Thursday, June 25, 2015

Retirement Security Options: Liberal and Neoliberal

by Neil H. Buchanan

My new Verdict column, published yesterday, was in many ways an unusual exercise for me.  True, it was on the topic of Social Security, which is one of my main areas of interest.  What made it unusual, however, was that I felt the need to respond to good news by saying, "Now, don't get any ideas!"  Allow me to explain.

Last week, The New York Times published a truly exceptional article describing a pleasant demographic surprise.  It turns out that the group of near-retirees and retirees currently in the 65-74 age range has beaten the odds and managed not to lose ground economically, despite the effects of the Great Recession.  This group happened to land in what one expert called "the sweet spot" of U.S. history, old enough to have qualified for defined-benefit pensions and to have bought their houses before the run-up in prices that preceded the bursting of the housing bubble in 2008.  Other than the very rich, this group is the only one that is not now worse off than it was in 2007.  In fact, as a group, they have managed to recover a bit more ground than they lost during the worst of the economic downturn.

As I said, this is good news.  As soon as I read the headline, however, my first thought was: "Uh oh.  This is going to be spun as proof that the older generations are screwing over younger generations."  Although I was pleased to see that the article itself did not go there, it is obvious that there is a cottage industry of people whose job it is to find excuses to attack "entitlements," such that any evidence that Social Security (or Medicare or Medicaid) is actually working -- even for just a small subset of people -- somehow becomes another excuse to cut the program.

This is not, moreover, limited to staffers for Republican presidential candidates.  When I wrote my first law review article on Social Security ten years ago, I found an article by a top legal scholar who argued that it was important to cut benefits to older people right away, because they were dying off so quickly that it would soon be impossible to take things away from them.  (This is not verbatim, but I am not exaggerating the point.)  Based on such logic, evidence that 65-74 year-olds are doing relatively well could quickly become, "Go after them now!"

Again, "doing relatively well" merely means that this age group did not lose ground, whereas the rest of the non-rich are worse off than they were before the bubble burst.  Going after this group because they have been able to maintain middle class status would be inappropriate, to say the least.  And as I argue in my Verdict column, doing so via cuts to Social Security would harm even the people who do not have houses and pensions.  That is, it would be an indiscriminate way to go about achieving a goal that is itself a dubious proposition.

As part of that discussion, I noted that the best way to make it possible to reduce government commitments to retirement security would be to make people less likely to depend on Social Security in the future.  However, neither of the two factors that have helped the people in the sweet spot -- private pensions, and housing appreciation -- is an option.  Housing prices are certainly not going to rise at the rates that they did during the last few decades, and they might even fall (at least in real terms) over the foreseeable future.  The most hopeful forecast on housing prices is that they will not do damage to the retirement plans of middle class people, not that housing will enhance retirement prospects.

Private pensions are not impossible to bring back.  In fact, changes in public policy over the last few decades enabled (one might even say that they encouraged) companies to stop offering traditional defined-benefit pensions.  Presumably, one could devise a way to return to the legal status quo ante.  Doing so, however, is unlikely to bring back the good old days, mostly because people now change jobs much more frequently.  If most people are likely to have multiple employers during their lifetimes, then the prospect of having an employer provide each worker with a private pension becomes logistically daunting.

Of course, one way around this would be to have all of a worker's employers contribute to her pension.  Again, this is possible, but it raises all kinds of difficult coordination issues, to say nothing of the possibility of gaming the system.  By comparison, consider how much of the adminstrative costs for health insurance companies is devoted to efforts to shift costs onto other insurers, the government, and the patients themselves.  If virtually every employer was on the hook for a private pension (remember, we are talking about defined-benefit plans, by which the employers bear the risk that the amounts contributed will not support the promised benefits), then devising rules for keeping every company on board would be a nightmare.  When we then take into account that there would surely be carve-outs for smaller businesses, and that many of the employers could be expected to go out of business, the private pension option looks worse and worse.

One could simplify all of that by having employers contribute to a general fund, from which pensions could be drawn.  But guess what?  That is what Social Security is!  When an employer hires an employee, 12.4% of the employees pay goes to Social Security.  As I have explained many, many times, it does not actually matter whether the money paid in is "saved" in the intuitive sense of being put in a "lock box" or even a deposit account in a bank.  Social Security is the method by which we eliminate the bureaucratic and legal nightmare that pensions would become, if we tried to rely on private alternatives of the old-fashioned sort.

In my Verdict column, I then pointed to what amounts to the neoliberal alternative to the liberal Social Security approach.  That is, if it were actually the case that people saved sufficient funds to support their retirement by drawing down bank accounts and selling financial assets during their golden years, then there would be less (or no) need for a government-coordinated pension program like Social Security.

As we know, however, people do not save enough for their retirements, and there is no reason to think that they would suddenly become savvy investors if the Social Security blanket were taken away from them.  Research over the course of decades demonstrates over and over again that people are myopic, that they are easily confused by too many options, that private investment companies charge excessive management fees and generally figure out ways to divert money from savers, and so on.

All of which is simply a way to back into the only real debate that remains regarding retirement security.  The nominally "pro-market" or "individualistic" approaches simply amount to getting people to save directly, rather than paying money into Social Security.  Because no one seriously believes that this can go well for the vast bulk of savers, such private accounts would have to be carefully regulated.

Moreover, because of income inequality, the only way to allow low-earning workers to have a decent retirement is to subsidize their savings.  A proposal during the Clinton Administration set up a sliding scale, with the lowest earners receiving (if I recall correctly) $7 to add to their retirement accounts for every $1 that they deposited from their paychecks.  Even that proposal, however, could only work if the worker actually is able to set aside money each month.

Or, we could require people to save, and have the government subsidize the savings of low earners.  But again, guess what?  That is what Social Security already does.  The George W. Bush Administration's partial privatization proposal simply amounted to diverting a fraction of payroll taxes to regulated savings accounts, which were supposed to provide higher returns than Social Security.  But because of management fees, the promise of systematically higher returns was hard to take seriously.  Moreover, to the extent that the economy grows quickly enough to provide higher returns on private retirement accounts, it can also support larger Social Security benefits.

The liberal vs. neoliberal choice, then, boils down to saying something like this: "We cannot go back in time to have private companies provide pensions.  One way or another, we are going to get people to contribute to a retirement system.  Social Security does this directly, and at very low administrative cost.  Pseudo-market alternatives merely dress this up in the garb of individual choice, but mimicking what Social Security does through private accounts is risky and expensive."  We are actually not choosing whether to try to guarantee retirement security.  We are only figuring out whether we want a system with low administrative costs, or with high costs and the increased probability that savers will be bilked out of their money.

1 comment:

djg273 said...

Are private account retirement plans such as 401(k) and 403(b) plans the type of "pseudo market alternatives" the article is intended to criticize as unworkable? I ask because the post treats the "pro-market" approach as a hypothetical concept rather than a well established form of retirement savings. Take for example the claim that "because no one seriously believes that this can go well for the vast bulk of savers, such private accounts would have to be carefully regulated."

Fortunately retirement plans are carefully regulated. I agree that "people are easily confused by too many options [and] private investment companies charge excessive management fees and generally figure out ways to diver money from savers." However, ERISA imposes heavy legal obligations on plan fiduciaries to select suitable investment options, monitor those investment options, limit plan fees, etc... I am skeptical of the claim that the rate of return for a dollar paid in payroll taxes will yield greater returns than a dollar invested in my 401(k) (but maybe the empirical evidence shows otherwise).