The Bonus Rich and The Years in Retirement Rich: The Arrogance of Power is Unchallenged Here, But Challenged Elsewhere

Two groups of people have been getting richer: the executives who sit on each other’s boards and vote each other a rising share of private sector income, and retired public employees whose unions have cut political deals for retroactive pension increases. Everyone else is getting poorer. There is, in other words, the executive/financial class, the political/union class, and the serfs.

The pay and benefits of the serfs is determined in negotiations with people who have an interest in keeping them as low as possible, either to keep more money for themselves or to be in a better position to offer better value to their customers.   Everyone wants to get more for less, whether they are shopping for labor or as consumers, but in the end these relationships are voluntary, so an equitable agreement has to be reached.  But the public employee unions and executives negotiate their pay and benefits in secret with their cronies, and then pass the bill on to powerless others who are made worse off, taxpayers/public service recipients and shareholders.  Here in the U.S. they continue to take more and more, and express outrage at anyone who dares to question their entitlement, even in the wake of a Great Recession that made everyone else much worse off.  But things are different elsewhere.  And that may be instructive.

First, consider what has happened to the executive/financial class over in Switzerland.  Is there a place that is more pro-business, pro-property rights, pro-individualism than Switzerland, the country where the rich have always preferred to stash their riches?  But the country has other traditions:  hard headed pragmatism and direct democracy.  Its citizens realized the executive and financial pay had risen to levels that had nothing to do with value provided, and was not reflective of a truly free market.  And they did something about it.

“Public wrath at the widening gap between packages awarded to company bosses and the average citizen’s take-home pay resounded through Switzerland on March 3rd,” The Economist reported. “Voters there overwhelmingly backed an initiative to give shareholders of Swiss listed companies a binding say on executive pay and an annual right to vet board appointments. Other sanctions would forbid the award to executives of severance packages, side contracts, and rewards for buying or selling company divisions. The penalty for infringements could be as much as three years in jail, or the forfeit of up to six years’ salary.”

In Switzerland, voters have the power of initiative and referendum, and can organize to impose laws on leaders who grow too comfortable in a point of view convenient to themselves while sharing each other’s company.  They organized to pass this rule, which the business and political elites opposed and tried to undermine with a competing proposal.  The initiative was known as the “people’s initiative against fat-cat pay” and by passing it overwhelmingly, according to The Economist, “Switzerland’s penchant for direct democracy has trumped its tolerance for tycoons.”

And who was behind the initiative.  A left wing socialist out to overthrow capitalism?  Union leaders out to grab a larger piece of the pie for their members?  A grandstanding politician?  A “community organizer?”  Nope.  It was started by an individual family entrepreneur.  And in reality, the provisions are as capitalist as they come, from the point of view of real capitalism.  “Shareholder votes on executive pay, hitherto ad hoc and advisory, will become routine and binding. Pension funds will be required to vote in the interests of their members and make their votes public. Board members will not be permitted to have consulting or other contracts with firms in the same group.”  Also, there are restrictions on bribes – er “Golden Hellos” for directors.

Compare this with the “outrageous” impositions of the Dodd Frank act in the U.S., whose “say on pay” provision is episodic and strictly advisory.  The Economist thinks there has been a change here, too.   “Since the financial crisis of 2008, which revealed widespread flaws in corporate governance, shareholders have flexed their muscles more often. Public outrage over high executive pay, regulatory reforms to give shareholders greater power and more scrutiny of how they use that power have created a climate in which even the most profitable companies can be targets of activism if their corporate governance is not up to scratch.”

But I don’t see it.  Basically, the federal, state and local governments give you a tax break to place your savings with financial sector intermediaries – 401Ks, 529s, pension funds, insurance policies with savings components – and tax you if you do not.  These intermediaries, not the actual owners of American business, then get to vote the shares.  And do so in their own interest in mutual back-scratching deals among those at the top, with whom they identify personally.

What “Say on Pay” has done is provoke outrage in the executive suite.  They were unwilling to say so directly, but I am convinced that it is this provision, not the “regulation” and “uncertainty” they claimed, that turned the executive/financial class so firmly and passionately against President Obama in the last election cycle.  Even though his administration carried through with all the bailouts put in motion by President Bush, asked little in return, didn’t manage to put any of the fraudsters of the 2000s in jail, and only managed to get through the weakest of regulatory reforms.

But none of that is enough to make up with the “disrespect” shown by “Say on Pay.”  You mean the shareholders and private equity and venture capital investors who own American businesses, those who have put up their capital, will be allowed to examine what their highest paid employees have cut binding contract deals to pay each other, and make non-binding suggestions?  How dare they!  It’s socialism!

To be fair few ordinary people have the time and inclination to follow company issues and vote shares on their own.  I own shares in only one individual company, received an annual report and proxy statement a couple of months ago, and just opened the thing which said “time sensitive material” a moment ago while writing this – recognizing my hypocrisy.  Too late.  Although I probably would have paid attention sooner if I wasn’t’ satisfied with the way things are going at the firm. But none of this excuses the failure of the financial sector intermediaries to put the interests of the people they are paid (over the table) to represent over the interests of their fellow members of executive/financial class.

While the executive/financial class has been forced to act with some sort of consideration by the broader public in uber-capitalist Switzerland, the political/union class has been forced to provide a more equitable deal in “liberte’ egalite fraternite” France.  That country is haltingly facing up to a public fiscal crisis caused by an aging population and the failure to collectively save up enough to provide for it in the past, when a larger share of the population was working age.

Realizing the situation, a conservative government made some adjustments in 2010. “On Wednesday, the French National Assembly gave its final approval to a law raising from 60 to 62 the minimum age for retirement and from 65 to 67 the age at which a full state pension kicks in,” the PBS Newshour reported.  “President Nicolas Sarkozy said the changes were essential to save billions in government pension payments and to make France more competitive with such neighbors as Germany.”

In response the French then did what the French do.  They took to the streets and went on strike in protest.  And two years later they elected a socialist government that cut the retirement age back. “France today defied the austerity measures sweeping Europe by unveiling a multi-billion pounds measures to lower its retirement age to 60 – five years less than Britain’s” according to the Daily Mail. “The changes mean that those who started their working lives at 18, as well as mothers of three or more children and older unemployed people, can draw a state pension at 60 instead of 62.”

Not long afterward, however, realism set in, particularly among young people who worry what will be left for them if the country keeps going in the hole. “Nearly two thirds of French support pension reform that includes raising the retirement age, a poll showed on Thursday, indicating the public would be willing to accept more drastic change than (Socialist) President Francois Hollande has proposed” according to Reuters.  “The Socialist leader is preparing a cautious reform to fix a hole in retirement coffers, hoping to avoid a repeat of huge protests in 2010 when former President Nicolas Sarkozy hiked the retirement age to 62 from 60.  But a survey by pollster IPSOS shows 63 percent of the French want an in-depth overhaul, 66 percent think the pay-in period should be extended beyond a current 41.5 years, and 61 percent say the legal retirement age should be raised.”  “Despite strong backing for a ‘deep overhaul that spares no issue,’ 76.0% of those questioned said they did not trust Hollande’s government to make the pension system sustainable.”

This is a country struggling with its problems.  And here is the difference between the situation of all workers in socialist France, and the public employee unions with their retroactively enhanced pensions in the United States – it is everyone’s problems.  The number of years worked – whether 40 or 41 and 1/2 – and the full and diminished benefit retirement ages, are for everyone, all workers, all in it together.  The same may be true of the French universal health insurance scheme.  And the French – all the French — pay for their benefits, as the overall average tax burden on labor income is 50.2% there, second highest in the world according to the OECD.  The U.S. was below the OECD average at 29.6%.

As the argument goes on in France, there is one part of the pension reform that is unlikely to ever be reversed.  The reform of the “Special Pensions” that allowed some workers, those in the public sector and other monopoly, price dictating sectors, to retire after just 35 years of work. “The ‘special retirement regimes,’ as the early retirement benefits are known, are available to a swath of workers, among them railroad employees, police officers, miners, lawmakers in Parliament and even employees of the Comédie Française. Those job categories fall into 128 ‘special regimes’ created to compensate people who work in tough professions” according to the New York Times.

“About 1.1 million retirees were covered by the special privileges in 2003, making up about 6.4 percent of total pension payments, according to figures from the Pensions Advisory Council, an independent body that reports to the prime minister’s office. But those pensions are creating a deficit of about €7 billion, or $9.7 billion, because they are financed by only 500,000 employees.”

Those special pension regimes were done cut back on.  Everyone in France has to work the same number of years.  If one job is too tough to work in later in life, those employees will either have to save up themselves to retire earlier or get another less tough job to work in until the retirement age arrives.  “The special privileges are increasingly regarded as unfair to people who are outside the system” according to the Times. “Experts said that to change the general culture of early retirement, Sarkozy will have to first eliminate the special perks enjoyed by some government and other employees.”

In contrast there is no belief among the political/union class in New York State that there should be any “liberte’ egalite fraternite” with other working people. By the late 1990s, you had a situation in which more and more private sector U.S. workers had been losing future retirement income, retirement health insurance, and even health insurance while working, for decades.  Public employees, meanwhile, were the beneficiaries of extremely generous “special” pensions themselves.

It is a fair argument that, in general, those who chose to work in the private sector had been free to take those public jobs if they qualified, and could have had those benefits, but chose not to.  I agree that people are entitled to the compensation there were promised when they were hired.  That was the deal.

What is not fair, however, and in fact is a great social injustice, is that those who already had the best deals have cut additional backroom deals, to get even more in retirement benefits, to be paid for by those with less or nothing, over and over again for 15 years, lying about the cost and consequences to the extent these were discussed at all. In 2008, for example, New York City teachers who were promised a retirement at age 62 after 30 years of work when they were hired, were suddenly allowed to retire at age 55 after 25 years of work.  That would be one year in retirement for every year worked.

Moreover, since no money had been set aside for the additional benefits retroactively granted, and thus no investment earnings help to fund them, the cost is devastating.  (Not that most U.S. state and local governments had set aside enough money to pay for the pensions and other benefits that had been promised to begin with).

And in a fitting contrast with France, where railway workers went on strike to continue to be allowed to retire at 55 while other workers retired at 60, on the way up to 62, in 2003 New York City transit workers who are already allowed to retire at 55 after working just 25 years went on strike themselves.  To retroactively be allowed to retire at age 50 after just 20 years of work.  They’ll deny it now, and claim it was about “respect” or some BS, but 20/50 is what the strike was about.  You had two factions in the Transit Worker’s Union competing for power, and one of them – New Directions – took over by promising 20/50.  They either had to get it or prove it couldn’t be had.

The public employee unions falsely claim that they only worked the system to get what they believe every worker should have, not a special deal for themselves at the expense of their fellow workers.  But of the tax burden on labor averages 50.2% for a retirement at 62 after 41 1/2 years worked in France, however, and even that isn’t enough, what would be the tax burden in New York if EVERYONE got the same retirement benefits as NYC teachers, police, etc?

One thing is for sure; New York City’s public employees – and others who work in fields that are government funded — would not be willing to pay for others to have what they demand and work the system for themselves.  The retirement income of public employees is exempt from New York state and local income taxes, no matter how that income (or total income) is, no matter how early the age of retirement. And, of course, the unions have worked for years to ensure that their members don’t have to live in New York City.  They can live in places with no local income tax, a lower overall tax burden, and better public services.

One wonders how NYC’s public employee pensioners would react to the level of taxation required in France to provide equal benefits despite inadequate past savings.  Even the French courts seem to think things have gone too far, striking down a tax increase the Socialist government put through to pay for retirement. “As applied to certain pensioners,” Motley Fool reported, “the law had the effect of creating a 75.04% tax burden in 2012, and a 75.34% tax rate in 2013. The court declared these rates an ‘excessive burden’ on these taxpayers and ‘contrary to equality.’ The court ordered that the maximum marginal tax rate on pensioners not exceed 68.34%. The court also rejected increasing the tax rate on certain bonds to 90.5%, and reduced the maximum tax rate on employee stock options and share grants to 64.5%.” (Note that these are the marginal rates at top incomes, as opposed to the average rate on all income quoted above).

Where the public unions and the politicians they control have tried to deal with the difference between the deals they have cut for themselves, and what everyone else gets, as in California, the result has been far from egalite.  There, the unions proposed pensions for state pensions for private sector workers to dull the anger over the pensions they were receiving.  But they new the state could hardly afford to retroactively grant the same deals.  Instead, they suggested that public employees continue to get very generous pensions, guaranteed to be paid regardless of the cost or consequences, and that private sector workers pay for them in taxes and services foregone.  In addition, private sector workers and companies would also be allowed to pay into the public pension funds to become eligible, after many, many years, to get far less generous, non-guaranteed pensions themselves, with no obligations for public workers to pay a dime in taxes to fund them.

As in the 1970s, New York’s politicians and public employee unions have been willing to agree to some sacrifices, as the cost of their deals increasingly cannot be hidden.  They are willing to agree that other New Yorkers should receive drastically diminished public services and benefits, for only slightly more money.  And that future union members will receive drastically lower compensation than those who came before, in exchange for an acknowledgement that all union members cannot be expected to do a decent job in return.  Here in New York those who grabbed unjustly gave nothing back when the bill came due. Since like all those executives who sit on each other’s boards and grant each other higher pay, but unlike just about everyone else, they’ve got unbreakable contracts that can only get richer.

The public and mostly publicly-financed unions have even fought against public health benefits for other workers, if they would have to pay something or give up something for it to happen.  In the 1980s and early 1990s the health care industry was given an unlimited budget in New York State via Medicaid, and they exceeded it.  So when the Clinton Administration sought approval for a national health care scheme that would limit the soaring public funding for the lucky people in on or making money off the various health insurance deals, in order to provide something to those who were getting nothing, the Greater New York Hospital Association and Local 1199 joined with the insurance companies to fight it.  And they won.

Nearly two decades later, perhaps realizing that a system that provided more and more taxpayer health care funding for fewer and fewer people – even as those without anything are forced to pay for the privileges of others — might eventually leave them with nothing too, these interest groups switched sides for the Obamacare debate.

You may have read that the federal, state and local governments pay for half of all health care in the United States.  But that is only directly.  It doesn’t count the indirect taxpayer funding of health care via the private health insurance purchased by taxpayers on behalf of public employees.  Or the cost of the tax benefit that excludes the value of employer-financed health insurance, for public and private employees alike, from those employee’s taxable income.  These indirect formers of taxpayer health care subsidies cost more, are worth more, the more health services are provided to those who are insured, the higher the resulting value of the insurance, and the higher the overall income excluding the tax break.  They are thus perfectly regressive – the more some people get, and the more they have, the more it costs – even as others get nothing.  And they are unlimited.

As a citizen of this city, I’d be curious to know just how many people the City of New York and affiliated organizations are paying for health insurance for.  How may employees and their family members, where they live, and what their average taxpayer cost of health insurance per beneficiary is.  Separately, how many retirees not yet eligible for Medicare and their family members, where they live, and what THEIR average taxpayer cost of health insurance per beneficiary is.  And, separately, how many retirees also receiving Medicare and their family members, where they live, and what THEIR average taxpayer cost of health insurance is.

I would expect that it is a lot of people, for a lot of money.  Which is fine – my family has always been pretty “wealthy” in this regard itself, and I for one would favor a single national system in which ALL people pay in equally (depending on their income) and get out equally (depending on their age and health).  As in France.  Even it if means that to stay solvent, some limits would have to be put on the health care I would be eligible to receive at public expense or with public subsidy, and required to pay for anything extra out of my own pocket.

But you know who is opposed to such a system?  Those who benefit the most from the system as it is, the “I’ve got mine jack” public employee unions as represented by the head of AFSCME Gerry McEntee.  “McEntee led workers in chanting a barnyard epithet to describe Senate Finance Committee chairman Max Baucus’s health care bill, which would levy a new tax on expensive health care plans” according to Politico back in 2009. “He published an op-ed in U.S.A. Today warning, in terms that could be used against Democrats in the midterms, that the plan could tax the middle class and cost workers their health care.”

The plan would have provided some upper limit on the taxpayer based subsidy for the richest people receiving the richest employer provided health insurance plans, in a country with the most excessive health care costs in the world.  The money was to be used to provide at least something to the lesser workers who were receiving no taxpayer-funded assistance for their health insurance at all.  Far from being willing to go a long with a situation in which everyone was equal, those with the best deals with regard to taxpayer-subsidized health insurance fought against a proposal to make people just somewhat less unequal.  And for the most part got their way.

The bottom line is that the public employee unions, particularly here in New York, are now completely and perhaps irrevocably out of solidarity with the vast majority of American workers, at the expense of those workers. A situation that does not exist in socialist France. And American corporate and private equity pirates are completely out of solidarity with real capitalism, and real entrepreneurs.   A situation that was unacceptable in Switzerland.  They continue to pretend and claim otherwise.  Claim to be risk takers, wealth creators, and job creators rather than mere appropriators of the shrinking pie.  Claim to the foundation and last refuge of American working men and women.  But that is mere propaganda.

The situation we have more and more in the entire United States is the one I identified as the prevailing political philosophy of New York State a decade ago – neo-feudalism. As I said then “Under capitalism, you get what you earn, at least in theory. Those who believe that people need an incentive to work and innovate can agree with that. Under socialism, you get what you need, at least in theory. Those who believe that we are all part of one human family can agree with that. But over time, when you have the same group of people in power, both capitalism and socialism degenerate into feudalism, under which the privileged expect to continue to get what they have been getting, and perhaps a little more, whether they need it or not, deserve it or not. For those who have real needs, and who produce real earnings, it’s just tough luck. The feudalism of unearned privilege explains much about the state of the State of New York, where all past deals are set in stone.”  It also explains much about business and more and more about the federal government, I believe.  It’s downright un-American.