is a country that over the course of the past twenty years has established a thriving democracy, a thriving economy, a free market society, and frankly there are many things that we can learn from the Chileans. One of the nice things in this agreement is we have some additional access in terms of pension fund management with a social security system that I wish we could imitate".

Let me close with an unexpected quote from Walt Whitman: “The spirit of the tariff is malevolent. I hate it root and branch. It helps a few rich men to get rich, it helps the great mass of poor men to get poorer. I am for free trade because I am for anything that will break down the barriers between peoples. I want to see the countries all wide open”.


By Caroline Nolan

WHILE BROWSING THE INTERNET RECENTLY, I stumbled across an interesting web site called The International Center for Pension Reform (ICPR).

I’d never heard of the ICPR, so this discovery was a little like panning the world for gold and finding a huge nugget. The site was initiated by José Piñera, the former Chilean Minister of Labor and Social Security who, at the age of 30, spearheaded that country's pension reform in 1980. Today, he's president of the ICPR and co-chair of the Washington, D.C.-based Cato Institute's Project on Social Security Privatization.

But why a web site? As Piñera put it in an on-line article, "I come from a distant country . . . But in these days of a global village, I can bring you an idea, a powerful idea, that can save social security by privatizing its provision. We tried this idea in Chile 16 years ago . . . with a team of young and creative people that I assembled to devise the reform, we did not ask ‘Why,’ but rather, as Bobby Kennedy had urged, ‘Why not?’"

As many readers will already know, Piñera successfully implemented "a simple idea" allowing workers to tuck away their payroll taxes (the equivalent of CPP contributions in Canada) into individual pension savings accounts (PSAs), with the freedom to invest the protected assets as they please. The results? Says Piñera: "Today, nine out of 10 workers are in the PSA system. They have received an average return rate of 12% above inflation during 15 years. The whole issue has been depoliticized and civil society strengthened. The economy, not surprisingly, has also benefited . . . " He goes on to say that besides reduced unemployment (the Chilean rate is 5.5%), the country's savings rate is now 27% of the GNP.

It's no secret Piñera thinks his PSA model is a good one for the U.S. and Spain, if not the world--hence the ICPR web site.

Pension reform is at the forefront of the global mind. The U.K. is the latest to tackle the issue. In early March, the ruling Conservatives proposed to privatize state pensions. In fact, The World Bank has predicted that in the next few years, some 30 countries will initiate such reforms. Many Latin American countries already have, using Chile's model. As Jean Bonvin, president of the OECD Development Center (Organization for Economic Co-operation and Development) noted recently: "Latin America is setting the pace for pension reform worldwide." These reforms, however, also raise many regulatory questions.

Should governments put restrictions on foreign investments? Click your way to the OECD site to read "Technical Paper No. 120," a new study, authored by the organization's Helmut Reisen, which explores the economics of foreign investment regulation for pension funds, with an emphasis on developing countries. One of Reisen's conclusions will be of particular interest to Canadian pension fund investors who regularly curse the 20% foreign investment limit.

A popular argument against giving pension funds free rein to invest beyond a country's borders is that foreign restriction policies serve to stimulate the growth of domestic capital markets. Reisen discovered, by studying the numbers from 23 developing and developed countries between the years 1986 and 1993, there was "a weak negative correlation" between a country's total pension fund assets and the growth rate of its stock markets. Even if there is some evidence to support keeping a country's pension assets domestic, Reisen concludes that "the home bias generally observed in pension fund investment should translate into sufficient potential demand for domestic financial assets so as to deepen markets and develop the institutional infrastructure." In other words, pension funds aren't solely interested in achieving the maximum return possible, they must also balance this goal with another: to fulfill the pension promise.

Tell that to Revenue Canada. In fact, fellow Internet junkies at Revenue Canada and elsewhere, can surf to our web site ( to find a link right to Reisen's research, as well as a link to the maestro of pension reform, José Piñera. (This article appeared in Benefits Canada in May 1997).



In October the Pensions Commission published its first report on the future of pensions in Britain. It painted a stark picture of what the working class faces with the intensifying attack on pensions.

The introduction of state pensions was presented as one of the great triumphs of capitalism, as proof that it was capable of meeting human needs. The politician responsible for introducing the first state pension in an industrial country was more pragmatic. "Whoever has a pension for his old age is far more content and far easier to handle than one who has no such prospect. Look at the difference between a private servant and a servant in the chancellery or at court; the latter will put up with much more because he has a pension to look forward to". These were the words of Otto Von Bismarck, the German Chancellor, as he began to introduce a system of national insurance across Germany in the 1880s. This 'state socialism' was the counterpart to the anti-socialist law of 1878 that banned socialist organisation and agitation and the publication and distribution of socialist literature. Where the one sought to deny the independent political expression of the working class, the other sought to remove the need for such expression. Further, the introduction of state benefits tended to replace or minimise the system of benefits set up through the trade union and social organisations of the working class and, thereby, tied the workers to the bourgeois state.

Pensions were introduced in Britain with the Old Age Pensions Act of 1908, which gave means-tested benefits to those over 70. The Act was passed in the middle of an intense period of class struggle that was beginning to have revolutionary overtones and also when there were growing concerns about the ability of British capitalism to keep up with its rivals. Subsequent legislation continued to have the twin aims of pacifying and containing the working class and of ensuring a sufficient supply of healthy workers. The role of pensions, as Bismarck said, was to give workers something to hope for, but also something to lose, while the social impact of industrialisation made it necessary to give some support to the non-productive parts of the working class in order to allow the better exploitation of the productive part. Welfare legislation always arises from the economic and political needs of the bourgeoisie.

During the First World War a ministry of pensions was set up in Britain as part of the wider 'welfare movement' that expressed the strengthening of the state necessary to wage the military struggle. After the war, as the struggle of the working class and the economic crisis shook capitalism around the world, pensions were extended and the amount increased, although those receiving them were still below the poverty line. At the end of the Second World War, the National Health Service and National Insurance Acts established the framework of the Welfare State. The Basic State Pension was introduced, linked either to earnings or prices. This has never been very generous (in 1946 it was £1.30 a week, in 2003 £77.45) and a range of occupational or private pension schemes developed alongside it. In 1978 it became compulsory for all employees who earn above a certain level to enrol in a second pension, either the State Earnings Related Pension (SERPs) or a private pension.

The pensions crisis

Today pensions around the world are in crisis as the funds available become insufficient to meet the need. A recent OECD report noted "there seems to be increasing concern over the funding situation of defined benefit plans in many OECD countries. In the United Kingdom, where pension funds always have had a relatively high equity allocation, recent estimates for the aggregate shortfalls range from BP 55 to 65 billion (or 6? per cent of GDP). In Japan, estimates of deficits of around USD 200 billion were cited in the press. 73 of the 1650 corporate pension funds were dissolved in fiscal year 2002, while 366 reduced the benefits they had promised to pay. A recent report estimated that pension fund assets at 100 of Japan's largest companies covered less than half the cost of payments due to retirees. In Canada, underfunding has been put at CAD 225 billion (20 per cent of GDP). In the Netherlands, the average funding ratio of pension funds fell by 25 percentage points in the two years to 2002, dropping in many cases below 100 per cent? In Switzerland, funding ratios have declined to 100 per cent or less in most pension funds... In Germany, Siemens indicated that under US accounting rules its pension shortfall exceeded 5 billion Euro in mid-2002." (Recent Developments in Funding and Benefit Security, November 2003).

According to the mouthpieces of the ruling class this is a simple, 'natural' consequence of the increase in the older population. In reality the pensions 'crisis' is an expression of the global crisis and the response of the bourgeoisie. In Britain pensions have been under attack since the late 1970s:

* the introduction of compulsory second pensions in 1978 was a recognition of the inadequacy of the basic state pension;

* in 1980 the Basic State Pension was indexed to prices rather than wages leading to its reduction from 24% of basic earnings in 1981 to 16% in 2002 - a reduction of some £30 a week for a single pensioner;

* in 1986 the value of SERPs was significantly reduced and workers were 'encouraged' to opt out in favour of private pension schemes;

* in 1993 further 'incentives' to opt out were introduced;

* in 1995 the Pensions Act further reduced the value of SERPs, announced that the retirement age for women would rise from 60 to 65 between 2010 and 2020 and relaxed the regulation of occupational pension schemes, which were no longer required to provide Guaranteed Minimum Pensions.

Many companies gave themselves 'contributions holidays', or even took money out of the pension funds. Some £19bn was not paid into funds, with 94% of this being used to reduce employers' contributions and only 6% to reduce employees. Over three-quarters of final salary pension schemes have already been closed and replaced by less valuable ones, with the result that the contributions of many employers has halved from 12% to 6%.

The overall tendency has been to shift the risk to the employees: "The UK places greater responsibility on its citizens for looking after their own needs than any other developed state. Indeed, both major parties are still committed to changing the current 60:40 ratio between state and employee investment in retirement income to 40:60." (Guardian 13/10/04).

Labour - continuing the attacks

The Labour government and its apologists have made great claims about reducing pensioner poverty. But they can't hide the fact that the working class, and especially the poorest part of it, have not actually benefited that much. Firstly, as is noted by the author of an article in the Guardian (13/10/04, 'We cannot allow the poor to fall into the pensions abyss'). "A third of poor pensioners don't claim pension credit, leaving a million people to live on the basic pension with little or nothing else, in a poverty that is beyond contemplating" She is mystified by this "since they [the government] already pay these missing claimants their pension every week. They know who they are; they know where they live?it should not be beyond the wit of the Department of Work and Pensions to knock on the door of every single one of them and help fill out the now simple forms". Secondly, the poor tend not to live so long to collect their pensions: "Sir Michael Marmot, director of the International Centre for Health and Society at University College London, recently pointed out that the difference in life expectancy between the rich and the poor rose from 5.5 in the 1970s to 9.5 years in the 1990s. If you take the central line from the centre to the east of London, he explained, for every stop there is a drop in life expectancy of a year" (Guardian 14/10/04). Given that significant numbers of the working class don't live much beyond 70, the proposal being floated of an increase in the retirement age, albeit dressed in the hypocritical language of choice and equal opportunities, could go a long way to solving the crisis.

No better tomorrow

The assault on pensions that is taking place throughout the developed world is part of the systematic dismantling of the post-war welfare state (see WR 277 'The dismantling of social security'). The approach in Britain has been a gradual, piecemeal one, but, in the case of pensions, it has gone on for a quarter of a century so that cumulatively such attacks have gone furthest here. These are not Tory attacks or New Labour attacks but attacks by the bourgeoisie as a whole; an expression of the class war.

The pensions crisis is not due to increased numbers of old people but to the inability of capitalism to use the immense resources it has created to meet human needs. Capitalism is locked in a contradiction it cannot resolve. With pensions this is expressed in the fact that the working class is being exhorted to save more for the future while it is also required to spend more now to keep the economy going: "if everyone responded to the recent pleas for a dramatic increase in savings to fund future pensions, a huge hole would appear in the economy: consumer spending would collapse" (Guardian 12/10/04)

Capitalism is no longer able to offer the pretence of a better tomorrow. The future will be one of increasing exploitation and poverty. There will be efforts to hide this, but it is becoming harder to do so. If the working class wants to plan for the future it must regain the vision of communism. It must raise again the rallying cry of "from each according their means to each according to their needs". To realise this vision it must renew the struggle against capitalism today - against its attacks and its lies. This has nothing to do with the anti-globalisation and 'alternative world' movement that celebrated its futility in London last month. To defend the welfare state of the 20th century against 'neo-conservatism' is no more in the interests of the working class than to have defended the laissez-faire capitalism of the 19th century. The working class has no interest in looking back to decide which period of its exploitation was preferable, it can only look forward to the ending of all exploitation.

North, 30/10/04.


The British government's announcement of the need to 'reform' the pensions system is not unique. Every national bourgeoisie is adopting the same measures: redundancy plans which don't leave any economic sector untouched; relocation of plant and investment; increasing hours of work; dismantling of social protection (pensions, health, unemployment benefits); wage cuts; the growing insecurity of employment and housing; deterioration of working and living conditions. All workers, whether at work or on the dole, whether still active or retired, whether they are in the private sector or the public sector, will from now on be confronted with these attacks on a permanent basis.

In Italy, following attacks on pensions similar to those in France and a wave of redundancies in the FIAT factories, there have been 3700 job cuts (over a sixth of the workforce) at the Alitalia airline.

In Germany, the Socialist and Green government led by Schr?der, with an austerity programme baptised 'Agenda 2010', has begun to cut health insurance, increase the policing of work stoppages, increase sickness contributions for all employees, increase pension contributions and raise the retirement age which is already set at 65. At Siemens, with the agreement of the IG-Metall union and under the threat of relocating to Hungary, it is making the workers work between 40 and 48 hours instead of the previous 35 without any wage increase. Other big enterprises are negotiating similar agreements: DeutscheBahn (the German railways), Bosch, Thyssen-Krupp, Continental, as well as the entire car industry (BMW, Opel, Volkswagen, Mercedes-Daimler-Chrysler). It's the same in the Netherlands, where the minister of the economy has announced that the return to the 40 hour week (with no compensatory payments) would be a good way of re-launching the national economy.

The 'Harz IV plan', which is due to come into effect at the beginning of 2005 in Germany, shows the direction that all bourgeoisies, and first and foremost those in Europe, have begun to take: reducing the length and amount of unemployment benefits and making it harder to obtain them, notably by forcing people to accept offers of employment which pay a lot less than the jobs they have lost.

These attacks are not limited to Europe but are taking place on a world scale. While the Canadian aircraft builder Bombardier Aerospace intends to cut between 2000 and 2500 jobs, the US telecommunications firm AT&T has announced 12,300 lay-offs, General Motors 10,000 more, posing a threat to its Swedish and German plants, and the Bank of America has announced 4500 lay-offs in addition to the 12,500 from last April. In the USA, where unemployment is reaching record levels, more than 36 million people, 12.5% of the population, live below the poverty line. In 2003 1.5 million more people had precarious jobs while 45 million are deprived of any social protection.

And all this without mentioning the terrible conditions of exploitation facing workers in the 'third world', where there is a race to lower wages as a result of frenzied competition on the world market.

Most of these attacks are presented as indispensable 'reforms'. The capitalist state and each national bourgeoisie claim that it is acting in the general interest, for the good of the people. In order to get workers to accept sacrifices, it claims that these 'reforms' are all about 'solidarity' between 'citizens', that they will make society fairer and more equal, as opposed to any defence of egoistic privileges. When the ruling class talks about greater equality, its real aim is to reduce the living standards of the working class. In the 19th century, when capitalism was expanding, the reforms carried out by the bourgeoisie really did tend to raise the living standards of the working class; today capitalism can't offer any real reforms. All these pseudo-reforms are not the sign of capitalism's prosperity, but of its irreversible bankruptcy.

Workers begin to respond

Despite the strength of union control over the struggles, despite workers' hesitation to enter into the fray, it has become clear that the working class is beginning to respond to these attacks of the bourgeoisie, even if this revival is still a long way below the level of the attacks themselves. The mobilisation of the Italian tram drivers and the British postal workers and firefighters in the winter of 2003, then the movements of the FIAT workers at Melfi in the south of Italy in the spring against redundancy plans were already signs of a revival of class militancy. The wide-scale movements in France and Austria against pension 'reforms' in the spring of 2003 provided definite proof that there is a real change of mood in the class; and today there are many more examples to be added.

In Germany last July, more than 60,000 workers at Mercedes-Daimler-Chrysler took part in strikes and demonstrations against threats and ultimatums by the bosses. The latter demanded that workers either accept certain 'sacrifices' regarding their working conditions, increase productivity, and accept job-cuts or face the relocation of the plants to other sites. Not only did the workers of Siemens, Porsche, Bosch and Alcatel, who all faced similar attacks, take part in these mobilisations; at the same time, when the bosses tried to stir up divisions between the workers of different factories, many workers from Bremen, where the jobs were to be relocated, associated themselves with the demonstrations. This is a very significant embryo of workers' solidarity.

In Spain, the workers at the shipyards of Puerto Real and San Fernando in Andalusia, as well as Ferrol in Galicia, launched a very determined movement against privatisation plans that involved thousands of job-cuts. The unions, which had already prepared a 'calendar of mobilisations', were taken aback by the workers' militancy. On 17 September, the workers of Ferrol decided in a general assembly, against the advise of the unions, to demonstrate outside the headquarters of the ruling Socialist Party. In San Fernando the workers spontaneously decided to march through the town. Part time workers and workers on insecure contracts often joined the movement. To keep control of the movement, the unions changed strategy, leaving the programme of mobilisations 'open' to such initiatives and allowing the base unionists to take them over. Even though the movement was dominated by traditional union actions aimed at derailing workers' anger into dead ends (such as blockading motorways and railways as at Sestao, often resulting in futile confrontations with the police), the newest and most significant aspect of these struggles was a push towards seeking the solidarity of workers in other sectors. Again at San Fernando, the unions were forced to organise a one-day general strike and demonstration which was the biggest in the town's history.

More recently, a demonstration organised by the unions and 'alternative worldists' in Berlin on 2 October, which was supposed to 'close' a series of 'Monday protests' against the government's Hartz IV plan, attracted 45,000 people. On the same day, a gigantic demonstration took place in Amsterdam against the government's plans, and it had been preceded by important regional mobilisations. Officially there were 200,000 participants, constituting the biggest demonstration in the country for ten years. Despite the main slogan of the demo, "No to the government, yes to the unions", the most spontaneous reaction of the participants themselves was surprise and astonishment at the size of the demo. It should also be remembered that the Netherlands, alongside Belgium, was one of the first countries to see a revival of workers' struggles in the autumn of 1983.

On October 14, 9400 workers from the Opel factory in Bochum, in the industrial heart of the Ruhr, came out on strike as soon as General Motors had announced its plans for massive redundancies across Europe (see our leaflet on this situation), and during union-led strikes in General Motors plants in other countries workers expressed real sentiments of class solidarity. Opel workers at Zaragosa in Spain stopped production in support of "comrades in Germany". In Silesia in Poland workers said "today it's the Germans' turn, tomorrow it will be ours", while German workers were quoted as saying "the policy of the bosses is to set the wage earners of Europe against each other". However, we have to remember that these Europe-wide union mobilisations also have the aim of diverting class solidarity into nationalist anti-Americanism (GM being a US-owned multinational).

Conscious of its responsibility in the slow maturation of consciousness going on in the class, the ICC has intervened very actively in these struggles. It produced leaflets and distributed them widely in Germany in July and in Spain in September. On 2 October, both in Berlin and Amsterdam, the ICC achieved record sales for its press, as it did during the struggles of spring 2003 in France

This situation opens up new perspectives. Even though these struggles are sporadic, the fact that they have involved large numbers of workers in important proletarian concentrations, and the fact that they have followed one after the other, show that they are not a flash in the plan. Each of these movements is a sign of the reflection going on in the working class. The accumulation of attacks by the bourgeoisie is bound to sap illusions that the ruling class is trying to spread. Workers are becoming increasingly anxious about the future which this system of exploitation has in store for their children, for the future generations. Above all, the recent struggles reveal the beginnings of an awareness that workers everywhere are facing the same attacks, and that they can only fight back as a class pitted against capitalism in all countries.

Wim 30.10.04


The following article first appeared in Revolution Internationale, the publication of the ICC's section in France. Although many of the references are to specifically French phenomena, the basic points made in the article apply equally to the creation of the National Health Service in Britain as well as other systems of social welfare put in place after the Second World War. The ruling class wanted to justify the carnage of the conflict and to prepare workers for the ferocious exploitation of the reconstruction period. In the same way, the current moves towards dismantling the National Health Service and other aspects of the 'Welfare State' are by no means a particular policy of Blair's New Labour or a wish-fulfilment for Howard's Tories. As the introduction to the article in RI puts it, "with its new plan to 'safeguard social security', the Raffarin government is once again preparing to reduce the social wage. It's the turn of health to be cut in this new plan of austerity, after the significant attacks on retirement pensions last spring and on unemployment pay last January. Far from being a national specificity, these attacks are developing and generalising to all capitalist countries which set up the Welfare State at the end of the Second World War because they needed reasonably healthy workers to undertake the reconstruction of the economy. The present attack on the welfare system in France, as in Germany some months ago, and as in Britain for some years now, means the end of the Welfare State and explodes the myth of 'social gains'. This attack reveals that, faced with the deepening of the economic crisis and the development of massive unemployment, the bourgeoisie cannot continue to maintain the majority of the workforce. The survival of capitalism demands an intensification of the productivity of labour, the hiring of the cheapest workforce possible, while reducing the cost of its maintenance. For the great majority of proletarians, it is uncertainty and misery that faces them now - in some cases even death, as we saw at the time of the heat wave last summer in France".

These attacks demand a massive and united response by the whole of the working class (workers in work, unemployed and retired workers); but the unions and their Trotskyist and alternative-worldist accomplices are trying to turn workers' reflection away from the failure of capitalism and towards illusory measures to 'save social security' (or 'save the NHS' as the leftists clamour in Britain).

The defenders of state-funded social security lie to us that: "Social security is a conquest of the workers' struggle, acquired at the end of the Second World War, in continuity with the Popular Front of 1936". Faced with this falsification of history by the left, leftists and unions, it is necessary to re-establish the truth, basing ourselves on a brief historical outline of social security. Only a lucid marxist analysis will allow us to understand that the bourgeoisie is trying to hide the historic bankruptcy of the capitalist system with the fool's gold of social security.

From proletarian solidarity to the 'welfare' of the capitalist state

During the second half of the 19th century, in the phase of capitalism's ascendancy, the proletariat established its own strike and assistance funds, its own mutual organisations in case of sickness or job loss, in order to attain its economic demands (reduction of the working day, the ban on the exploitation of children, night work for women, etc.). Most often it was the workers' unions who managed this economic solidarity within the working class. But such solidarity also had a political dimension, because through these struggles for improvements in its conditions, the proletariat constituted itself as a class with the long-term perspective of taking political power and establishing a communist society.

With the bloody outbreak of the First World War, capitalism signalled the end of its economic expansion and the entry into its phase of decadence. This phase is characterised by the absorption of civil society by the state. The bourgeoisie must impose its class domination on the whole of economic, social and political life and it's the state that fulfils that role. Faced with the change in period, the unions became a force for corralling the working class in the service of capital.

"The state maintains the forms of workers' organisation in order to better control and mystify the working class. The unions become a cog in the state and as such are keen to develop productivity, that's to say increase the exploitation of labour. The unions were the organs of the workers' defence when the economic struggle had a historic sense. Emptied of this old content, the unions became, without changing form, an instrument of the ideological repression of state capitalism and of control over the labour force." ('On State Capitalism', Internationalisme 1952, reprinted in the International Review 21, 1980).

Thus the state directly appropriated, through the union police, the different mutual and assistance funds, and emptied the very notion of workers' solidarity of its political content.

"The bourgeoisie has taken political solidarity away form the hands of the proletariat in order to transfer it into economic solidarity in the hands of the state. By splitting up wages into a direct payment from the boss and an indirect payment by the state, the bourgeoisie has powerfully consolidated the mystification consisting of presenting the state as an organ above classes, the guarantor of the common interest and the guarantor of social security for the working class. The bourgeoisie has succeeded in linking the working class, materially and ideologically, to the state" (IR 115).

From the very beginning, attempts to set up social security systems had the aim of boxing in the proletariat. In the 1920s, the proposals for social security were part of an attempt to establish social peace through the participation of the workers in the running of the country, as the Cerinda Report underlined: "In the administration councils of the social security we will establish the rapprochement and fraternal collaboration of classes; wage earners and employers will not defend antagonistic interests here. There will be unity in the same aim: combating the two great scourges of the workers, sickness and poverty. This permanent contact will prepare for the closer and closer association of capital and labour." (Quote in Governing Social Security, Bruno Palier).

Despite the political will of the state and the unions to implement this plan of compulsory social obligations, it was only during the Second World War that the National Council for the Resistance focussed on the organisation of a general regime of social security.

1945: the creation of social security, a mystification in the service of national reconstruction

It was during World War II that the bourgeoisie, conscious of the millions of victims that the military conflict would provoke, of the inevitable destruction and ravaging of the world economy, rushed to justify its barbarity: "In a solemn message to the Congress pronounced on January 6 1941, President Roosevelt gave the first moral justification to the conflict by assigning to it the objective of a 'liberation from want' for the masses. This movement culminated in May 1944 with the Philadelphia Declaration of the International Labour Organisation, through which the member countries would make a priority objective of setting up a real social security after the war. Consequently, social security figured high in the aims of the war defined by the Allies" (History of Social Security 1945-1967, Bruno Valat).

In Britain in 1942 the Beveridge Report, in its attack on disease, ignorance, squalor and idleness, the obstacles "on the road of reconstruction", laid the basis for a system of family allowances and national insurance. This was accepted by the Churchill government and implemented by the subsequent Labour regime. In 1944, Belgium set up an obligatory system of collective social security under the control of the state.

In France, while a part of the bourgeoisie was in Vichy, the other part in exile, with General de Gaulle at its head, took up this preoccupation. He declared in April 1942, in a solemn message to the Resistance: "National security and social security are for us imperative and inter-connected aims". Also, it's not surprising that the programme of March 1944 of the National Council of the Resistance, where the Stalinists had a majority, called for a complete plan of social security aiming to guarantee every citizen the means of existence.

So, far from being a workers' victory, the origin of the systems of social welfare came from the capacity of the international bourgeoisie to foresee the need to fence in the proletariat at the end of the war, and thus to ensure the success of economic reconstruction. The years after the war were terrible for the living conditions of the proletariat. In France, wages were frozen, there was galloping inflation and a still flourishing black market; rationing, which had existed since the occupation, was maintained up to 1950, including electricity and petrol. The bread ration, which was 200g in the summer of 1947, was only 250g in June 1948. GNP in 1948 was still lower by 4% than in 1938. To meagre wages and food shortages can be added appalling standards of health. Infant mortality was more than 84 in a thousand and the adolescent population suffered from rickets. Faced with this situation, the bourgeoisie knew that it wouldn't be able to increase national capital with such a weakened working class. This was all the more true when you take the human losses of the war that reduced the number of available workers. The creation of social security, the nationalisation of health services, was thus the bourgeoisie's way of giving itself a workforce capable of carrying out the tasks of reconstruction. In exchange for super-exploitation (the length of the working day in 1946 was 44 hours and 45 in 1947), the proletariat had access to a social security cover that allowed it to reconstitute its labour power. Pierre Laroque, an official charged in October 1945 with setting up the social security system, was explicit in these objectives, even if he wrapped up the goods with fine words: "The aim was to assure the mass of workers, and to begin with wage-earners, of a real security for tomorrow. That went along with a social and even economic transformation; the effort that one was demanding from them to get the economy working had to have a counter-part."

The comment of Bruno Palier is also illuminating: "In 1945, it was also an immediate political investment, which had to allow the participation of wage-earners in the work of reconstruction (?) This dimension of the French social security plan was a counter-part to the efforts of reconstruction (and to the moderation of direct wage increases), which appeared as a sort of social contract of the Liberation." (Ibid).

Faced with the criticisms of some parliamentarians, who considered the cost of social security to be excessively high, the Socialist Minister of Labour, Daniel Mayer, responded: "Every industrialist considers it normal and necessary to deduct from his returns the indispensable amounts to maintain his material. Social security, in large measure, represents the maintenance of the human capital of the country, which is as necessary to industrialists as machines. Inasmuch as social security contributes to conserving human capital, to developing capital, it brings an aid to the economy that shouldn't be underestimated" (Bruno Valat, idem.).

It is for that reason that, initially, social security was reserved for wage earners because the bourgeoisie counted on them to put the country back on its feet. It later applied the welfare regime to the non-salaried population. One can thus measure the lie of the left and the unions that the creation of the Welfare State was a workers' victory: this 'concession' was given at the price of unprecedented super-exploitation. Thus, in 1950, French industry had almost recovered the level of production of 1929. As in 1936, it was the Stalinists, thanks to their engagement in the Resistance, who went on to play a decisive role in dragooning the proletariat for the reconstruction. Several Communist ministers were present in the government of General de Gaulle, calling on the proletariat, through the voice of its leader, Thorez, to "roll up its sleeves" for reconstructing the country and denouncing strikes as "an arm of the trusts". At the same time the CGT had a monopoly in presiding over the social security funds up to 1947. Subsequently, other unions succeeded the CGT.

The end of the welfare state

In the years which followed the war social security spread to the whole of the population; but from the beginning of the 1970s came the first signs that the economic crisis was ringing time for these social policies. Social security itself could only function when capitalism could guarantee full employment. The development of unemployment meant that social costs increased more quickly than GDP. Faced with this situation, the bourgeoisie responded with Keynsian measures to re-launch consumption, particularly by creating and increasing new family allowances. From the point of view of the management of capitalism, these measures increased public deficits considerably. Henceforth, from 1975 up to today, the bourgeoisie hasn't stopped running after deficits, with a social security hole which looks like a bottomless pit, despite the permanent increases in social costs and the constant lowering of social allowances. Throughout the 1980s and 1990s, successive governments of the right and the left came up with all kinds of ingenious ways of inventing new taxes, of making the sick pay for their treatment and medicines, of cutting unemployment benefits?. Not only have workers still in employment seen an ever-growing part of their pay tapped in order to finance deficits and other complementary mutual funds; on top of this, the care system is being constantly degraded by the reduction of workers in the health sector and endless austerity plans.

Thus, far from being a victory for the workers, social security is on the contrary a real organ of state imprisonment. Thanks to the participation of the unions in managing sickness, retirement and unemployment funds in company with the boss, this system of management merely provides the illusion that a policy is in place which defends the interests of the workers.

More than ever, the new attacks on healthcare signify the bankruptcy of the capitalist system, the end of the Welfare State and of the myth of social welfare "from the cradle to the grave". If revolutionaries show solidarity with their class faced with attacks on both direct and social wages, at the same time we denounce the myth of a system of state social security which is supposed to be above classes and for the wellbeing of the workers. The preoccupation of capitalism in 1945 was to have workers in good health in order for its reconstruction efforts to succeed. In 2004 capitalism sacrifices a growing number of proletarians in order to maintain the workforce at the lowest cost and leave the rest to rot.

"There's no need to underline that if socialist society defends the individual against illness or the risks of existence, its objectives are not those of capitalist social security. The latter only has sense in the framework of the exploitation of human labour and in terms of this framework. It is only an appendix of the system." (Internationalisme 1952, reprinted in International Review 21).

Donald 20/6/04.

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