More on the Squeeze

June 21st, 2011 at 7:07 pm

The work I’ve been doing on the middle-class squeeze is for a hearing to be held by the Senate Health, Education, Labor and Pensions Committee on Thursday at 10.  (Webcast:

Interestingly, most of the folks who are testifying are “real people” struggling with all the stuff I’ve been blogging about.   I think it’s great that in the midst of all this mishegoss on the debt ceiling, budget, deficits, stimulus, the committee is taking the time to look at the longer term challenges that middle class families have been struggling with well before the recession took hold.

There are so many dimensions to this squeeze.  Take, for example, retirement security.  The figure below highlights the complete reversal in pension coverage from defined benefit pensions (a fixed guarantee) to defined contribution plans (like a 401(k) plan), where your pension benefit varies with market returns.  It’s a classic risk shift, a change that shifts the risk of income adequacy in retirement from employers to workers and their families.  The figure reveals a complete reversal in share of coverage between a guaranteed and variable pension benefits.  And of course, many in the middle class don’t have even variable benefit pension plans.

Here’s what Sen. Tom Harkin said today in announcing this hearing:

“…even people who have spent their whole lives playing by the rules are seeing the future they dreamed of slip out of reach. People’s paychecks aren’t rising, but the costs of essentials like gas, health care, and college education are soaring.  With this squeeze on family finances, the hope of a middle class lifestyle with a house, a car, and a secure retirement is fading for far too many Americans…it’s time to recognize that this is not the way things have to be. Our economic recovery as a nation depends on rebuilding the middle class, the backbone of America. It’s time we showed the backbone to defend it.”

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7 comments in reply to "More on the Squeeze"

  1. Bruce Ross says:

    In a dynamic economy with today’s level of creative destruction, is it really still viable for companies to bear that long-term risk? And is it really sensible for workers to rely on those companies?

    My understanding is that it was in part retirement promises to the UAW that left General Motors with unbearably higher costs that didn’t go away even when its market share shrunk (leaving it less of a sales base to spread around those fixed costs, and thus feeding a death spiral that seemingly inevitably ends in bankruptcy court). Newcomers to a market will always have a built-in advantage over older companies with formerly large workforces.

    Also, do we really want companies that must react to a recession and bear market (and thus pension-plan shortfall) by investing not in new products but in shoring up pension funds? We’re learning all too painfully in California that the rules for pension funding tend to exacerbate the effects of the business cycle.

    I’d be very curious about potential methods to re-create the (apparent) retirement security of the defined-benefit pensions, but I’m not sure businesses are the right place to park that risk.

    • Jared Bernstein says:

      Fair points. Of course, many large companies have been doing very well for a while and have yet shed their DB pensions for DC (or nothing). So part of this is less about how much there is to set aside for retirement and more about how wealth is distributed.

      But if you’re right, and the days of pvt firms providing DB pensions are behind us, we can still afford greater retirement security. I like the ideas of Teresa Ghiladucci in this area: eg,

      Given that you’re “very curious” about this, peruse her website also:

      • Bruce Ross says:

        Hey, many thanks for the reading material!

      • Jieun says:

        This is just another exlmape of the looting of America. I’m tired of people saying we made poor choices to wind up in the fiscal mess we’re in. This just another exlmape of legalized theft. Bailouts, subsidies, guaranteed pensions all equal legalized theft. Is it any surprise that gold is going parabolic. I guess you can’t just print it.

  2. Kevin Rica says:

    If we say that we want people to be able to earn middle class wages and benefits for hard work, we are implying that employers must pay middle class wages and benefits. There is no other way. In a middle class world, you can’t pay poverty level wages.

    But the left in this country no longer insists on middle class wages. They insist that employers have aright to pay poverty level wages to immigrants and “guest workers” if Americans are “too lazy” or “unrealistic” about their wage demands. As long as we insist on the right of employers to pay poverty level wages — we are arming employers against the middle class.

  3. marycontrary says:

    Risk is shifted, but the motive is ultimately cost. DC plans are cheaper — a lot cheaper (in part because of the risk shift). The move to DC plans is part of the big shift in where the wealth goes. More for the top, less for the middle and bottom. And instead of dealing with retirement security as a problem, our policy-makers have chosen instead to facilitate the disappearance of DB plans through legislation like the PPA and to make sure that Walmart has a steady supply of catfood-eating senior citizen “greeters” by further eroding the replacement value of social security. Nice.

  4. Taryn Hart says:

    We – the middle class – have no choice but to put our money into 401(k)s. If I had the choice of paying more into Social Security, with an employer matching contribution, I would. They’ve already “privatized” pensions and still want Social Security. It’s been a disaster to the middle class! Why aren’t any Dems fighting to get it all back? Give workers the option to have their entire retirement funded through contributions to Social Security – so I pay the mandaotory FICA and then can pay additional amounts (plus employer matching) to Social Security. Then, of course, I would get additional Social Security benefits when I retire that, hopefully, is something resembling a reasonable “pension” and not the near poverty level benefits seniors currently get. Yes, I know, it’s far too radical – all money must first march down Wall Street so that they can take a cut. This happened long ago with “pensions” and Wall Street won’t rest until it gets Social Security.