TCS Daily

Labor's Social Security Hypocrisy

By Bryan O'Keefe - March 14, 2005 12:00 AM

In the weeks since the President began pushing for Social Security reform, labor unions have targeted businesses and investment firms that support personal retirement accounts with a public relations campaign aimed at crippling business support for the President's plan. Leading this charge is the AFL-CIO, which has already organized protests and websites targeting Charles Schwab, Edward Jones and other investment firms that have supported reform. The AFL-CIO pressure was so strong that Edward Jones eventually dropped out of a business coalition that supports personal retirement accounts. On top of the usual public relations tactics, Bloomberg News has reported that union trustees of public employee pension funds have written sharp letters to several investment firms warning them that support for personal accounts could mean lost business as pension fund managers.

But of all the groups engaged in the war over President Bush's Social Security reform proposal, big labor has one of the most contradictory positions -- at once arguing that the stock market is a bad investment for retirees, but, at the same time, having billions of dollars invested in the stock market in its pension funds for union members. If anything, big labor seems to be telling everybody -- including their rank and file membership -- "do as we say, not as we do."

The union's opposition to personal retirement accounts is ironic since labor unions have heavily invested their participant's own pensions in the markets. As of 1999, the last year for which solid data are available, private multi-employer pension funds whose boards include union representation held over $400 billion dollars in assets. Public-employee pension funds, which also have union trustees, controlled another $2 trillion dollars. In both cases, significant portions of these assets were invested in equities. Even in the financial world, these are substantial sums of money.

Big labor's double-standard is both simple and complex, having to do with politics and power.

One reason for the union hypocrisy is straightforward -- partisan politics. Democrats have formed a near united front in opposing personal retirement accounts and are relying on their traditional allies to help them win the battle. Big labor has its own political motives for following the Democratic lead.

Unions are lobbying for new legislation that would make it easier for them to unionize workers. The legislation, which has over 200 mostly Democratic co-sponsors in Congress, would be a priority if Democrats ever regained Congressional majorities. As a result, big labor is wary of straying from the Democratic line. If the Democrats need big labor to go to bat for them in a war against the President, labor is eager to play a role, hoping to earn political capital that will be spent in the future.

A more complex reason for the union opposition is the fear that personal retirement accounts could threaten organized labor's considerable voting power at shareholder meetings as ownership is diffused.

Faced with declining rank and file membership, one way that unions have been able to flex muscle is through the considerable voting power of their pension funds.

Corporations function as a democracy of sorts in that shareholders are entitled to voting privileges. By owning thousands, sometimes even millions of shares of stock in companies, union pension funds and their allies now control a large number of shareholder votes at annual meetings. As a result, they are able to force votes on shareholder resolutions that may not be in the best interest of the company, but are labor-friendly.

Pension funds have also helped to redefine the traditional duty of companies from maximizing profits and minimizing risks to taking into effect "socially responsible investing" criteria on the environment, workers rights, and other liberal social issues when making corporate policy. In this way, unions have used financial investment capital to change corporate behavior at a time when their actual membership continues to fall.

Personal retirement accounts could upset this scheme. At the very least, with their ability to empower all Americans as investors, personal retirement accounts would put more players in the game, some of whom would not necessarily support union-friendly positions. In fact, it's even possible that conservatives could pool their money together and offer a counterweight to the pension funds and unions in the shareholder voting wars. One conservative pool already exists -- the Free Enterprise Action Fund -- and countless more could crop up with the introduction of personal retirement accounts.

The idea of personal retirement accounts also threatens the "socially responsible investing" drive. Successful personal retirement accounts could put the emphasis for companies back where it belongs -- financial performance, not social issues. People might like the idea of saving the whales, but not at the expense of their personal retirement account performance.

The irony however is that in order to maintain their clout as shareholders and their convenient political alliance with the Democratic Party, big labor is forced to demonize the very same mechanism that has helped make some unions more powerful: stock-market investments.

The corporate campaign being waged by big labor today is also a familiar tactic that has helped labor in the past. Jarol Manheim, a professor at the George Washington University and the nation's leading authority on these efforts, describes these campaigns in his book "Death of a Thousand Cuts" as coordinated, wide-ranging programs, involving political, economic, and psychological warfare, directed against a corporation that has refused to yield on some issue of great importance. But big labor's major arguments this time are stunning since these same unions routinely use Wall Street investment firms for their own pension funds and have no problem investing retiree's pensions in the markets.

In the upcoming months, unions will undoubtedly step up the public relations war against businesses that support personal retirement accounts. The public -- and union members -- would be wise to cut through the rhetoric and ask union bosses one question: "If it's good enough for you, why isn't it good enough for us?"

Bryan O'Keefe is a research assistant at the American Enterprise Institute. He studied with Jarol Manheim while attending the George Washington University.


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