Goodbye, Pension. Goodbye, Health Insurance. Goodbye, Vacations.
Welfare capitalism is dying. We're going to miss it.
By Daniel Gross
For some employees near the end of their careers, the golden years may be
looking a little more like lead. Both United Airlines and US Airways are
making noises about terminating their pension plans. Lucent recently said it
would slash retiree health benefits yet again. The inability or refusal of
companies to live up to promises and commitments made to workers seems to be
largely a cyclical phenomenon, a symptom of temporarily sick industries
(airlines) or of a company plagued by poor bets and bad management (Lucent).
But it is also a sign of the troubling collapse of welfare capitalism.
Welfare capitalism is a term used by historians and economists to define the
distinctive style of capitalism that emerged in the 20th century. Until the
turn of the 20th century, fringe benefits, insurance, retirement plans, and
health benefits?the perks we have come to define as essential to
employment?simply didn't exist. Employers had compensated employees solely
But that changed with the onset of industrial capitalism. In Europe,
governments responded to industrialism by developing state-run systems of
unemployment insurance, health care, and pensions. But?in yet another
example for American exceptionalism?the private sector took the lead in the
United States. After the age of the robber barons and various bitter
strikes, forward-looking companies began to take action on their own. They
were influenced by a range of factors: noblesse oblige, paternalism, and the
emerging fields of industrial psychology and human resource management.
Henry Ford led the way. In January 1914, Ford Motor Co. instituted the $5
day. Over the next several years, Ford took steps to ensure that its
employees remained healthy, loyal, and above all, efficient. It opened an
infirmary and established the "Sociological Department" to both keep tabs on
and look after the welfare of its workers. In 1922, Ford cut the work week
from six days to five.
In the roaring 1920s, when other highly profitable companies began to
emulate Ford, welfare capitalism began in earnest. Companies built
cafeterias and health clinics, sponsored baseball and bowling leagues, and
granted days off for the opening of deer season. Corning Glass Works began
providing health insurance in 1923. The same year, U.S. Steel slashed its
workday from 12 hours to eight. In 1927, International Harvester began
offering two-week paid vacations. All this was all done without government
mandates and largely without the influence of unions.
Welfare capitalism proved a phenomenal success?socially, economically, and
politically. America's industrial complex was ultimately unionized, but with
relatively little upheaval. Even with the rise of the welfare state in the
'30s, corporations continued to assume responsibility for the well-being of
their employees. It was part of a grand bargain between labor, capital, and
government that allowed for remarkable growth, innovation, and rising
standards of living for decades. It also served as a bulwark against
socialism. By endowing labor with dignity, welfare capitalists made
industrial work a ticket to the middle class.
But just as the New Deal Coalition started to fray in the 1960s, so too did
welfare capitalism. American businesses?and workers?increasingly began to
face competition from all over. They began to have difficulty competing with
companies from countries where more robust welfare states bore the burden of
providing pensions and health insurance (like Germany and Japan). They began
to have difficulty competing with low-wage competitors in countries where
welfare capitalism had yet to take hold, like Mexico, China, and India. And
they began to face competition from newer domestic companies that never
bought into the ideas of welfare capitalism.
In the 1920s, competitive pressures led companies to become more
paternalistic to unskilled workers. But now, the pressure is all in the
other direction. With each passing year, more and more retailers have to
compete with Wal-Mart, and more and more manufacturers have to compete with
China. Even enlightened employers like Starbucks can't ever hope to offer
the sort of programs that International Harvester and Ford did back in the
1920s. And so welfare capitalism is slipping away. Health care insurance has
increasingly become decoupled from work. According to this Kaiser Family
Foundation study, 61 percent of workers are covered by employers' health
insurance, down from 65 percent in 2001. And pension plans, which guaranteed
a retirement income to employees, are being replaced by 401(Ks), which offer
no such certainties.
Most free marketeers would argue that this is simply the price of progress.
Now that we're competing in global markets, welfare capitalism as practiced
in the mid-20th century is simply untenable. And companies that aren't
burdened with expensive benefit programs can be more agile and thus more
profitable. But it isn't just the workers of Lucent and US Airways who are
going to pay for the long goodbye of welfare capitalism. We all will.
When companies decide they no longer want to?or can't?meet the promises they
made to employees, they push them wherever possible onto the federal
government. The Pension Benefit Guaranty Corp. has been remarkably busy
taking over the pensions of bankrupt textile, steel, and other
manufacturers. The PBGC closed last year in its worst shape ever, with an
$11.2 billion deficit, and will doubtless require a large taxpayer bailout.
The establishment of the new drug program entitlement for Medicare will
similarly relieve many older companies of meeting the obligations they
made?and impose massive costs on the rest of us. And as companies providing
health care become the minority, the Fords and General Motors of the world
may increasingly agitate for a larger federal role in health insurance.
The more welfare capitalism declines, the more the federal government will
have to fill the gap, and the more America will look like Europe.
Daniel Gross (www.danielgross.net) writes Slate's "Moneybox" column. You can
e-mail him at email@example.com.