The Betrayal of the American Dream (21 page)

At the heart of the retirement scenario engineered by the ruling class that will leave millions of Americans with far less than they will need in their later years is the now-ubiquitous 401(k). Just over three decades old, 401 (k)s are corporate America’s and Washington’s answer to the pension. There is nothing wrong with 401 (k)s as such if they are used as tax-sheltered savings plans or as a supplement in retirement, but as the principal retirement benefit for most Americans they fall hopelessly short.

To begin with, 401 (k)s were never supposed to take the place of pensions. They were created in 1978 as a tax break given by Congress to corporate executives who wanted to defer part of their salaries and cut their tax bills. At the time, federal income tax rates were much higher for upper-income individuals—the top rate was 70 percent. (Today, as we discussed in Chapter 5, it’s half that.) It wasn’t until several years later that companies began to make 401(k)s available to most employees. Even then, the idea was to encourage saving and supplement retirement, not to create a substitute for pensions. By 1985, assets in 401 (k)s had risen to $91 billion as more companies adopted plans, but that was still only about one-tenth of what had been set aside in guaranteed pension plans.

All that changed rapidly as corporations discovered they could fatten their bottom lines by shifting workers out of defined-benefit plans and into uninsured 401(k) plans. In effect, employees took a hefty pay cut and barely seemed to notice. Proponents of 401(k)s pointed to a changing economy in which employees switch jobs frequently. They maintained that because defined-benefit plans are based on length of service and an average of salaries over the last few years of work, they don’t meet the needs of twenty-first century employees. But Congress could have revised the rules and made the plans portable over a working life, just like a 401 (k), and retained the guarantee of a fixed retirement amount, just as corporations do for their executives.

As it is, 401 (k) portability often impedes efforts to save for retirement. As job-hoppers move from one employer to another, many succumb to the temptation to cash out their 401 (k)s and spend the money. Others, when they lose their jobs, are forced to tap into their 401(k)s for money to live on—something they wouldn’t be able to do with a pension plan. Studies show that 401 (k)s also fail because “workers do not save consistently enough, and when they do, they do not tend to save substantial sums,” according to a report by the Center for American Progress.

A total of $3 trillion is in 401 (k) accounts. But look beneath that number and you’ll see why they are no substitute for pensions. By 2011 the average balance in a 401 (k) account was $60,329, according to the Employee Benefit Research Institute (EBRI). But even that modest number does not reveal how inadequate these accounts are for most Americans. Their median value was $17,686—meaning that half the 401 (k) accounts held more, and half less. Nearly one in four accounts had a balance of less than $5,000. For most Americans, the amount in their 401 (k) account would pay them a retirement benefit of less than $80 a month for life.

But to Wall Street and corporate America, their effort to move millions of Americans out of pensions and into 401 (k)-style plans could not have gone better.

In almost every year since 1978, Congress has passed legislation encouraging the shift to 401(k)s, while doing nothing to shore up pension programs. This legislative action doesn’t stem from lawmakers’ deep-seated philosophical leanings. It has happened because Congress was paid to do so. Changing the rules of the game has been on the to-do list of every major corporate lobbyist for years. The amount of money that just one industry—securities and investment—has invested in Congress over the last two decades tells the story of why the corporate world got its way.

From 1990 to 2012, the financial industry—which includes stockbrokers, investment houses, brokerage firms, and financial planners—contributed $875 million to members of Congress, mainly Republicans, according to the Center for Responsive Politics. And that’s not all. From 1998 to 2011, the period for which data are available, the securities and investment industry spent an estimated $900 million lobbying Congress and federal agencies. All that money—at least $2 billion over the last two decades—flowed into Washington from just one industry to buy favors and influence policy.

For the industry, it was money well spent. Corporations saved tens of millions of dollars by eliminating pensions, and the substitution of 401(k)s created a profitable new industry in the financial sector. The proliferation of 401 (k)s led to a proliferation of financial planners. Studies show that the administrative costs of 401 (k)s are higher than traditional pensions, in part because there is so much overhead as a result of an army of players grasping for a piece of the $3 trillion industry. Even more distressing, the returns of 401(k)s have been, with some exceptions, inferior to those of pensions. Not to mention all the losses suffered during the great crash.

“This is what’s wrong with our country,” says Robin Gilinger, the United flight attendant who lost nearly two-thirds of her pension. “I think the American public sees it, but they don’t know how to stop it. We all see little things. We can see what’s going on and how the well-off are manipulating what’s happening to us. And there’s nothing we can do. So every day you live, hoping to make change, but what change can you make? It’s very frustrating.”

So it is that, in the end, all but the most affluent senior citizens will have to join the ranks of those like Betty Dizik of Fort Lauderdale, Florida, who is into her seventh decade as a working American. She’s had no choice. Betty did not lose her pension. Like most Americans, she never had one, nor did she have a 401(k). After her husband died in 1968, she held a series of jobs managing apartments and self-storage facilities, tasks that brought her into contact with the public. “I like working with people,” she said. But none of the jobs offered a pension.

Her monthly Social Security check comes to $1,200. That barely covers her supplemental health insurance, car insurance, and out-of-pocket expenses for medications to treat her heart problems and diabetes. To buy gas for her car and pay rent, utilities, and other living expenses, Betty continued to work long after the age of sixty-five. For years one of her jobs was with Broward County Meals on Wheels, which provides meals to seniors, some younger than she. But by the time she turned seventy-five, driving one hundred miles a day was too much for her, and she gave up the job to work for H&R Block, the tax return service, where she had also worked part-time in varying capacities for years.

She did a little of everything for H&R Block. She was the receptionist and the cashier, the person who opened and closed the office and “took the money to the bank.” She worked at H&R Block for nearly twenty years until she was laid off in 2010. By then she was eighty-three. Even so, Betty still needed to work, so she began applying for jobs. When she showed up for interviews, she figured “somebody will hire me because I’m good. I can read. I can write. I can do computers. I am definitely a senior tax preparer, and I am a good manager. I have run offices for many, many years and been complimented on how I run my offices and how my people produce.” But in two years she’s had only two interviews, and at one she was told, “You’re just too old.”

A widow, she lives alone in an apartment building for seniors. Her four children pay her rent, but she is reluctant to accept anything more. “All my children are great, but I do not like to ask them for anything,” she said.

She doesn’t have much hope that Washington will help seniors like her. “They don’t understand what it’s like to worry: Are you going to be able to make it every month, to pay the telephone bill, the electric bill? How much are you going to have left over for food and other expenses?” Her key to getting by each month is forcing herself to live within a strict budget.

“On the third, I get my Social Security,” she said. “On the fourth, I’m broke. I go on and pay all the bills and do what little shopping I have to do, and then I stay home the rest of the month. And I’m not alone. There are a lot just like me.”

And thanks to the people who make the rules in America, there will be millions more like her in the future.

CHAPTER 7

DEREGULATION: ECONOMIC CHAOS

I
t was rare enough for the nation’s top banking regulators to be in the same room together with the chiefs of the industry that they regulate, but what captured everyone’s attention was the chainsaw.

Standing around a tall stack of
Federal Register
s draped in red tape, the group had assembled on the morning of June 3, 2003, in the offices of the Federal Deposit Insurance Corporation (FDIC) in Washington to declare war on excessive banking regulations, which they claimed were stifling business.

Like those groundbreaking ceremonies where politicians lift a shovel of earth and pose for photos, the banking executives had come prepared for a photo op. Four of them—James McLaughlin of the American Bankers Association, Harry Doherty of America’s Community Bankers, Ken Guenther of the Independent Community Bankers of America, and John Reich, the FDIC vice chairman who was the architect of the antiregulation crusade—came sporting long-handled pruning shears. They gathered around the stack of regulations in front of a wall emblazoned every few inches with the words CUTTING RED TAPE in big red letters, and they pretended to trim away at the pile as cameras recorded the scene.

But the undisputed star of the show was the fifth member of the group, James Gilleran, director of the Office of Thrift Supervision (OTS), the federal agency charged with regulating the nation’s savings and loan associations. Gilleran was an impassioned foe of government regulations. In his tenure at OTS, he would cut one-quarter of the agency’s staff, drastically reducing its oversight ability. To drive home his point on this day, the beaming Gilleran had brought along a chainsaw, and when he jubilantly placed its blade atop the stack of documents, he made it clear to everyone where he stood. “Our goal is to allow thrifts to operate with a wide breadth of freedom from regulatory intrusion” was how he put it later.

Of course, we all know how this worked out. The lack of oversight of companies peddling various kinds of mortgages was a main cause of the financial meltdown in 2008. One of the worst offenders was the OTS, headed until 2005 by Gilleran.

In the annals of bad government agencies, the OTS stands alone. This is the agency that permitted thrifts to peddle home equity loans to homeowners with dementia who could neither understand them nor afford them. It looked the other way when thrifts refused to comply with federal financial laws that were intended to keep them solvent. It allowed lenders to falsify federal reporting documents. It refused to rein in the reckless lending practices that steadily pushed the thrift industry toward a catastrophic fall. It rubber-stamped requests from thrifts, no matter how harebrained, like one from a small bank in the hills of West Virginia to open a branch in upscale Palm Beach Gardens, Florida; ultimately it collapsed. The refusal of the OTS to oversee the industry caused some of the biggest bank failures in U.S. history, including that of Washington Mutual, the largest ever recorded. The agency couldn’t even supervise its own officials, one of whom, a regional director, permitted an imperiled thrift, IndyMac, to backdate a capital infusion to make it appear that the company was healthy.

By the end of the George W. Bush era, the OTS was such a monumental disaster that the only solution was to get rid of it and assign its functions to another office in the U.S. Treasury Department. Congress duly merged it with the Office of the Comptroller of the Currency and other divisions. On October 19, 2011, the OTS ceased to exist. But the damage it presided over was not so easy to hide.

The mind-set that brought the banking chiefs together around a chainsaw that morning was a hallmark of the Bush years, when the antigovernment movement long in the making reached full flower. The phrase “get government out of . . .” was everywhere, with the last word filled in according to one’s interest:
Get government out of the housing industry
.
Get government out of health care
.
Get government out of the economy
. And so on. Government restrictions, we were told, were hamstringing job creation, business development, and entrepreneurship. Regulations concocted in Washington were said to be the biggest obstacle preventing America from achieving its potential. No one stopped to ask the simple but necessary question: Who benefits from the absence of government? Who really enjoys the absence of supervisory regulations?

For the corporate chiefs and other members of the economic elite, having fewer government regulations and laws gives them a freer rein to run the country as they see fit. Their argument goes like this: just leave business and investment alone and everything will work out best. Sure, there are excesses that lead to setbacks; the 2008–2009 recession would qualify. But, deregulators say, such blips are only temporary and the benefits of leaving the economy alone far outweigh the harm done by constraints. Issues such as the minimum wage, the lack of health care for millions, unfair trade competition that kills jobs in the United States—well, those are issues for the market to sort out, not the government. Any intervention in the market by government, the ruling class claims, is destined to fail because it upsets the natural order of things.

For much of the twentieth century in the United States, that view was tempered by the belief that there should be policies that both benefit industry, by establishing a stable and predictable business environment that enables companies to succeed and create jobs, and protect the public interest by helping all classes of Americans to prosper.

From the 1970s onward, the decade when wages, benefits, and so many other economic benefits enjoyed by middle America first began to erode, the deregulators started to gain the upper hand and upset the balance. The wealthy and their supporters founded influential think tanks such as the Heritage Foundation and the Cato Institute. Many more would follow. Ideas propounded by these free-market, antigovernment groups began to receive more credence. Their reports were picked up by the mainstream media, which treated their conclusions as if they were widely shared by the public, although they represented the goals of only a sliver of the populace—the very rich. Funded by corporate chieftains, wealthy Americans, and right-wing ideologues, the think tanks were one of the most important early steps in their plan to remake the country.