Politics & Policy

Unions Are Defining Benefits Down

American workers can do a lot better than underfunded, job-tethered pension plans.

The Service Employees International Union (SEIU), the largest union in the U.S., has increasingly sought to take the lead in driving the economic policies of this country. As one example, today the SEIU is sponsoring a “Take Back the Economy” rally, with planned events in 100 cities.

And how does the SEIU propose to “take back the economy”? As part of its economic agenda, the SEIU is advocating defined-benefit (DB) pension plans over defined-contribution (DC) plans, using promises of secure pension benefits to encourage workers to join the union. However, the financial health of many SEIU defined-benefit plans is deteriorating. That is, the health of DB plans for rank-and-file workers is deteriorating. The pension plans owned by SEIU staff members and executives are well funded.

Every American should be able to retire with financial security. With unionization at historic lows today, and more state employee retirement plans shifting from the DB to the DC formula, the “American Dream” is more easily attainable than ever before. However, union-controlled DB pensions, and specifically the SEIU worker pensions, are putting union members at an economic disadvantage to the rest of the working populace.

Workers who own DC pension plans — such as 401(k)s — can achieve financial stability in retirement through consistent, simple investing. For example, a $200 per month 401(k) contribution invested in a basic S&P 500 index fund over the last thirty years would be worth just under $700,000 today. At double that monthly investment, the return would be around $1.4 million. Based on these returns, workers drawing 5 percent of their nest eggs each year in retirement would have annual pensions of about $35,000 and $69,000 respectively. DC plans also remain with workers as they move from job to job — a critical variable that places DC plans at a significant advantage to DB plans.

Unions often champion themselves as protecting rank-and-file workers from corporate greed and malfeasance. Yet DB pension plans, managed by union officers, are often plagued by insolvency, threatening to leave members with little in retirement.

For example, the SEIU National Industry Pension Fund — which covers the majority of the union’s rank-and-file workers — has assets of about $2.8 billion, or $19,000 per participant. For the record, this amount will cover only 56 percent of more than $5 billion in current liabilities. In short, the plan is underfunded. Conversely, the pension plan for SEIU officers has a current funded liability of 108 percent, with assets of nearly $81,000 per participant. The great disparity between these plans exists despite the fact that both are invested in one combined master trust.

How can this be? For one, between 1996 and 2006, the SEIU paid investment advisors roughly $35 million to steer pension money towards projects requiring union-only contracts. The trust’s return on investment during this time was more than 200 basis points below that of the S&P 500, for a loss of more that $8,500 per worker.

The Employment Income Retirement Security Act (ERISA) requires that pension funds maximize returns while minimizing risks for plan participants. But this cannot be accomplished when fund managers are more concerned with furthering union interests than providing solvent retirements for workers.

The SEIU claims that DC plans are, in fact, the riskier venture, since they are attached to the ups and downs of the stock market. But the real reason for union opposition to worker-controlled DC plans is not economic — it’s political. Union members cannot take their DB pensions to new jobs. This keeps workers in place, and provides unions with a significant income stream from the dues they collect, financial clout that is then used to influence corporations, effect proxy votes and the election of directors, and sponsor activist proposals.

Workers, meanwhile, are left to sacrifice opportunity for security. Since they are tethered to their pensions, they are greatly discouraged from changing their jobs, and are thus denied the free-agent rights enjoyed by their peers. Not only is this pension immobility bad for workers, but the macroeconomic effects are staggering as labor is not allocated efficiently.

Contrary to what the SEIU tells its prospective members, a shift from defined-benefit to defined-contribution plans will do much in the way of securing the retirement finances of the country’s hundreds of thousands of union workers. It is imperative that our leaders do not allow union special interests to trump the retirement prospects of these Americans.

– Brian M. Johnson is executive director of the Alliance for Worker Freedom. 

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