In terms of the overall financial burden shift from corporations to employees, by far the largest change has come in retirement benefits. In 1980, 84 percent of the workers in companies with more than 100 employees were in lifetime pension plans financed by their employers. By 2006, that number had plummeted—only 33 percent had company-financed pensions. The rest either got nothing or had been switched into funding their own 401(k) plans with a modest employer match.
The switch offered big savings for employers. According to pension expert Brooks Hamilton, the lifetime pension system cost companies from 6 to 7 percent of their total payroll, but they spent only 2 to 3 percent on matching contributions for 401(k) plans. Often those savings went directly into corporate profits and bigger stock options bonuses for the CEO and other top executives.
Businesses said they could no longer afford lifetime pensions. But digging into the records, Wall Street Journal reporter Ellen Schultz found that wasn’t really true. In fact, pension plans were moneymakers for many a big company. In the bull market of the 1990s, America’s blue ribbon companies did so well investing their employee pension funds that many built up huge surpluses, above their obligations to employees, without contributing a cent of company cash for a decade or more. The stock market gains were so large that by November 1999, GE had a $25 billion surplus in its basic employee pension funds; Verizon had $24 billion; AT&T had $20 billion; IBM had $7 billion.
What’s more, some of America’s largest corporations were able to shift pension fund gains indirectly to their profit lines and, Schultz reported, a few legally took advantage of loose and poorly enforced accounting rules to siphon off money from their employee pension funds to finance portions of their corporate downsizing, restructuring, and mergers and acquisitions.
Some companies made billions by shutting down employee pension plans and shifting surplus assets to company profits. And if company pension plans got into financial trouble during the stock market decline in the early 2000s, it was either because the company itself was in deep financial trouble or because company finance officers had been too aggressive in gambling with pension assets, putting them into risky equities in hopes of making big gains, rather than investing carefully in safer, more conservative assets like bonds.
Either way, the shift out of lifetime pensions to 401(k) plans and so-called account balance plans by highly profitable corporations was a heavy cost blow to their workers. In the 1950s, U.S. employees nationwide paid collectively about 11 percent of their retirement costs. By the mid-2000s, they were paying 51 percent. Hundreds of billions of dollars in safety net costs were shifted from companies to employees without any offsetting real increase in the typical worker’s pay.
Corporate America was so successful in shifting a major portion of the cost for health and pension benefits onto individual employees that even a corporate financial giant like Metropolitan Life Insurance Company was moved to comment in 2007 that this shift had essentially turned the old social contract upside down. As MetLife put it, “The burden shift has turned the traditional definition of the American Dream ‘on its ear.’ ”
Perhaps the starkest indicator of mounting middle-class distress has been the sharp rise in personal bankruptcies, now an integral feature of the New Economy. Bankruptcy is a middle-class phenomenon. The poor go broke, but they don’t file for bankruptcy because they have few, if any, assets to protect. Middle-class people and upper-middle-class professionals go into bankruptcy to try to hang on to basic assets such as their home, their retirement nest egg, or their income stream, all of which are protected by law if they file for bankruptcy.
Bankruptcy can happen to almost anyone. Typically when solid families go bankrupt, the cause is almost always some acute and unexpected economic calamity—the loss of a job; a medical catastrophe; divorce; foreclosure or drastic loss of home value; or the slow, relentless ebb tide of poverty in retirement. Millions of middle-class families go over the financial cliff, pushed inexorably into bankruptcy by ever-mounting debt. In fact, private debt in America has risen far more rapidly than government debt. The total personal debt of American consumers exploded from several hundred billion dollars in 1959 to $12.4 trillion in 2011, according to Federal Reserve statistics.
When you combine credit cards, auto loans, home mortgages, student loans, and other forms of credit, the average debt for every adult man and woman in America has nearly quadrupled since the 1950s. “We have gone from a society where most consumer borrowing was episodic and for special purchases, to a society where many families have to use credit to pay for ordinary household expenses and are permanently indebted,” University of Illinois bankruptcy professor Robert Lawless told Congress.
After Congress deregulated consumer lending in the 1970s and 1980s, the market was flooded with complicated, high-interest, and potentially dangerous credit products that were sold to unwary consumers untutored in the fine print of credit fees and charges that kept them sinking into the debt quagmire.