Wednesday, November 13, 2019

Job-Linked Benefits Revisited

by Michael C. Dorf

My latest Verdict column takes the recent election in Argentina as a point of departure to argue that everyone would be better off if we did not regard demotions as shameful. In that election, I note that Argentines elected a former President, Cristina Fern├índez de Kirchner, as their Vice President. Argentina has a two-consecutive-term limit on the Presidency but no lifetime term limit, so Kirchner may regard the Vice Presidency as a stepping stone back to the Presidency (in the same way that Vladimir Putin allowed Dmitri Medvedev to keep the President's chair warm for him while he cooled his heels as Prime Minister).

I explain that not every demotion offers a clear path back to the better job but that there will often be reasons why a "lesser" job is better than or at least as good as a more elevated one. That's the column in a nutshell, but interested readers should check it out for more details and examples.

Here I want to connect a point I make in the column to a recent Dorf on Law essay by Prof Buchanan. I note in the column that with a few exceptions, we no longer have an economy in which workers can expect to land a job with a single firm and then stick with that firm until retirement. Rather, millennials, Gen-Z, and subsequent generations (as well as Gen-Xers and Boomers still in the workforce) can expect to change firms and even lines of work with some frequency. In the column I say that this fact ought to make people less concerned about "demotions."

In addition and more tangibly, frequent job shifts also underscore a point made by Prof Buchanan last week: Our system of tying health insurance and retirement savings to particular employment makes no sense. I agree with that observation as a normative matter. But I want to try to explain as a causal matter why we nonetheless have the system we do.

A big part of the story is political economy: Companies that make their money as incumbents in any given system will lobby hard to prevent changes that could result in new competitors displacing them.

Forget about how we ended up with employer-based health insurance in the first place. Think about the last two efforts to change the system. Then-First Lady Hillary Clinton's ill-fated efforts were thwarted by political ads that aimed to scare people about the dangers of bureaucrats choosing their health insurance coverage. A generation later, the Affordable Care Act moved us closer to universal coverage, but part of the price for securing political support was that the additional coverage on the newly created exchanges supplements rather than supplants the existing system.

Contrasted with health insurance, retirement savings have actually made a certain kind of progress in moving away from employer-tied systems. As Prof Buchanan discusses, we have almost entirely shifted from defined-benefit to defined-contribution plans. That shift makes a certain sense. If most workers were spending most of their careers with the same firm, then it was almost sensible to have that firm continue to pay them after they retired, with paychecks for pensions replacing paychecks for salary. Once more frequent job shifts became the norm, it likewise made sense for employment savings to become portable, as they are with defined-contribution plans.

To be sure, defined-contribution plans are not as portable as they ought to be. Prof Buchanan describes the ordeal Professor X faced in navigating what ought to have been a simple move that almost resulted in a large financial loss due to what sounds like a glitch in federal law defining a 457 plan. Is that glitch readily fixable?

Not knowing exactly what the glitch is, I'm not sure, but one would think it should be relatively simple to set up rules governing maximum amounts contributable from any and all sources of earned income, allowing ready combination and transfer when people change jobs. If so, then the most likely explanations for the complexity of existing rules are: (1) inattention on the part of Congress and the relevant agencies due to what they regard as more pressing issues; and/or (2) rent-seeking by various actors who benefit from the particular rules in place (such as the entities that receive the spoils of forfeitures) or from complexity itself (such as financial planners).

Setting aside the sort of glitch that Professor X encountered, it remains true that the shift from defined-benefit to defined-contribution plans made sense as the nature of the economy changed, but that alone cannot explain the change in plans. The key to understanding the change is to realize that employers drove the shift to defined-contribution plans because they prevent huge back-end liabilities. The bailout and temporary takeover of GM by the federal government during the Great Recession was occasioned in no small part by the legacy costs, i.e., pension obligations, that the company had incurred through defined-benefit plans.

Of course, GM's problems were mostly of its own making. A well-run company would set aside sufficient funds to cover defined benefits based on an actuarially sound basis making conservative assumptions about the rate of return on those funds. GM apparently didn't do that. But more broadly, one can understand why a company that specializes in making cars (or computers or sporting goods or whatever) would not want to also be in the business of financial planning for its employees, especially if those employees will only be with the company for a few years. Better simply to designate some portion of employees' compensation for retirement savings, to be controlled and managed by the employees.

Yet now we have a puzzle. If the shift from defined-benefit to defined-contribution plans can be explained by the interests of employers, why aren't employers a more powerful political force in lobbying for a system of health insurance that is not tied to employment? After all, a car, computer, or sporting goods company is no more (and arguably even less) interested in managing its employees' health insurance than in managing their retirement savings. Why aren't employers at the forefront of lobbying efforts for Medicare for All or some other non-employer-based system of health insurance?

Although it may well be in the enlightened self-interest of corporate America for the burden of the cost of health insurance to be shared among the public as a whole, as Mitt Romney said but not in the way he meant it, "corporations are people, my friend." That is, the people who run our large corporations (both management and directors) tend to be ideologically centrists to conservatives. Not all of them and generally not on social issues, but I would be surprised to learn that in their personal convictions most CEOS and directors of large corporations favor something like Medicare for All.

Meanwhile, owners of small-to-medium-sized businesses that are also subject to the obligation to provide health insurance for their employees (as many of them were even pre-Obamacare due to market forces) should chafe even more under that obligation. They often do, but as a group they are also not especially active in promoting government provided health insurance for all. Why not? While small-to-medium business owners may not be plutocrats, many share the modestly-to-severely libertarian ideology of the captains of industry. Karl Marx and Richard Hofstadter no doubt painted with too broad a brush in identifying these petite bourgeoisie and mugwumps (in their respective accounts) as inevitably conservative, but as a statistical matter, the portrait probably was and remains accurate.

Accordingly, ideology may explain why business leaders happy to shed pension obligations have been less eager to shed the obligation to provide health insurance. Should that change--should business leaders come to understand that it is in the interest of the businesses they head for government, not employers, to take responsibility for health insurance--incumbent insurers, doctors, hospitals, and others might still resist reform, but that is not inevitable.

The most likely scenario in which the US finally joins the rest of the developed world in providing universal health insurance would probably result in something more complex than Medicare for All, because as with the politics that just barely led to the passage of the ACA, it may be necessary to buy off incumbents by maintaining a large role for them and thus prevent their political opposition.