Pragmatic Utopia #30

Diego Rivera mural of autoworkers at the Detroit Institute of Art. Historians debate whether the United Auto Workers should be blamed for undercutting campaigns for expanded Social Security and health insurance in signing their own generous contracts with the Big Three car manufacturers in the 1950 “Treaty of Detroit.”

I’ve been learning a bit about pensions and Social Security lately, and I find it can be hard to keep some facts about the respective retirement programs straight. For a while I figured it was just my ignorance not being able to tell them apart. And while that may be true, I think it makes sense to speak about pensions and Social Security (and 401(k)s) in the same breath. Their histories are intertwined. In her book For All These Rights: Business, Labor, and the Shaping of America’s Public-Private Welfare State, Jennifer Klein investigates why we have a divided retirement savings system–why the public system needs a private, employer-based supplement.

You may recognize a familiar ring to this question from other books I’ve mentioned lately: the age-old question of why we can’t have nice things they have in Europe. Sometimes people answer this question with appeals to American values–faith in individualism, distrust of government, etc. I find such arguments a bit unsatisfying on their own; I want to know exactly who stood up for which values in which battles. In Klein’s book, the insurance industry emerges as the big culprit. It makes sense. As single-payer advocates will tell you, the government is a natural insurance company and a nation is the largest possible risk pool, ideal from a social perspective if not an actuarial perspective oriented toward maximum profit. So insurance companies have long been on edge about the prospect of the government stealing their business.

Before getting to shady insurance practices, I should mention two key pieces of conventional wisdom that Klein is trying to disprove. First, historians often talk about how the 1920s were the age of “welfare capitalism,” where big companies paternalistically looked after their workers (think free meals, on-site housing, health clinics, etc.) in order to forestall confrontational labor disputes. But then the conventional idea is that thanks to the New Deal and World War II, we moved past welfare capitalism and instituted a public welfare state.Klein is saying there is actually more continuity than change–the reliance on employer-based pensions and health insurance in the postwar decades means we’re basically still living in the welfare capitalist world.

Second, even among people who agree with Klein on that point, the conventional wisdom is that the large industrial unions (like the United Auto Workers) were culpable for undercutting the New Deal push for a public welfare state by scooping up generous contracts for themselves and then losing interest in the broader fight. This story centers on the 1950 “Treaty of Detroit,” where the auto workers signed the most generous contracts (e.g. health, unemployment, and pension benefits) in American labor history with Ford, GM, and Chrysler.

Klein convincingly shows that the unions had a strong preference for either a government-run insurance system or union-controlled insurance funds and group medical plans, fought hard for those things over decades, and only settled for employer-based insurance after losing political fights to the insurance companies and their own bosses. For example, some unions wanted to start their own medical plans. But under heavy lobbying from the American Medical Association, many states passed laws in the 1940s requiring any would-be medical plan to get approval from the state’s medical society (i.e. the incumbent doctors). Not going to happen.

Ok, on to the insurance companies. They weren’t all bad; in fact it’s their ambivalent commitment to worker-friendly policies that makes them so interesting. During the Progressive Era, there was a healthy competitive dynamic between academic reformers who called for public old age insurance and insurance companies (Equitable Life, Metropolitan Life) who took those ideas, watered them down, and sold policies to private employers. Yes, this undercut the public movement, but at the end of the day more people (only steadily employed white men) won old age insurance.

You might expect the insurance companies to have opposed the Social Security Act, and some did at first, but they quickly came around to support it, recognizing that it was the perfect advertisement for their business model and that they could sell more extensive plans on top of it. But they insisted that Social Security be limited in particular ways. They stressed that public aid should flow only to elderly or disabled people, not able-bodied workers. They modified private pension plans to count Social Security payments toward the originally promised payouts, making the plans cheaper for employers. And they lobbied to make Social Security a pay-as-you-go system rather than allowing it to build up a substantial trust fund.

The private welfare state is a relationship between workers and insurance companies.Employers, of course, sit awkwardly in the middle of that dynamic. Whose side are they on?According to economists, employers want to buy their employees the best possible benefits package for the price or risk losing out to competitors.

But in surveying pension plan politics in the postwar decades, Klein shows how insurance companies collude with their corporate clients to skimp on benefits. At the end of each year, insurers kick back a portion of their surplus to management as a dividend, even when workers had paid a portion of the premium in the first place. Unions struggle to contest this because information on the true cost of their benefits is shared only with management. Next, since insurance companies are actually financial companies, they often double as lenders to the same corporations who buy their benefits packages. Klein suggests that this dynamic gives employers little incentive to negotiate on pension plan costs.

An attractive takeaway from Klein’s book is that private insurance markets are inferior to public ones, both because fewer people end up included and because corporations and insurers have an interest in skimping on benefits (I haven’t even mentioned the companies who just refuse to pay the promised pensions). There’s a different way to say this, which involves the semantic point that health benefits and old age benefits aren’t really insurance.A more restrictive definition says it’s only insurance if you hope you’ll never need to receive the benefits. Flood insurance, fire insurance, and renter’s insurance all fit this bill. Needing the payout is bad news.

But healthcare and old age income support are different–we all get old, we all get sick, and when you sign up for the policy you expect to use it. In this light, you can see that Social Security (and Medicaid and Medicare) aren’t really insurance policies; they’re just social transfers (the Supreme Court agreed with this reasoning in Fleming v. Nestor (1960)). At times this has been a conservative argument: only by privatizing Social Security, they say, can we establish property rights on our future Social Security payments like you have on a private annuity. But I think the logic goes exactly the other way. Health and old age benefits don’t work in an insurance framework, so we should just get over our fetish for “contributory” programs and provide basic economic security as a right of citizenship.

1. Fair but unequal?
Interesting piece of research (h/t Thomas Smyth) from psychologists arguing that even though we’ve started framing lots of issues around inequality, people don’t care about inequality–they care about fairness. So then the question is: what do people think is fair? The authors suggest that people are pretty comfortable with income inequality, which they perceive as the outcome of fair competition in the labor market. But I suspect (hope) that people are less comfortable with inequality from capital income, i.e. how hard do I really work for my capital gains?

2. Hooray for do-nothing executives?
I really enjoyed this story (h/t Jessica Cole) about two law professors who  tried to mimic activist hedge funds by investing their savings in a struggling public company and trying to shake up management. The big surprising lesson they learn is that the executives at the public company actually feel less pressure from investors than they had when working at private companies. This is because so many shares are held by passive mutual funds who don’t bother to intervene in a “tiny” $500 million company’s management. The result is that the executives get to sit around, pay themselves huge salaries, and not do much of anything. Funny enough, in this case I’m quite happy to see them not doing anything because “doing something” would involve developing pristine ranchland between Los Padres National Forest and Bakersfield, extending Southern Californian sprawl deeper into the Central Valley.

3. Parents can be dependents too
I was excited to see the news that Starbucks is extending health coverage to the parents of its Chinese employees. Based on my comments on the American case, you might think I’d say something like “It would be better if they just had Medicare for the elderly.” But I have no idea how difficult it would be to perform such an aggressive cross-cultural transplant, and I’m trying to respect national differences in institutions and norms. Here’s some more info on the state of healthcare for the elderly in China. Given the value they put on caring for one’s parents, it might make more sense to deliver elderly care through children’s insurance than we do here. Whether that insurance itself should be tied to the workplace is another matter. In the short term, it’s nice to see that this is the way Starbucks is trying to make a beachhead in China (as opposed to paying off regulators or the like).    

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