April 12, 2005

April 12, 2005 | Commentary on Social Security

Don't Place Stock In Big Labor

Some organized labor groups recently decided that the retirement security of their members was less important than their own short-term political goals.

The AFL-CIO and some of its member unions declared that investment managers for their retirement funds should be chosen based on their position on Social Security reform, not on what is best for current and future retirees.

Labor is signaling that it would rather employ a bad fund manager (if he agrees with it politically) than a good funds manager (if he does not). If this happens, it'll be union members and retirees who lose, not the AFL-CIO leadership. That fact alone could signal a violation of the unions' legal responsibility to manage retirement funds to benefit their members.

Unfortunately, this political pressure has paid some dividends. Faced with threats to significant business relationships and shouting crowds at their offices, two financial firms have dropped their support for establishing Social Security Personal Retirement Accounts (PRAs). Both the AFL-CIO and several of its affiliated unions have sent letters to more than 100 financial firms threatening to move $400 billion in assets.

Of course, with union membership dropping below 8 percent of the private-sector workforce (down from 36 percent 50 years ago), and 84 percent of union members living in only 12 of the 50 states, the union campaign is more an admission of weakness than a sign of strength.

Still, this campaign should be a warning shot for the rest of us. It hints at what would probably happen if the largest senior lobbying group, AARP, gets its way. AARP wants to block personal retirement accounts and instead have the Social Security Administration invest directly in stocks.

It's pretty clear that bullying and political pressure rarely result in good investment decisions, but those are the tactics sure to be used if Congress ever approved AARP's plan. The retirement group says that it is confident political influences would not affect the government's investment decisions. But history says differently. Government entities that manage pension funds have come under repeated pressure to base investment decisions on political goals rather than the best interests of future retirees.

The day after President Bill Clinton announced plans to have the government invest 15 percent of the trust fund in stocks and bonds, a prominent activist told Congress that he agreed with the plan -- as long as the trust fund was not invested in companies that produced liquor, tobacco, firearms and other products he disapproved of.

Attempts to politically influence investment decisions is not rare, or confined to the United States. In August 2004, Canadian MP Pat Martin wrote a Toronto Globe and Mail online column urging that the Canada Pension Plan, which is invested in stocks and bonds by a government agency, should be "prohibited from investing in companies and enterprises that manufacture and trade in military arms and weapons, have records of poor environmental and labour practices or whose conduct and practices are contrary to Canadian values." His column followed the Canadian Medical Association's urging that the fund stop investing in tobacco -- no matter how lucrative the returns.

This country also has seen politically motivated investment decisions in state and local pension plans. When the investments did not work out, the losers were the workers whose retirement savings were squandered on poor quality investments. These poor investments included from Pennsylvania's decision to invest in a VW plant that subsequently lost half of its value, 30 states that banned investments in South Africa to protest its racial policies, and 11 states that restricted investments in Northern Ireland.

These bad policies are not limited to liberal-oriented governments. When George W. Bush was governor of Texas, the Texas State Board of Education dumped 1.2 million shares of Disney to protest the content of films made by a subsidiary. While the Board seemed to think it had made a forceful policy statement, it was the state's employees, not Disney, that were affected.

The only way to ensure that American workers get the retirement security they deserve is to let them control and own any Social Security money that is invested in stocks and bonds. That way, they can make sure that the money is used for its rightful purpose -- not for ill-advised political goals.

David John is a senior research fellow for Social Security at the Heritage Foundation.

About the Author

David C. John Senior Research Fellow in Retirement Security and Financial Institutions
Thomas A. Roe Institute for Economic Policy Studies

First appeared in the Pittsburgh Tribune Review