Executive Times






2008 Book Reviews


While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis by Roger Lowenstein




(Highly Recommended)




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Roger Lowenstein’s new book, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis, provides a chilling description and analysis of the pension mess throughout America. Lowenstein calls on corporations, unions and government to mend their ways and have the political will to allocate resources effectively. Here’s an excerpt, , pp. 106-109:


After the transit strike, one union after another demanded higher pensions. What is surprising is not that they succeeded, but how easily they did so. In 1966, the Patrolmen's Benevolent Association won full pensions (that is, equal to their full salaries) after thirty-five years.76 A game of leapfrog ensued. The sanitation workers, arguing that they were also "uniformed," got four pension sweeteners over the mid-1960s, vault­ing them to a half pension after twenty years and virtual parity with the firemen and cops.77 A panicked PBA came hurrying back for more.

The TWU, which had set off the pension bandwagon, demanded that it not be left behind. Ellis Van Riper, a negotiator for Local 100 who had been jailed for nine days in 1966, met with the city's actuary and, pounding on the desk for emphasis, thundered, "Goddamn, if the garbage men get `20/50' so can we."78 This was late 1967. With its contract nearing expira­tion, the union threatened a strike. This made pensions truly a citywide issue. Transit disputes always galvanized the public, and memories of the strike of '66 were still raw. Fearing a repeat, the city agreed: half of final salary—guaranteed—for workers fifty and up with twenty years' service. And there was more. Transit agreed to change the definition of the "final salary" upon which the pension was calculated. Previously, it was the aver­age earned over an employee's final five years. Almost unbelievably, it now became the last year's salary—including overtime. This led to significant abuse, as retiring employees maneuvered, with the help of friendly over­seers, to be assigned heroic amounts of overtime. As the TWLT crowed to its members, an employee who retired after thirty years, and who had earned $9,000 in his last year, would receive an annual pension of $6,129— compared with $3,943 under the old contract. 79 In a pen stroke, the city's future commitment to transit workers had soared by more than half.

John J. Gilhooley, the head of the Transit Authority, considered it frankly excessive, but, as he admitted later, "I yielded on the pension rather than take a strike.” 80 The authority made the same decision two years later, when it agreed to pay the transit pension's full cost, thus eliminating en­tirely the employee contribution. Transit workers—and they alone—now had the "free" pension that the fiery Santo had demanded. 81

The transit deals opened the floodgates. Thanks to the free ride at transit, contribution rates for other unions soon fell to negligible levels. Victor Got­baum, head of the sprawling District Council 37, which represented parks, hospital, and municipal workers, was set to sign a contract when he heard about the TWU's gold-plated pension. He barged into City Hall exclaiming, "I can't live with my pension deal." He negotiated a better one.

The teachers got an even richer settlement—a pension for more than half pay after twenty-five years (a rather short career for a white-collar professional). When Gotbaum saw he had been leapfrogged by the teach­ers, in 1970, he demanded yet a sweeter deal. The response of a Lindsay aide to one such pension demand was memorable: "When would we have to start paying for it?" Told that, due to the peculiarities of the pension calendar, an increase would not affect the budget until three years later, by which time Lindsay would be serving out his final year, the aide breezily approved it. 82

Police and firemen got two quite special plums. One was the so-called heart bill. This mandated that any officer or fireman retiring with heart disease was entitled to a presumption that his sickness was job-induced, meaning he could retire with a disability benefit equal to three-quarters, instead of half, of salary and one exempt from federal taxes. 83

More exceptional still was the so-called variable pension supplement. Unhappy that other unions had narrowed the gap, the firefighters de­manded an extra ... something. The city said it was tapped out. The firefighters union, always intellectually creative when it came to its pen­sion, suggested that the city, which then was investing most of its retire­ment funds in bonds, put a portion in stocks. Any surplus profit could be divided up among retired firemen at the end of the year.

This turned every principle of pension accounting on its head. Since the city would have to pay a full pension even in years in which its invest­ments declined, reason dictated that it save, not distribute, the so-called surplus in good years. Nonetheless, retired firemen and also cops got the "variable supplement"—quickly dubbed a "Christmas bonus" without shouldering any of the market risk. 84

Although one wonders at the thinking of Arthur Goldberg, the former secretary of labor and Supreme Court justice who mediated that deal, the labor accords of the late '60s fit a pattern, and responsibility for them, at least in part, lay beyond Lindsay's (or anyone in the city's) control. All of urban America was, to one degree or another, in the midst of a broad ex­periment with the welfare state that had begun in the late 1950s and early '60s, largely as an effort to improve the conditions of inner-city minorities and others. Spending on social services was rising sharply, welfare rolls were soaring ultimately accommodating nearly one in seven New Yorkers—and public-sector work rolls were expanding.85 Interest groups gained new influence at City Hall, and unions were among the beneficiaries.

However, Lindsay's helplessness in the face of organized labor surely made it worse. In a visceral sense, the mayor spent his entire first term recovering from the debacle with Quill. Seeking to avoid work stoppages, he embraced fact-finding panels to mediate disputes but these only played into labor's hands. Though seemingly impartial, the tendency of mediators was to "split the difference" and recommend at least a portion of union demands." Transit was thus able to piggyback substantial wage gains-36 percent over four years—on top of its rich new retirement ben­efits.87 The irony is that, despite Lindsay's generous treatment of labor unions, he was hit by a wave of crippling strikes anyway.

The mayor's approach—and his results—somewhat improved as he moved into a second term, in 1970. By then, however, New York had es­tablished a uniquely generous pension edifice. In effect, it bizarrely in­verted the age-old wisdom that pensions should be a fraction of working income. By the end of the 1960s, and including Social Security (to which the city contributed), municipal employees earned more after they retired. A transit worker could retire on 120 percent of his final salary; a teacher, on 130 percent. 88

Predictably, such rich pensions induced a wave of early retirements. In the next fifteen months, 30 percent of eligible motormen retired.89 Within two years, two-thirds of the subway maintenance crew was gone. 90

Thanks to the new, more liberal definition of "final salary," this exodus turned out to be far more costly than expected. One motorman, who had earned $13,500 in his second to last year, claimed a "final salary" (on which his pension would be based) of $29,000—an extreme example of overtime abuse. Such cases became common throughout the civil service. However, it took an actuary to fully understand their impact. For instance, the cost of employing a fireman for a day of overtime in his last year was $76 in cash wages. However, that single day could boost the fireman's lifetime pension benefits by an astonishing $1,141. 91

Such and similar pension mathematics led to soaring obligations, which put a heavy load on the city budget. By 1970, the New York City Employ­ees' Retirement System (an umbrella fund for transit and various other employee groups) had fallen to a funded level of only 40 percent—a dan­gerously low level, and down from 70 percent a decade earlier. 92


Anyone worried about taxes and pensions and searching for alternative solutions will enjoy While America Aged.


Steve Hopkins, July 18, 2008



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The recommendation rating for this book appeared

 in the August 2008 issue of Executive Times


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