Martin Gelter, an associate professor at Fordham Law, arrived from Austria to live and work in the United States. When he received his first American retirement package he became intrigued at how the use of 401(k)s in America differed from Europe’s preference for government-backed social security and traditional pension plans.
As a specialist in comparative corporate law and governance, Gelter is prone to question fundamental assumptions of accepted corporate systems. Where the 401(k) is concerned, he said being from Europe has only heightened this critical viewpoint.
“When you come from somewhere else it’s easier to see the social context of changes within corporate law,” he said.
In the past 30 years, most American corporations have abandoned defined benefit pension plans, in which employers absorb changes in the value of the plan’s investment portfolio, for 401(k)s, individual defined contribution retirement accounts that are to a large extent invested in the stock market. Gelter researches how the large number of shareholders created by all those retirement accounts might influence corporate governance.
With so many workers’ retirement funds reliant on the stock market, the social significance of corporate governance is, naturally, greater in the United States than in Europe, and America has a population more strongly dependent on the stock market.
“The general perception in Europe is that the stock market is where people with too much money go to invest. You don’t hear middle-class Europeans talking about the stock market the way they do here,” he said. “This is why pursuing the interests of shareholders is more developed in the United States.”
In much of Europe, retirees depend to a much larger extent on public pay-as-you-go plans analogous to Social Security, instead of private plans.
Gelter explored the development in detail in an award-winning 2013 paper, “The Pension System and the Rise of Shareholder Primacy.” In the paper Gelter argues that a shift from “managerial capitalism” to “shareholder capitalism” is a fairly recent development, and that the road to 401(k)s was paved by failed pension plans.
He cited the noted Studebaker-Packard collapse that left workers high and dry and led to the Employee Retirement Income Security Act (ERISA) of 1974. As ERISA made it more difficult and costly for corporations to create and manage defined-benefit pension plans, it precipitated the current penchant for defined contribution plans, which took hold in the 1980s, he said. Nevertheless, pensions are still used by many municipal governments and the federal government.
“The European various systems are publicly subsidized, so you have to hope somewhere down the line that the government will still be able to pay for it,” he said. “Imagine being a public employee in Detroit or Greece right now.”
But with the memory of 2008 financial crisis still fresh in the minds of many Americans, the stock market isn’t a sure thing either.
“Taking an exaggerated view on both systems, for some the joke is that it seems like a policy choice between a Ponzi scheme and a casino,” he said.
The pay-as-you-go systems must increasingly be subsidized by taxes, as the number of retirees collecting pensions grows while the number of workers stays the same, said Gelter. As a result, the Organization of Economic Cooperation and Development (OECD) has recommended that European countries make the shift to private retirement plans, and many are doing so.
“These changes are linked in part due to overburdened government budgets,” he said.
Gelter said the shift toward private retirement accounts is a major factor in why corporate governance systems are becoming more alike around the world.
“There’s been a lot of discussion about convergence in corporate governance practices toward the model of the English-speaking countries,” he said. “I am now tracing how saving habits are changing in countries that didn’t have them before OECD recommended them, and how this effects corporate governance in those countries.”
Other factors are fostering convergence as well, he said, including American and British pension funds, mutual funds, and hedge funds.
“These investors go around the world and buy shares everywhere,” he said. “That means that corporate ownership structures everywhere are increasingly looking more similar. That means that the corporate governance is starting to look similar as well.”