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Joe Guinan © 2003


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"These days the bulk of potential investment funds comes not from individual rich men, but from the financial institutions such as the insurance and pension funds, who do not necessarily use the huge sums at their disposal in a manner compatible with the public interest. This is one area where there will have to be change. The trade unions have for some time been arguing that the pension funds are one area where democracy could be applied without disturbing the even flow of management and industry. These savings belong to the workers, they are their own deferred earnings. Workers want them not only as income when they retire, but to sustain and create jobs while they are at work, and so to guarantee that they will retire in a buoyant economy."
-- Tony Benn, Arguments for Socialism. [1]

'Bringing down capitalism from within,' 'changing the system from the inside': in hackneyed phrases like these many a young radical has justified the anguished decision to accept a job in the City. But the peculiar political economy of 'Pension Fund Socialism' might just offer the mother of all such prospects. Consider:

Originating from a mixed parentage in the Baroque and Puritan traditions of eighteenth-century Europe, first promoted to workers by patrician corporate managements in the Fordist postwar period, and then spread widely across many sectors of the economy as retirement security was gradually assimilated into the demands of labour unions during collective bargaining rounds, employee pension funds have grown exponentially to the point where they now represent the largest single pool of investment capital in the world. A new and unusual form of wealth, neither public nor private, pension funds, as Tessa Hebb notes, are now "the primary drivers of today's financial markets...When these modern instruments were first bargained in the 1950s, no-one foresaw the enormous influence they would yield by the beginning of the twenty-first century." [2]

To take America as the most dramatic example, in 1974 U.S. pension funds had a portfolio of about $150 billion, compared with a total list price for the stock market of under $500 billion, representing 30 percent of the total value of listed companies. [3] Explosive growth during the 1980s and 1990s resulted in a capital pool, by 1998, of $7 trillion of workers' pension fund savings, or 45 percent of all publicly traded equity in the United States. [4] It is not uncommon for occupational pension schemes to have a fund of far, far greater worth than the companies that actually run them. Worldwide, pension funds had a global value of $13 trillion in 1999. Here we have the elephant in the living room, the 800-pound gorilla (add sufficiently impressive animal metaphors to taste) loose in the financial heart of corporate capitalism.

If workers were ever to exercise their collective ownership rights over these deferred earnings--and to express their social and economic priorities through their funds' investment decisions--it could shake our present economic system to its very core. And if there is to be a serious attempt by the Left to reconstruct and rehabilitate a socialist political economy for the twenty-first century (beyond the commitment to a mere "sustainable development") then the chances are that pension fund capital will have an early and significant strategic role to play.

'Pension Fund Socialism'--the term--first entered the political lexicon back in the 1970s when Peter Drucker, the relatively enlightened philosopher of management, wrote The Unseen Revolution, in which he began to fret and ponder the implications of this rise of 'labour's capital.' His book made the bizarre claim that "if 'socialism' is defined as 'ownership of the means of production by the workers'--and this is both the orthodox and the only rigorous definition--then the United States is the first truly 'Socialist' country." [5]

His argument rested on the above noted stratospheric rise of the employee pension fund as a significant owner of corporate equity, which, he claimed, represented a "bigger shift in ownership than any that has occurred since the end of feudalism. In fact, one could argue that it represents a more radical shift in ownership than Soviet communism." Thus, Drucker mischievously suggested, we had already witnessed the shift to an entirely new economic system, "a twentieth-century version of the 'Philansteries' and of the utopias of the French 'Romantic Socialists' of the early nineteenth-century--Fourier, for instance, and in particular Saint-Simon, whom both classical economists and marxists thought they had committed for good to the lunatic asylum of history." [6] And no-one had even noticed.

What really got Drucker excited, however, was the idea that Pension Fund Socialism had outflanked the Left--in particular, was about to make the trade union obsolete--as workers abandoned shop-floor solidarity and became more loyal to their capital than to their labour. For a conservative mind, the joy of this 'unseen revolution' was that, after all the apprehension on the Right about the coming of socialism, it had actually required relatively little real change overall. Socialism was here, and it looked just like... capitalism. But, in his premature declaration of the arrival of Pension Fund Socialism, Drucker had neglected to pay attention to the vast and crucial difference between ownership and control of pension fund assets.

Though he had been among the first to point to the enormous potential inherent in the growth of labour's capital, Drucker could hardly have been more wrong in his predictions about its effects. A significant new element in the struggle, the pension funds by their very nature emerged as weapons which, if not wielded by workers toward their own ends, were destined to be wielded against them. The result was not Drucker's Romantic utopian socialism but, instead, the nihilism and destructiveness of an overcaffeinated and brutalizing neoliberalism. The "boring world of pension provision," Robin Blackburn explains in his magnificent new book on the subject, "fuels the glamorous world of high finance, property speculation, rogue traders, media and technology mergers, and stock exchange bubbles":

" much of the investment which shapes our future is undertaken by pension funds...At present the pension funds are integral to the globalised economy which decrees that shopping malls and shiny office blocks will proliferate while parks, swimming pools, libraries and theatres open to all will not, that some regions will boom while others decay, that commercial gain will displace the ethos of public service, that the poorest will have to tighten their belts if economic 'adjustment' is required, that natural resources accumulated over millennia will be consumed in a few short years, and that the abundance of the oceans will be poisoned and destroyed." [7]

The rise of pension funds--and the resulting shift from capital markets made up of individuals to those dominated by big institutional investors--helped fuel the major economic restructurings of the 1970s and 1980s, in which workers in declining industrial areas--the British manufacturing towns and coalfields or the rustbelt of the American Northeast and Midwest--were subjected to massive downsizings and layoffs on behalf of a blind and aggressive pursuit of shareholder value. "The occupational schemes," Blackburn writes, "represent a tally of the compromises reached between employers, employees and the state in the twentieth century. Some of the largest blocks of capital...are held for such class warriors of yesteryear as Arthur Scargill's miners or Walter Reuther's auto workers." [8] But that it was the workers' own savings that were being mobilized against them--used by the financial services industries of London and New York as capital to fuel the export of their jobs through overseas investment and the deposing of old-line managements in hostile takeovers--while excruciating, made little difference: "By and large, the source of capital has little bearing on its deployment across investment opportunities. Thus, the fundamental shift in the ownership of capital has not resulted in a corresponding shift in the control of capital." [9]

This distinction--between nominal ownership and real control--and the high stakes at play in the deployment of workers' retirement funds was definitely not lost upon the next "prophets" of Pension Fund Socialism, Jeremy Rifkin and Randy Barber, this time approaching the subject very much from the Left in their 1978 book The North Will Rise Again. The question for workers, they argued, "is whether they will continue to allow their own capital to be used against them, or whether they will assert direct control over these funds in order to save their jobs and their communities." [10] The stark consequences for communities that have failed (despite some desperate attempts) to seize control of their collective assets in the face of economic restructuring are inscribed in the bleak landscapes of industrial decline and the 'double alienation' of their workers. "[N]one of the miners' huge pension assets were invested in the regeneration of their own blighted valleys and villages." [11]

Worse still, in the United States, as Teresa Ghilarducci has demonstrated, despite an absolute growth in pension fund assets there have been reductions in the level of eventual payouts to individuals due to "five major leaks" in the system: increasingly limited pension coverage, losses due to conflicts of interest, administrative costs, inflation, and investment effects. With regard to the latter, the end-result of the collusion of pension fund managers with a neoliberal investment model that fails to sustain plans by creating new employment and real wealth is excellently captured in Ghilarducci's description of "the Cheshire cat problem of pension investments that earn high returns but create no jobs. All that will remain is the 'toothy grin' of high rates of return, with no workers left to be covered by pensions." [12]

Rifkin and Barber raised the spectre of this prospect in The North Will Rise Again, and helped kick off a discussion within the trade union movement and among its allies which continues to this day, a push for alternatives to the current patterns of institutional investment, with much of the focus on raising awareness among the trustees of labour's pension fund assets that there are radically different investment options beyond those currently on offer from the satraps of casino capitalism. Leo Gerard, the International President of the United Steelworkers of America--and a prime mover in the Heartland Labor Capital Project--now highlights theuse of workers' capital to drive different investment priorities and force capital markets to maximize long-term value for workers as "one of the key challenges facing the labor movement today":

"All too often, investments made with our savings yield short-term gains at the expense of working Americans and their families. Destructive investment practices that rely on layoffs, mergers and acquisitions, plant closures, and off-shore job flight can create quick profits and short-term stock price increases, but, over time, these management practices erode America's wealth. The challenge for labor is to align workers' savings with workers' values...Our capital is patient and long term, and our challenge is to develop a capital strategy that moves our savings beyond the quick saccharine highs of destructive corporate behavior." [13]

It should also be clear by now that if, as Tessa Hebb and David MacKenzie put it, the trade union movement should "harness pension power," then this is "not an end in itself but rather a critical first step toward a democratic investment agenda based on the premise that workers generate capital and should also direct its uses." [14] Union-based investment vehicles, Hebb has argued, "do not automatically advance a worker-owner agenda unless they are designed or mandated to do so." [15] The emerging trade union strategy should be focused around the organisation of assets, the development of regulations and legal reforms, and the articulation of an alternative politics of investment, skewed toward real economic growth and patterned on equitable distribution and long-term expansion, shifting the power that flows from control of pension assets to advance "a worker-owner view of value in the allocation of capital by firms and markets." [16]

Ultimately, the goal should be to accommodate a variety of forms for collective control of assets through the creation of new institutions that go beyond today's mere "ethical investment" models. Not that such models are worthless, as the South Africa divestment campaign showed. Indeed, according to Eric Becker and Patrick McVeigh, almost $1 of every $8 invested in the U.S. in 1998 (for a total of $2.2 trillion) was channeled through a "socially-responsible" investment vehicle of the sort that commonly screens out investment in firms involved in child labour, union-busting or other nefarious workplace activities, the manufacture of armaments, tobacco and alcohol, or in environmentally harmful practices. [17] But, in a wider sense, "ethical investment" funds are inevitably limited in their impact in that they have to rely on the use of "exit" rather than "voice"--and, in any case, are often focused on highly telegenic "dolphin-friendly" causes and less interested in regional revitalization, working practices, health and safety, employee ownership, cooperatives, and other issues important to the labour movement.

There are, however, already some fragmentary precedents for a more ambitious strategy, such as the success of labour-sponsored investment funds (LSIFs) in Canada. What really matters, as Jonas Pontusson has argued, is the broader political consequences of institutional reforms: "The critical issue from a democratic socialist perspective is not the immediate results of a given reform, but what possibilities it opens up for further reforms by altering the terms of public debate or encouraging popular mobilization." [18] Hebb and MacKenzie remark of the Canadian LSIFs that their significance "extends far beyond their success as worker-friendly venture capital instruments":

"They offer one more example of the remarkable new creativity emerging from the workers' movement, as labor comes to grip with the rapidly changing forms of contemporary capitalism. We see this creativity surfacing in bold new organizing initiatives across Canada and the United States. We see the resurgent political energies in conventional electoral arenas and in coalition-building efforts with new social movements and with young and working people around the globe. Labor's social impact and transformative potential lies ultimately in its membership and in the militant commitment and intelligence of its activists. But working people have generated, and continue to generate, huge pools of wealth, which casino capitalists use to hold them back. A central part of labor's arsenal must be the willingness to experiment with every good idea that allows workers and their organizations to harness and direct the capital they produce toward useful social purposes." [19]

Of course, a common response to any proposal for Pension Fund Socialism is horror, and the immediate objection that, in pursuing social objectives, trustees will be engaging in below-market-rate investments that undermine individuals' retirement security. "Pension-holders of the world unite! You have nothing to lose but your security in old age!" is hardly a winning political slogan for the Left. Most pension-holders are looking for a safe, conservative investment model with limited risks and decent long-term returns, and certainly not the opportunity to provide fuel for fancy left-wing alternative economic strategies. As Frances Fox Piven has observed, "The idea of turning worker pension funds into a capital instrument for social ends has been around for a while. It flared and fizzled because it never seemed to capture the imagination of workers, perhaps because they were not stirred by the prospect of risking their pensions for socially desirable investment." [20]

The short answer to this line of argument--much easier to articulate now, in a climate of growing awareness of the depredations of 'Enron capitalism'--is a simple one: there is no safe, conservative investment model. On a good day, pension-holders can look forward to underperformance and the decompounding effects of piss-poor long-term returns, not to mention the role of trustees in ramming through key aspects of the neoliberal programme: on a bad day, they face borderline criminality in the skimming and squandering of their assets.

Numerous studies have upbraided the current practice of pension management for its paralysing risk aversion, short-termism, herd instinct, hyper-active "churning" of stocks (thus frittering away gains through the incursion of transaction costs), timid preference for blue chip stocks and dismal record in terms of venture capital. Even labour's interest in playing a role in the storied 'Shareholder Revolution' became, through the actions of trustees and managers, a focus on eliminating antitakeover devices such as 'poison pills' and 'staggered boards', the danger being that this enabled leveraged buyouts and hostile takeovers (with their subsequent layoffs and downsizings) by further emphasizing the instant gratification of quick boosts in shareholder value. Some of this is the result of perverse incentives built into fiduciary law, but a lot of it is simply due to the corporate culture of money management. Blackburn points to the role of pension funds in "two decades of low growth, high unemployment, growing inequality and painful restructuring":

"[O]bsessed with holding only assets that could readily be 'marked to market', they preferred to back the junk-bond kings and corporate raiders rather than to channel resources to build a productive and sustainable economy...For many years the possibilities opened up by the knowledge-based industries were neglected--opportunities that would have been missed altogether if it hadn't been for the universities with their programme of basic research and their industrial parks." [21]

What is not so readily appreciated is the immense cost to the wider public in foregone tax revenue: "Pension funds as we know them today are a creature of legislation, since they would not exist without tax breaks. Yet the growth of the funds has placed huge reservoirs of financial power at the disposal of fund managers run by the world's leading banks and brokers." [22] Much of this public subsidy afforded retirement funds through tax expenditure goes to the money managers and intermediaries of the financial services industry, while pension investments are diverted into companies' gargantuan payouts to their chief executives. Jeff Gates, for one, believes that U.S. fiduciaries should be led off in handcuffs for their outright complicity in the corporate looting spree of the 1990s. A former counsel to the U.S. Senate Finance Committee and now president of the Shared Capitalism Institute, Gates recently wrote a virtual mini-manifesto for the activist group Unreasonable Women, asking the question "Who's Being Unreasonable?

"The fiscal cost of tax subsidies for retirement plans now averages $110 billion per year (a projected $553 billion, FY 2002-2006). To date, pension fiduciaries have allowed executives to skim at least $500 billion while embracing an investment model that put $1,540 billion in the hands of just 400 families (the wealth of the top 30 families has grown 10-fold)...By using pension assets to chase short-term returns with no concern for long-term economic distribution results, pension fiduciaries created one family in Arkansas (the five heirs of Wal-Mart founder Sam Walton) who now have $100 billion... Anyone not outraged is out to lunch." [23]

Conservative critics decry "social investment" as fiduciary irresponsibility, arguing that bleeding-heart social investments cannot hope to compete with the "pure market." But pure markets exist only in the eroticized fantasies of Chicago-school economists. Capital markets, in particular, are "neither perfectly efficient or value free." [24] By overprivileging the 'thin' information available in quarterly earnings reports, financial markets can miss the true worth of companies with long-term investment strategies and induce sub-optimal performance in the real economy. Of course, the real world of investment also includes the massive inefficiencies and distortions that result from conflicts of interest and corporate fraud, as we have recently seen in Enron and in Merrill Lynch, whose analysts were caught tailoring recommendations in order to secure investment banking business, pushing stocks they privately considered "dogs" and "crap." [25]

With an increasing share of workers' savings tied up in volatile capital markets, Robin Blackburn's key point is unarguable: "If there are to be government-mandated, government-devised and government-guaranteed pension funds owning decisive chunks of the economy, why should not the generality of citizens exercise democratic oversight and ensure that these arrangements benefit them and their families rather than the financial services industry." [26] This need not imply breaking the cardinal rule of diversifying risk by putting all workers' eggs in the same basket: "A socially responsible industrial policy should not commit workers' savings to keeping afloat businesses in a declining sector. But such a policy could very well use those savings to diversify the regional economy or enhance its facilities." [27]

Beyond occupational funds, a crisis over public pension provision in Western Europe is gathering pace, and has already contributed to "the defeat of right-wing governments in Italy in 1996, France in 1997 and Germany in 1998." [28] The difficulties are only going to multiply as the demographic shift to an older population means that "societies will need to make provision for perhaps a fifth of the population who will consume far more than they can produce. This explains why pension programmes loom so large in public finances and why funded private pension provision, where it is encouraged, soon controls huge resources. Even other large items of expenditure--education, health, the armed forces--do not employ anything like a fifth of the population." [29]

Things really do start to get interesting when universal coverage by the state is brought into the picture, particularly if we are talking about pre-funding, though even pay-as-you-go systems can soon accumulate a surplus, as has been the case with the Social Security Trust Fund in the U.S. This scares the hell out of conservatives, who fear the economic muscle it could give to public agencies, a route to 'nationalisation by stealth'. "A national debt, giving financiers leverage over the state [is] one thing. A national investment fund, giving government leverage over business, quite another." [30] As the most famous monetarist economist of them all, Milton Friedman, has written:

"I have often speculated that an ingenious way for a socialist to achieve his objective would be to persuade Congress, in the name of fiscal responsibility, to (1) fully fund obligations under Social Security and (2) invest the accumulated reserves in the capital market by purchasing equity interests in domestic corporations...Suppose the president's proposed policy had been followed in the most extreme form from the outset in 1937, i.e. the whole excess of the Social Security payments...had been invested in the stock market...In that case the Social Security Trust Fund would own more than half domestic corporations! To return to my fantasy, full funding would have long since brought complete socialism." [31]

Anything that puts the wind up Margaret Thatcher's favourite economist must surely be worth a second look. In the context of a general crisis of the Left and wholesale retreat of social democratic possibilities, the issues raised by 'Pension Fund Socialism' go back to the central economic question of control over the means of production. It is high time that these assets--the largest single pool of investment capital in the world--were put to work for their real owners.

[1] Tony Benn, Arguments for Socialism, (London: Penguin, 1980), p. 150.

[2] Tessa Hebb, "Introduction: The Challenge of Labor's Capital Strategy," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca: Cornell University Press, 2001), p. 1.

[3] Peter F. Drucker, The Unseen Revolution: How Pension Fund Socialism Came to America, (New York: Harper & Row, 1976), p. 12.

[4] Tessa Hebb, "Introduction: The Challenge of Labor's Capital Strategy," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca: Cornell University Press, 2001), p. 4.

[5] Peter F. Drucker, The Unseen Revolution: How Pension Fund Socialism Came to America, (New York: Harper & Row, 1976), p. 1.

[6] Ibid, pp. 33-34.

[7] Robin Blackburn, Banking on Death, Or, Investing in Life: The History and Future of Pensions, (London and New York: Verso, 2002), p. 5.

[8] Ibid, p. 103.

[9] Tessa Hebb, "Introduction: The Challenge of Labor's Capital Strategy," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca: Cornell University Press, 2001), p. 2.

[10] Jeremy Rifkin and Randy Barber, The North Will Rise Again: Pensions, Politics and Power in the 1980s, (Boston: Beacon Press, 1978), p. 13.

[11] Robin Blackburn, Banking on Death, Or, Investing in Life: The History and Future of Pensions, (London and New York: Verso, 2002), p. 14.

[12] Teresa Ghilarducci, "Small Benefits, Big Pension Funds, and How Governance Reforms Can Close the Gap," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), pp. 159-63.

[13] Leo W. Gerard, "Preface," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), p. vii. Of course, any capital strategy advanced by organized labour relying on pension funds must take extreme care to avoid the past mistakes and pitfalls of what might be termed 'the Hoffa problem': the shady manipulation of union funds (like those of the Teamsters) for tropical adventurism in Miami, Las Vegas, Reno, the Bahamas and other such colourful venues.

[14] Tessa Hebb and David MacKenzie, "Canadian Labour-Sponsored Investment Funds: A Model For U.S. Economically Targeted Investments," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), p. 145.

[15] Tessa Hebb, "Introduction: The Challenge of Labor's Capital Strategy," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca: Cornell University Press, 2001), p. 8.

[16] Tessa Hebb and David MacKenzie, "Canadian Labour-Sponsored Investment Funds: A Model For U.S. Economically Targeted Investments," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), p. 203.

[17] Eric Becker and Patrick McVeigh, "Social Funds in the United States: Their History, Financial Performance, and Social Impacts," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), pp. 44-5.

[18] Jonas Pontusson, The Limits to Social Democracy: Investment Politics in Sweden, (Ithaca: Cornell University Press, 1992), p. 224.

[19] Tessa Hebb and David MacKenzie, "Canadian Labour-Sponsored Investment Funds: A Model For U.S. Economically Targeted Investments," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), p. 157.

[20] Frances Fox Piven, "A Response to Richard Freeman's 'Solving the New Inequality'," Boston Review, December 1996/January 1997.

[21] Robin Blackburn, Banking on Death, Or, Investing in Life: The History and Future of Pensions, (London and New York: Verso, 2002), p. 432.

[22] Ibid, p. 108.

[23] Jeff Gates, Unreasonable Women: Who's Being Unreasonable? available online at
For information on the Shared Capitalism Institute, see

[24] Tessa Hebb, "Introduction: The Challenge of Labor's Capital Strategy," in Archon Fung, Tessa Hebb and Joel Rogers (eds.), Working Capital: The Power of Labor's Pensions, (Ithaca, NY: Cornell University Press, 2001), p. 3.

[25] David Usborne, "Now Spitzer Turns His Eyes on the Rich but Fallen Idols of Corporate America," The Independent, August 2, 2002, p. 20.

[26] Robin Blackburn, Banking on Death, Or, Investing in Life: The History and Future of Pensions, (London and New York: Verso, 2002), p. 458.

[27] Ibid, p. 481.

[28] Ibid, p. 17.

[29] Ibid, p. 23.

[30] Ibid, p. 74.

[31] Milton Friedman quoted in Ibid, p. 385.




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