Over the past couple of decades, American companies and American state and city governments have descended into financial purgatory just the way, in The Sun Also Rises, Mike Campbell says he went bankrupt: “gradually, and then suddenly.” A deadly combination of generous pension and health-care packages and years of passing the buck has left institutions like General Motors, Ford, and New York City struggling to fulfill old promises. Companies and governments did an exceptionally good job of evading their impending problems for as long as possible. But actuarial reality has now caught up with them. And, as Roger Lowenstein demonstrates in his vivid and scathing new book, While America Aged, the havoc that reality has already wreaked is nothing compared to what’s in store.

Retirement benefits are, at first glance, a somewhat unlikely source of crisis. They are, to begin with, a relatively new innovation—while American Express introduced the first corporate pension in 1875, it wasn’t until after the Great Depression that pensions became widespread. And in principle, pensions should be relatively simple to pay for: it’s no surprise that workers get old, so you can roughly calculate how much you need to set aside every year to pay what you’re going to owe. Unfortunately, as Lowenstein shows in engaging detail, in their short life span, pensions have become a remarkably destabilizing force, metastasizing out of control. Corporations have responded with a massive rollback—less than 20 percent of companies now offer traditional, defined-benefit pensions. But they’re still on the hook for all their past promises, to the tune of hundreds of billions of dollars, while governments have found it essentially impossible to get rid of pensions or even to trim them back.

So how did this happen? The simple, and true, answer you get from Lowenstein’s book is that the people in charge didn’t care enough to stop it, and often actively abetted the situation. Pensions were an easy way for companies and governments to avoid labor unrest while still protecting their bottom lines. As Lowenstein writes: “A sort of devil’s bargain is struck, whereby the unions (which know that pensions are constitutionally guaranteed) push for benefits that are beyond the ability of governments to properly fund. The unions get their promises; the politicians get to satisfy a powerful constituency. And by shortchanging their pension funds, they can run their budgets on borrowed time and put off the necessity to tax until a later generation.”

Lowenstein looks in detail at three institutions in his book: General Motors, where Walter Reuther and the United Auto Workers pioneered the extension of retirement benefits to blue-collar workers; New York City, which has spent decades bending over backwards to placate municipal unions; and San Diego, where a toxic mix of corruption, cronyism, and anti-tax fervor destroyed the city’s finances. The dynamics in each situation were different. But the way the leaders—CEOs, mayors, governors, and labor negotiators alike—dealt with those challenges was surprisingly, and infuriatingly, similar. They nearly always chose the easy alternative over the hard one. They put off till tomorrow what they didn’t want to do today. What Lowenstein shows is that the pension crisis was not an inevitable problem. It was, instead, a man-made disaster.

Part of what makes this disaster so troubling, of course, is that its origins were so hopeful. The success of the UAW and other industrial unions in winning health-care and pension benefits and a reasonable retirement age for their workers has to go down as one of the most important social advances of the last century. It was a victory that helped make postwar America a genuinely middle-class society. Yet once having won those benefits, unions could not stop themselves from continually asking for more.

It’s easy enough, then, to paint the unions as villains, and there are places in While America Aged where Lowenstein hints at that conclusion. Certainly some of the demands unions have made (and won) seem, in retrospect, absolutely absurd. It’s also true that industrial unions have been surprisingly obstinate in their refusal to adapt to new realities, like the spread of foreign competition in the auto industry. Nonetheless, the unions were ultimately looking for what all Americans seem to want: more. They were asking to be paid as much as they thought they were worth. It was the job of company executives and of city and state officials to figure out what they could and could not afford.

And that, of course, is precisely what they did not do. Instead, the overseers at GM tiptoed through a kind of bookkeeping loophole. “Retiree benefits were a future cost,” Lowenstein writes. “Forced to choose, executives inevitably found more slack in future budgets (if they bothered to calculate them at all) than in present ones. Thus they repeatedly offered richer pensions later in exchange for modest increases in wages now.” San Diego officials engaged in a similar shell game. Their desire not to raise taxes made the city council look at pensions as an ideal vehicle for funneling money to city workers without actually having to pay for it.

Since these decisions amounted to mortgaging the future to keep peace in present, they seem obviously wrong in retrospect. But the truth is that they were obviously wrong at the time they were made, which is what makes Lowenstein’s story so infuriating. It’s not that offering pensions was a mistake. But offering—and continually expanding—pension commitments without preparing to meet them was impossible to defend.

What makes the behavior of these institutions so mysterious is that aging is not exactly a new process. This is the nice thing about looking at an actuarial table: it makes it very clear what you can expect. (The rapid inflation in healthcare costs made forecasting the future value of health-care benefits more difficult, but Lowenstein shows that as far back as the 1960s, auto executives were aware that health-care inflation was a serious problem.) Yet whenever actuarial reality told them something inconvenient, Lowenstein’s protagonists chose to ignore it. When their pension funds had a good year in the stock market, they often spent the proceeds instead of saving them as a bulwark against the bad years. When they needed to make their pension obligations look smaller, they boosted the expected return on their investments, creating the illusion that the fund was in better shape than it actually was.

The glaring question is why. As Lowenstein sees it, the people making the decisions were too insulated from the consequences of those decisions. And again, they had incentives to take care of things in the present while letting the future go to hell. After all, the nature of retirement benefits is that by the time the bill comes due, the people who negotiated the deals are usually long since gone. Someone else can pay the costs down the road.

In that sense, While America Aged is about more than just pensions. It’s really an excellent case study of a bigger and more general problem in the modern economy, namely the principal-agent problem. Today, we (the principals) have to put more and more responsibility for our lives in the hands of others (the agents), whom we pay to represent us. (Shareholders are the principals, CEOs the agents; voters are the principals, elected representatives the agents.) And sometimes this works great. But what’s become increasingly clear is that unless the incentives in a principal-agent relationship are carefully designed, agents are often going to look out for their own interests first.

The recent boom in reckless behavior by people working for mortgage brokers and investment banks—behavior that in some cases wrecked entire companies— can be explained in large part by the fact that the people who made the bad decisions had a short-term interest in doing so. And pensions, of course, exacerbate the principal-agent conflict, because of the factor of time. In the short run, taking a tougher line on pensions means that executives need to pay higher wages, raise taxes (or cut profits, if they’re running a company), or risk a strike. None of those options are especially attractive. By contrast, if they’re generous with pensions, they get to keep the peace and not give up very much in the present. Everyone wins—except the future citizens or shareholders, now saddled with hundreds of millions or even billions of dollars of debt. As Lowenstein suggests, this was a recipe for disaster: “Retirement schemes necessarily involve a treaty between today and tomorrow, and on a mass scale. It is no surprise that so many have run aground, or that when they do, financial upheaval is the result.”

After reading Lowenstein’s book, it’s hard not to come away with a picture of leaders as almost weak and self-interested. But there’s another piece of the equation: most of us, as shareholders and taxpayers, also prefer not to face reality. The quintessential case of this is San Diego, where citizens accepted the delusional and outright deceptive statements of their politicians because they didn’t want to pay higher taxes, even though San Diego has some of the lowest taxes in the country. San Diego is an extreme case of a dysfunctional city, but it captures something important about voters, which is that they, too, seek to avoid short-term pain even if it means longer-term suffering.

The other problem, of course, is ignorance. There just aren’t that many people who understand how pension benefits really work, and institutions are good at covering up what they’re doing, at least in the short run. (Not long before everything started to fall apart in San Diego, Lowenstein writes, “to the outside world, San Diego was the picture of health.”) But to some extent, this ignorance is willed. Lowenstein demonstrates that, particularly in places like New York, editorials have been inveighing against pension giveaways for at least three decades. And while the local paper in San Diego did a very poor job of covering the burgeoning crisis—in part, the author suggests, because of its anti-tax ideology— one would be hard-pressed to say that the mainstream media have ignored the pension debacle. Lowenstein himself has done a number of pieces for the Times on this very subject.

Ignorant or indifferent voters, greedy workers, and shortsighted and self-interested executives: that’s not really a recipe for finding a way out of a crisis. So it’s not surprising that while Lowenstein ends his book with some sensible suggestions, the overarching tone of While America Aged is unrelentingly grim. To some degree, things are already changing: with fewer and fewer companies offering pensions, and with union power on the wane, there will be fewer budget-busting promises being made. But that creates problems of its own, given the finances of Social Security and the failure of most Americans to save. A lot of people are going to have keep working a lot longer, and be much poorer after they retire, than they had once counted on. There is, on the whole, not much solace to be derived from the situation. America is aging. Too bad it’s not doing so gracefully.

 

James Surowiecki is a staff writer at The New Yorker and the author of The Wisdom of Crowds.