A wobbly three-legged stool
Gene Sperling has penned the best simple explanation I've read of how a pension and disability system should be structured, and where private accounts would fit into such a system. His pre-obituary for the bamboozlepalooza, "
Bush Private Accounts Are Dead Shark" (HT Woody Allen), will be read mainly for its assessment of GOP and Dem tactical maneuvering. But it is actually a tidy little essay on the principles of a "three-legged stool," which should underpin the logic of any scheme if it is to be supported by Democrats and reasonable Republicans.
Sperling expresses far more succinctly the
key points I made more than three months ago, when last I took up the dreaded Social Security topic.
Social Security is simply the wrong vehicle for pushing the worthy and important goal of increasing ownership and savings among working Americans. In our three-legged retirement system [government benefits, employer-based pensions, personal investments]... Social Security is the only leg free of market and economic risk.
When communities were devastated by corporate scandals or bankruptcies in 2001 and 2002, many families saw not only their pensions dissipate, and retiree health benefits evaporate, but even their housing values decline as their hard-hit neighborhoods spiraled down.
The only part of their financial package that didn't join this spiral was Social Security. With privatization, those families would have seen their Social Security benefits drop, as well. That is why those of us who support new investment incentives like Universal 401(k)s should be the ones most adamant about the importance of keeping the Social Security leg of our retirement system completely risk-free.
Sperling then proceeds to outline why it's important for the three legs to be kept separate and distinct.
The second substantive rationale for a hard "no" on privatization is that virtually every private-account plan is designed to make Americans undervalue the social-insurance benefits of Social Security and overvalue their private accounts.
To see why, imagine a father who decides to invest $5,000 in the market and $5,000 in a combination of fire insurance, life insurance, and auto insurance. After one year, he happily notes that his market investment has risen 6 percent. Yet, because he neither died, saw his house burn down nor experienced a serious auto accident, he concludes he got a negative annual return on his $5,000 insurance investment and, therefore, cancels all of his insurance policies.
Of course, this father would be a fool. No rational person measures the value of insurance by an annual return. Yet, when Bush tells Americans to compare the return on their private account with the return they get with a Social Security system -- which provides valuable insurance against poverty, devastating disability, and the early death of a provider -- he encourages exactly that foolish comparison.
And here's the pernicious effect over time of Bush's political "optics" in action:
Bush leads Americans to ignore the value that goes to the recipients of survivor and disability insurance -- almost a third of all Social Security beneficiaries -- and the almost 100 percent of workers who can go to bed knowing that if such misfortune occurs, Social Security will help their families maintain a modicum of economic dignity.
Bush's plan is designed to even further exacerbate this false comparison. By requiring borrowed funds for private accounts to be paid back not from the accounts themselves but by reducing Social Security benefits, his plan is designed to make private accounts seem deceptively large and Social Security benefits appear deceptively small.
This absurd design serves only one purpose: to encourage the healthy and the well-off to misconstrue Social Security as a bad deal.
Now, you may say, it may or may not be a bad deal for the healthy and well-off. But isn't the real point that the current program is more than is necessary to provide a safety net to keep folks from really falling through the cracks. Wouldn't it do the trick to provide a means-tested small safety net for everyone, with a bigger private investment portfolio portion that varies for each individual by the size of his or her contributions? And I would respond, that depends what's happening with the other legs of the stool -- not merely from the vantage of individuals but for the overall structure of the economy.
We need to take Sperling's analysis one step further -- to what's happening with the second leg of the stool, employer-based pensions. This is the story of the
rapid demise of the defined-benefit system. Business has been shifting to defined-contribution plans at an accelerating rate, leaving the financial risks with the employees. According to
Business Week:
The number of defined-benefit pension plans has plunged from 112,000 in the mid 1980s to fewer than 30,000 today. The tally of workers earning a pension has fallen more slowly, but their ranks now total just 17 million, down from 22 million 20 years ago.
Where defined-benefit systems have survived, they are increasingly endangered species. Many plans are experiencing crises in funding, and they remain most common in "legacy" industries like the older airlines and autos. These industries simply cannot continue their previous levels of employee benefits and stay in business.
The result has been a growing
crisis at the Pension Benefit Guaranty Corporation, where it is rapidly losing its ability to fund its liabilities from premiums. To compound the difficulty, as the
GAO just reported this week, the government's current pension accounting rules allow companies to use techniques that can mask significant funding shortfalls. Any "cure" for the PBGC's own balance sheet will undoubtedly accelerate the move away from defined-benefit plans, even as the mopping up of old problems grows more expensive by the year.
Give the Bush Administration credit in one sense -- they have proposed to
address the PBGC issue head-on rather than continue to temporize, despite screams from many industries. The PBGC problem is frequently described as an "S&L crisis" in the making, and the Bush Administration seems to have
taken the lesson from the S&Ls to heart. Continuing to tinker with the rules to accommodate an arrangement that no longer makes much economic sense is simply running up the costs while delaying the inevitable. The PBCG isn't going to "grow out of" its dilemma any more than the S&Ls did. And make no mistake about it -- the outcome will be the same in both cases -- the disappearance of a type of financial service that has lost its economic logic as the structure of US competition has shifted. The only question is when, at what cost, and who will bear those costs.
The Bush Administration's approach to the PBGC is an implicit acknowledgment that global competition has made defined-contribution arrangements -- those that shift financial risk to employees -- the only realistic option for most individual employers. But when we look at this shift in financial risk from the view of American business as a whole, the picture is becoming
far less attractive. A system without predictable levels of retirement income is a system in which a considerable portion of the consumer confidence and spending power of the American middle class would be subject to the volatility of investment portfolios. In three-legged stool terms, over the past few decades one of the legs of the stool has started to change length frequently and is coming loose -- making for a rather wobbly stool.
Now why would we compound this financial uncertainty, exacerbate business cycles, and reinforce financial crises, by cutting the size of the one leg that is fixed and steady? This is one of the reasons why most captains of industry and finance (other than the sell-side guys in the brokerage firms) have been noticeably missing in action on the score of privatizing Social Security. They understand that the health of the American economy and American business depend on a secure, confident middle class. They know full well that over the past decades financial risks have been shifting from business to individuals. Few but the true-believers see much virtue in shifting more risk onto individuals from a widely-accepted, easily administered government program.
Shouldn't Democrats, as well as US business and labor together, be supporting policies that strengthen both legs of the stool?
For the employer-based-leg of the stool, it's time to face up to the fact that defined-benefit plans are going to be phased out over the coming years. The costs to both individual employees and taxpayers may be extremely high if corporations and unions persuade Congress to delay the day of reckoning. Shouldn't we be pushing for the orderly conversion of existing defined-benefit plans to defined-contribution plans in the private sector?
And as the financial security of the employer-based-leg of the stool decreases, shouldn't we be strengthening, not weakening, the Social Security leg of the stool?
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