Labor’s Misguided Objections to Social Security Privatization

This article originally appeared in The Journal of Commerce on July 1, 1997.

Polls indicate that most Americans favor privatizing Social Security, allowing workers to invest what they now pay in Social Security taxes in IRA-like personal retirement accounts instead. Moving to a privatized system would clearly benefit the average worker since even the most conservative investments will yield monthly checks significantly larger than the meager Social Security payments they are projected to receive.

Unfortunately, U.S. labor leaders don't get it. Last January, the AFL-CIO's Gerald M. Shea denounced privatization, saying that labor unions would organize a campaign "to prevent these ideas of radical reform from getting past the fantasy stage." Today, a union-backed opposition campaign is in full swing with union officials objecting: Might workers unwittingly invest in retirement funds harmful to their own interests? Won't workers unfamiliar with securities markets be especially susceptible to bad investment advice? What will prevent fund managers from putting their own interests ahead of the investing worker?

Such objections are misguided. What they all overlook is the central role labor unions can play in a privatized system. Take the objection that workers might unwittingly invest in funds harmful to their own interests. This can be easily resolved by labor unions themselves. They can develop their own version of a Good Housekeeping seal of approval for funds that meet whatever criteria they set for being "pro-worker." This might include funds that invest in companies with high levels of unionization, or established traditions of labor law compliance, or perhaps strong employee health and safety records.

This is not a new idea. Worker-friendly seals of approval already exist. Co-op America, a non-profit public interest group based in Washington, D.C., for example, maintains a list of "socially responsible" mutual funds that are sensitive to the concerns of labor, while funds like the MFS Union Standard Trust Equity Fund have emerged to meet the demand for pro-union investment choices.

The objection that workers will be especially susceptible to bad investment advice can also be resolved by labor unions themselves. They can authorize their own funds in the same way that the American Association for Retired Persons (AARP) does. Currently, AARP authorizes fifteen funds through Scudder, Stevens & Clark. These funds are designed to meet the diverse investment needs of AARP's membership while providing competitive returns. Following this model, labor unions can help protect their membership against bad investment advice by providing them with a spectrum of union-authorized retirement funds. Furthermore, participating unions could earn additional revenue from such funds. Indeed, AARP stands to collect $9.6 million in management fees this year alone from the $15 billion currently invested in its funds.

This approach to privatization is similar to the one labor unions have followed in Chile, which privatized its Social Security system in 1981. As of last year, four of the nation's fifteen retirement funds -- Fomenta, Aporta, Future and Magister -- were run respectively by the Telephone Workers Union, the State Bank Employees Union, the Private Bank Employees Union and the College Professors Union.

What is more, American labor unions are no amateurs when it comes to institutional investing. They have been doing it for decades and presently control over $300 billion in pension fund assets. The returns on these funds, furthermore, have been historically respectable, averaging 10.3 percent for multi-employer funds and 12.1 percent for single-employer funds for the sample period between 1977 and 1987.

As for the objection that fund managers might not share the interests of the investing worker, this too can be resolved by labor unions. They can simply require that the companies that manage their funds allow the union to appoint the fund's trustees. Currently, the Teamsters Union appoints trustees to its Central States Pension Fund, and Teamsters president Ron Carey is pushing for greater accountability and the democratized election of the fund's trustees by the union's local chapters.

As an added bonus to unions, when they become major shareholders and fund trustees, their ability to affect corporate governance increases. Last spring, for instance, six of 87 shareholder proposals initiated by union pension funds passed. Privatization can only increase their success rate.

What all of this suggests is that under a privatized Social Security system, labor unions can play a crucial role in terms of recommending funds, authorizing funds of their own, establishing leadership roles within those funds and directly influencing corporate governance. Furthermore, workers will be returned control of their earnings via personal retirement accounts and have the freedom to choose among retirement funds, including those endorsed and designed by unions themselves. Most importantly, union members will be better off when they retire, with greater retirement income and the standard of living that goes along with it.

It's a shame that union leaders have chosen another course. Their members' best interests lie with privatization.

Gary Dempsey

Gary Dempsey is a researcher at the Cato Institute in Washington, D.C.