A Reminder Why Protecting Social Security Is So Important

January 9th, 2013 at 2:08 pm

Take a look at this useful set of pictures from the BLS on the not-very-healthful status of defined benefit (DB) private pension plans in America today (DB pensions provide guaranteed, periodic payments in retirement).  A quick glance led me to believe that these data points should be a front-and-center defense against those who would cut deeply into Social Security and Medicare benefits.

In sum, as DB private pensions weaken, we need to strengthen public ones.  The loss of DB private pensions—and their partial replacement by financial-market-dependent defined contribution plans—represents a shift in the locus of risk of retirement insecurity from employers to workers.

Simple economics dictates a role for government to absorb the risk as it can do so far more efficiently than individuals on their own.  That means ensuring the viability of social insurance.  That, in turn, is not an argument against “entitlement reform,” whatever that is.  But it’s very much an argument that such reform must absorb the added risk in such a way as to protect vulnerable retirees as private pensions fade.

–The first figure shows the decline in coverage from different surveys by the Bureau over the years.  Looking at the all-workers part of the figure, private coverage is down from 35% in the early 1990s to 18% in 2011 (10% of private workplaces offer DB pension, covering 18% of the private workforce).

–Among participants in DB plans that exist today in the private sector, 25% are in “frozen” plans, meaning new employees are not eligible, and, in some cases, the plans are no longer accruing benefits for active participants.

–Even in private industry, there’s a huge union advantage to DB pension receipt (see second figure).  In the state and local sector, 78% of workers have such coverage.  This has, of course, been a huge bone of contention in recent state politics—the union advantage in such coverage has served as a big motivator for union busting campaigns in Wisconsin and Ohio.

A quick word on this last point.  I’ve had discussions about these trends, including the union difference, with high-level policy makers who argue for downward convergence.  That is, they argue that we can’t defend public DB pensions when so many private workers have lost theirs.  Why, I ask, shouldn’t we argue for upward convergence?  Why accept that the public sector should go the way of the private?

The answer tends to reference globalization, as in we can’t compete with countries with lower pension standards than our own.  I find this response deeply confusing.  You don’t globalize to make your economy worse off.  You do so to seek comparative advantage, otherwise you’re better off with autarky.  And, in fact, while more international trade has of course had negative distributional consequences, it has arguably added to macroeconomic growth relative to a protectionist counterfactual.

So if we’re better off overall due to trade, why is globalization an explanation for why our workforce should expect less retirement security?  And if it is, why should anybody in the bottom 80% support more globalization?  Because it enriches multinationals and provides cheaper goods at Walmart?  Sorry, but this logic is deeply screwed up.

If globalization means private industry can’t support DB pensions, than some of the benefits of globalization should be used, through the tax system, to strengthen and expand retirement security through social insurance.

QED.

Source: BLS, link in text.

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9 comments in reply to "A Reminder Why Protecting Social Security Is So Important"

  1. PeonInChief says:

    Social Security is particularly important for women, as we are less likely to have pensions, and many who have pensions through their spouse lose that income when the spouse dies.

    One topic that doesn’t seem to be up for discussion is the huge subsidy to the financial services industry that comes with defined contribution pension systems. These are hugely more expensive than defined benefit systems, as the larger pension funds get “wholesale” rates. Defined contribution pensions are charged the higher retail rates, which can cost employees 20-40% in fees and charges.


    • Phil Perspective says:

      I’ve had those who know tell me that pensions, as a lot of us know them, are infinitely better than 401(k)’s. Cheaper and all, you name it. I’ll let you guess why they’re being done away with.


    • CTObserver says:

      I don’t want to be harsh, but there’s generally no reason for widows to lose pension benefits when their pension-earning husband dies. When any married worker retires, he or she is given a choice of the type of pension he or she draws: Option 1 is a “Single Life Annuity” – the beneficiary (retiree) gets a fixed amount per month until he or she dies. Option 2 is a “Joint and Survivor Annuity” – the payment continues until both the retiree and spouse die. There are different flavors of “Joint and Survivor Annuity” – the surviving spouse may get the same payment after the first death, or a reduced payment (typically 50% of the previous level). Option 2 provides lower payments from the beginning, due to the longer expected payment period, but the retiree can not (by federal law) choose Option 1 without the spouse’s consent.

      You have a legitimate point that many 401(k) plans have unreasonably high fees; I expect that this is because the plan managers offer employers lots of conveniences which make the plans painless for the employers. It seems like a good idea to encourage greater competition in the provision of these services.


  2. Fred Donaldson says:

    We shouldn’t confuse globalization with American corporate greed and the failures of inept politicians, who depend too much on wealthy contributors.

    The combined national export leadership and wage earnings power of Germany refutes the low wage, low benefit mantra, and argues for trade unions, apprenticeships, more technical schools, and higher wages for engineers to attract the brightest. plus some worker representation on business boards of directors.

    Germany’s “social security” pays a benefit about twice the average of middle class workers here, because we use a hobbled plan that returns less to the worker on a percentage basis, the more you contribute to Soc. Sec. For example, I paid in three times as much as workers with half the benefit, while under a fair system I would only pay twice as much. This regressive benefit is little understood until folks apply for Soc. Sec., and find they are at a third of previous wages and facing cuts to even that.

    France, Australia, Italy, Canada also have a similar deal, and even GB has a guaranteed small pension, plus one based on contributions.

    The proper approach would be to give everyone a small guaranteed benefit, regardless of whether they worked or not, when they reached 65 (not 67 as projected, or 70, as hoped by the hawks). In addition, retirees would receive a benefit based on what they contributed, what employers contributed, and some modest interest from the government for their funds (which might be used to buy real, guaranteed value, Treasury bonds, held in your account.)

    Disabled workers should be covered by general funds, meaning the richer taxpayers would have to also contribute fairly to a public problem, not just the working stiffs. A nice financial tax would help here and show the patriotism of the finance industry.

    Many other countries also use high restaurant taxes to fund social programs. The better you eat, the more you pay, and in Canada it’s steep, but nobody seems to stay out of the thousands of delightful resturants in Toronto and Montreal.


  3. wkj says:

    Larry Kotlikoff is not my favorite data source, but this NYT article for 7/31/10

    http://www.nytimes.com/2010/07/31/your-money/31money.html

    reports the results of his computations of the [impossible or at least implausible] increases in private savings that would be necessary to offset an increase to age 70 in the Social Security normal retirement age. Kotlikoff equates this NRA change to a 19% benefit reduction and calculates that the required increase in personal savings to offset this benefit reduction would reduce disposable income by about 10% in some typical cases. (The results vary slightly for his examples of couples ages 35, 45, and 55.)

    At the time, I thought this analysis would be a strong argument for the preservation of current SS benefit levels, but I have not seen any comparable argument since then.


  4. PJR says:

    Keep arguing for “upward convergence” please. The civil service system used to provide a model (and competition) for the private sector regarding wage structures and benefits that Americans desired. Today, conservatives complain that low-wage government workers earn too much, and high-wage government workers earn too little. No, the problem is in the private sector where inequality grew out of control, not in the government sector.


  5. MarvyT says:

    Wow, Jared explains a lot in a very concise space. I agree with all of it. The only thing I would add is the fact that some state and local governments also have employees with a defined benefit retirement but only offer expanded 401k plans to new employees. Republican governors and legislators seem to love copying the worst ideas from the private sector.
    In the 60s and 70s, financial planners told us to plan our retirements using a 3-legged-stool model. We were to count on personal savings, Social Security and a company pension. Anyone having all three in the future will be very lucky.


  6. CHART: Pensions Have Been Disappearing For Decades | Political Analytical – Insight and Analysis on Politics and Reason says:

    […] White House economist Jared Bernstein noted, “as [defined benefit] private pensions weaken, we need to strengthen public ones. The loss of DB private pensions — and their partial replacement by financial-market-dependent […]


  7. CAinDC says:

    The issue as I see it is that things continue as they are expected to Social Security will eventually go through its trust fund — and then automatic cuts will take effect to make payout be ~77% of expected.

    This is obviously an unacceptable outcome, so the question is what do you do to avoid this scenario.

    The shortfall can either be made up by cuts to SS, or by revenue increases, or a combination of both.

    To me it seems wrong to focus entirely on spending increases, as this would either require an increase of the regressive payroll tax percentage, or to subject all income to said payroll tax increase.

    The former is obviously unacceptable, as its burden will fall the hardest on poor and middle class workers. The latter better, but given all the budget cuts to the rest of the government, it seems wrong to direct what would be a large tax increase on the wealthy entirely to the elderly, who as Kevin points out, as a cohort are among the most well off.

    If taxes are increased substantially on the wealthy they should go to boosting employment, helping children and people in poverty, or just keeping the government running. Putting all of that money into Social Security, makes all of those other goals harder to achieve.

    Thus it seems the best solution is to a combination of cuts and revenue increases to social security — while keeping payouts to the poorest recipient of SS the same (or even boosting).

    It seems like there are a lot of ways to do this — changing the PIA “bend points” to make SS more progressive, increasing the Windfall Elimination Provision / Government Pension Offset, etc.

    Although it would be best to keep the retirement age where it is today, if the above (in combination with a limited raising of the wage basis cap) is not enough to keep the program solvent, even a small increase of the retirement age seems more fair than to drastically put more money into SS (and thus rest in the rest of the government)


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