Who Stole the American Dream?

by Hedrick Smith

  But digging into the records, Wall Street Journal reporter Ellen Schultz found that wasn’t really true. In fact, pension plans were moneymakers for many a big company. In the bull market of the 1990s, America’s blue ribbon companies did so well investing their employee pension funds that many built up huge surpluses, above their obligations to employees, without contributing a cent of company cash for a decade or more. The stock market gains were so large that by November 1999, GE had a $25 billion surplus in its basic employee pension funds; Verizon had $24 billion; AT&T had $20 billion; IBM had $7 billion.

  What’s more, some of America’s largest corporations were able to shift pension fund gains indirectly to their profit lines and, Schultz reported, a few legally took advantage of loose and poorly enforced accounting rules to siphon off money from their employee pension funds to finance portions of their corporate downsizing, restructuring, and mergers and acquisitions.

  “Many, like Verizon, used the assets to finance downsizings, offering departing employees additional pension payouts in lieu of severance,” Schultz disclosed. “Others, like GE, sold pension surpluses in restructuring deals, indirectly converting pension assets into cash.” Some companies made billions by shutting down employee pension plans and shifting surplus assets to company profits. And if company pension plans got into financial trouble during the stock market decline in the early 2000s, it was either because the company itself was in deep financial trouble or because company finance officers had been too aggressive in gambling with pension assets, putting them into risky equities in hopes of making big gains, rather than investing carefully in safer, more conservative assets like bonds.

  Either way, the shift out of lifetime pensions to 401(k) plans and so-called account balance plans by highly profitable corporations was a heavy cost blow to employees from assembly line workers at Ford and GE to software and Internet specialists at IBM.

  In the 1950s, U.S. employees nationwide paid collectively about 11 percent of their retirement costs. By the mid-2000s, they were paying 51 percent. Hundreds of billions of dollars in safety net costs were shifted from companies to employees without any offsetting real increase in the typical worker’s pay. For ordinary Americans, the consequences were acute.

  “This fundamental transformation, which I call the ‘Great Risk Shift,’ ” says Yale political economist Jacob Hacker, “… is at the root of Americans’ rising anxiety about their economic standing and future.”

  The Ownership Society

  Some major political leaders and economic analysts have defended the burden shift from government or employer safety net programs to individuals as a positive development. They have argued that both corporate welfare and government welfare were misguided policies that fostered economic dependency instead of promoting personal self-reliance and individual responsibility. In the White House, George W. Bush called this philosophy “the ownership society,” and he pushed hard to make it policy. What Bush meant by an “ownership society” was that individuals should take ownership, or total financial responsibility, for their own economic destinies and not expect employers or the federal government to provide a safety net.

  The “ownership” concept lay behind Bush’s abortive effort to privatize the Social Security system in 2005 after his reelection. Bush barnstormed the country pushing the plan. His goal was to get government off the hook for guaranteeing lifetime retirement payments for people on Social Security. Instead he wanted people to invest their Social Security contributions in the stock market and finance their own retirement.

  That same general concept lay behind the plan that Republican Paul Ryan, as House Budget Committee chairman, proposed for Medicare in 2011. Ryan’s plan was to give individual Americans a stipend from Medicare and have them buy their own health insurance. That would relieve government of responsibility for unlimited health care costs. In both the Bush and Ryan plans, the financial risks over the long run would have been put increasingly on ordinary Americans. Individuals would have been at far higher financial risk than at present. Once enough voters understood what was afoot, they objected vociferously to the changes in their safety net. Both Bush and Ryan had to back off.

  Turning the American Dream “On Its Ear”

  But Corporate America was so successful in shifting a major portion of the cost for health and pension benefits onto individual employees that even a corporate financial giant like Metropolitan Life Insurance Company was moved to comment in 2007 that this shift had essentially turned the old social contract upside down. As MetLife put it, “The burden shift has turned the traditional definition of the American Dream ‘on its ear.’ ”

  In nationwide surveys, MetLife reported, it found that the burden shift from employers to employees was “having an impact, with potentially profound implications” on the living standards and finances of middle-class families. In its 2007 “MetLife Study of the American Dream,” the firm found that by more than a 3 to 1 margin (65 to 19 percent), Americans believed things had gotten less secure in the last decade, even though the economy had enjoyed a growth spurt in the mid-2000s. When MetLife asked people whether they were living the American Dream of home ownership and a solid economic life, two-thirds said they had not achieved the dream. Roughly half of those over forty said they never expected to achieve it. That was before the economic collapse of 2008.

  Two years later, as the recession hit bottom in 2009, MetLife did another poll. Once again, only one-third of Americans thought they were living the dream. But this time, half of that group, especially people in their midfifties and older, were worried that the dream was going to slip through their fingers and that they would be unable to sustain the good life in the years ahead.

  Bankruptcy—the Red Flag

  Perhaps the starkest indicator of mounting middle-class distress has been the sharp rise in personal bankruptcies, now an integral feature of the New Economy. Bankruptcy is a middle-class phenomenon. The poor go broke, but they don’t file for bankruptcy, financial experts say, because they have few, if any, assets to protect. Middle-class people and upper-middle-class professionals go into bankruptcy to try to hang on to basic assets such as their home, their retirement nest egg, or their income stream, all of which are protected by law if they file for bankruptcy.

  Personal bankruptcies soared in the 1990s. By 2005, there were more than two million personal bankruptcies—roughly seven times as many as two decades earlier, in 1984. “Bankruptcy has become deeply entrenched in American life,” Harvard Law School professor Elizabeth Warren wrote in 2003. “This year, more people will end up bankrupt than will suffer a heart attack. More adults will file for bankruptcy than will be diagnosed with cancer. More people will file for bankruptcy than will graduate from college…. Americans will file more petitions for bankruptcy than for divorce.”

  Bankruptcy can happen to almost anyone, even middle-class people who have been riding along comfortably. Some families teeter on the brink for years, but typically when solid families go bankrupt, the cause is almost always some acute and unexpected economic calamity—the loss of a job; a medical catastrophe; divorce; foreclosure or drastic loss of home value; or the slow, relentless ebb tide of poverty in retirement.

  Millions of middle-class families go over the financial cliff, pushed inexorably into bankruptcy by ever-mounting debt. In fact, private debt in America has risen far more rapidly than government debt. The total personal debt of American consumers exploded from several hundred billion dollars in 1959 to $12.4 trillion in 2011, according to Federal Reserve statistics.

  Pam Scholl Files for Bankruptcy

  Pam Scholl, the unemployed former RCA worker, filed for bankruptcy in September 2010. Scholl had been jobless since May 2009, except for a temporary three-month stint as a census taker in 2010. Her unemployment checks were not enough to cover her mortgage, car payments, health care, taxes, food, clothing, and living expenses, so she borrowed on credit cards. Very quickly, she fell into a downward spiral. By the end, she
was making $500 a month in minimum payments to her credit card accounts, on top of her living expenses. Her debt climbed—to $50,000.

  “I was pretty much borrowing from one credit card to pay for the others,” Scholl told me. “I figured that once I got a job, I could pay them off. But I never could catch up. As soon as I realized that I was over my head, I went to the bankruptcy lawyer. You feel horrible. You know you’ve ruined your credit. I’ve had excellent credit since I was seventeen years old. But there was nothing I could do. There was nobody I could borrow from.”

  Her bankruptcy filing was not contested by any credit card company, and in February 2011, the court approved it. “That ended my credit card debt,” Scholl said. “It protected my house so I could live. It protected my retirement fund and my 401(k). To keep my car, I had to take $4,000 from my retirement savings to pay off the car loan.”

  Just after Thanksgiving 2010, Scholl got a job with the Ross County Auditor’s Office at $8.50 an hour, but after tax withholding, that job actually paid her less than unemployment insurance had paid. For a year she limped along, borrowing from her savings to pay her bills. Then, a year later, in December 2011, she got a chance to work as a payroll clerk in the Ross County Sheriff’s Office, making $12.25 an hour. The pay was about half as much as her RCA salary. But, said Scholl, “I am thrilled—$12.25 an hour seems like heaven to me. I’ve been without work for so long, I really appreciate having that. And I feel very fortunate to have health insurance again because I am a diabetic.”

  The Making of the Debt Quagmire

  Pam Scholl’s nightmare of sinking into ever-deepening debt is a microcosm of middle-class experience. When you combine credit cards, auto loans, home mortgages, student loans, and other forms of credit, the average debt for every adult man and woman in America has nearly quadrupled since the 1950s. “We have gone from a society where most consumer borrowing was episodic and for special purchases, to a society where many families have to use credit to pay for ordinary household expenses and are permanently indebted,” University of Illinois bankruptcy professor Robert Lawless told Congress.

  The reason is that debt and bankruptcy follow the rise of easy credit.

  “Just a generation ago, the average family simply couldn’t get into the kind of financial hole that has become so familiar today,” observed Elizabeth Warren. “The reason was straightforward: A middle-class family couldn’t borrow very much money. High-limit, all-purpose credit cards did not exist for those with average means. There were no mortgages available for 125 percent of the home’s value and no offers in the daily mail for second and third home equity loans. There were no ‘payday lenders,’ no ‘live checks,’ no ‘instant money,’ and certainly no offers to ‘consolidate’ all that debt by moving it from one credit card to another.”

  “The single biggest determinant of bankruptcy rate is how fast consumer credit goes up,” adds Professor Lawless. After Congress deregulated consumer lending in the 1970s and 1980s, the market was flooded with complicated, high-interest, and potentially dangerous credit products that were sold to unwary consumers untutored in the fine print of credit fees and charges that kept them sinking into the debt quagmire.

  The Unnoticed Court Decision That Affects All Our Lives

  But the single biggest cause of exploding private debt, Lawless contends, was a U.S. Supreme Court decision in 1978 in the Marquette National Bank case. “That really opened the floodgates,” Lawless told me. “It’s the court decision that has had the most effect on people’s lives, that no one has ever heard of. It effectively deregulated the credit card interest rates. Banks hail that as ‘democratization’ of credit. Their attitude was, we can now charge 30 percent to people who would not qualify for a loan before, because they were too high a risk. For banks, these vulnerable borrowers are the most lucrative borrowers.”

  For the finance industry, the steep-interest credit card and, even more, the debit card became the ideal vehicles to sell to people with bad credit records, who would get mired in debt and would forever feed bank profits by making the minimum payments while interest and card fees dragged them deeper into debt.

  “If they make the minimum payment,… then that loan will take almost 20 years to pay back,” said Shailesh Mehta, whose firm, Providian Financial, helped pioneer marketing credit cards to low-income people—“bankrupts … no credits,” Mehta called them. He admitted to PBS Frontline correspondent Lowell Bergman that Providian never wanted these bad-risk borrowers to pay off their cards because the firm made so much money off high-penalty fees. They hooked customers, Mehta said, by offering 0 percent interest for a few months. “We made it look like it’s a giveaway and took it back in the form of … ‘penalty pricing’ or ‘stealth pricing,’ ” Mehta said. “In a strange way, the banks were charging [these] borrowers higher interest rates in order to give the wealthy people a break … because the people who have money were paying in full, and they were getting the break at the expense of the people who couldn’t pay in full.”

  “More than 75 percent of credit card profits come from people who make those low, minimum monthly payments,” Elizabeth Warren and Amelia Warren Tyagi reported in The Two-Income Trap, “and who makes minimum monthly payments at 26 percent interest? Who pays late fees, overbalance charges, and cash advance premiums? Families that can barely make ends meet, households precariously balanced between financial survival and complete collapse. These are the families that are singled out by the lending industry, barraged with special offers, personalized advertisements, and home phone calls, all with one objective in mind: get them to borrow more money.”

  Preapproved Credit—$350,000 per Family

  Once the lid was off interest rates because of congressional deregulation, the banks had a field day. They sold as much debt as possible. In the early 2000s, banks and credit card companies blanketed the nation with preapproved credit card offers totaling $350,000 per family. This profligate policy represented a complete reversal in lending strategy. A generation earlier, banks were extremely careful, almost stingy, about granting credit. They were quick to shut it off if a borrower got in trouble. But by the 1990s, banks had come to see slow-paying borrowers who were in financial peril as their most lucrative targets.

  As Pam Scholl’s story illustrates, one way to get off the treadmill of endless credit or debit card debt is to file for bankruptcy and get a second chance financially, much the way bankrupt corporations do. But as personal bankruptcies rose through the 1990s, banks and credit card companies saw the bankruptcy process as depriving them of the most profitable segment of their business.

  In the early 2000s, the financial industry began lobbying Congress to close the bankruptcy door, or at least tighten the terms for going bankrupt. They told Congress that “high-income deadbeats” were using bankruptcy to welsh on credit card debt. “The idea,” explained Professor Lawless, “was to make it harder for people to get to bankruptcy court. The harder it is, the more expensive it is, the longer people put off filing for bankruptcy, the longer they pay the big penalty fees to the banks.” Consumer advocates protested, saying the banks were squeezing helpless debtors who didn’t have the funds to pay with. The banks countered that they were targeting the “high-income deadbeat,” not the “honest and unfortunate debtor” who had truly run out of money.

  Two Million Bankruptcies a Year

  In 2005, the financial industry got what it wanted. Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which raised the legal and financial barriers to bankruptcy filings. As expected, the number of personal bankruptcies plunged from just over 2 million in 2005 to about 750,000 in 2006. But after a few years, bankruptcy filings climbed sharply again in the wake of mass layoffs and high unemployment. By 2010, bankruptcies were back over 2 million a year, evidence that even with tougher barriers to bankruptcy, financial distress among the middle class was more acute than five years earlier.

  What’s more, when experts examined who was filing for bankr
uptcy, it turned out that the banks and their lobbyists had misled Congress. As the financial industry had urged, the law was designed to block supposed high-income deadbeats from improperly filing for bankruptcy by instituting a financial “means test.” With the means test as a filter to weed out high-income filers, the average income of bankruptcy filers should have fallen. But that didn’t happen. Researchers saw no significant change.

  So instead of filtering out high-income cheats, the new law was actually creating obstacles for honest, financially busted debtors, just as consumer advocates had feared. As Professor Lawless put it, the law “functioned like a barricade, blocking out hundreds of thousands of struggling families indiscriminately.” So by the time people got to bankruptcy under the new law, they were in far more desperate straits than before. “The families in bankruptcy are much more deeply laden with debt,” one study found. “Their net worth, which has always been negative, sank further…. Families filing for bankruptcy are in ever-increasing financial distress.”

  Once again, the New Economy altered the old rules of the virtuous circle economy, and average Americans got hurt. In the Old Economy, bankers issued credit just to strong, creditworthy customers who typically paid off their debts. The go-go New Economy went for easy credit and higher debt for all, especially people with risky credit records, and many more people wound up in bankruptcy. Over the past five years, as the housing market nosed down and twenty-five million Americans lost solid, full-time jobs, more and more middle-class families turned to easy credit to try to stay afloat. That added to the profits of banks and credit card companies, but the more money they made, the more middle-class and working families sank into financial ruin.