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Monday, October 31, 2005


If Social Security Looked Like Insurance…

Our discussion in 321 of an alternate plan for what the Social Security program would look like were it run like an insurance program (and not a transfer program) included an aspect of new way of Social Security payments not being granted automatically upon reaching ‘retirement age’, but rather upon the occurrence of an adverse event. That event, in this case, would be running out of assets, and not retirement in and of itself – so that it truly is an insurance-type payment and not an entitlement program. In general, I think that this is a great idea, except…

Except for that fact that Congress has made it so that large corporations can dump their retirement obligations, thus wiping out workers’ retirement assets that they either worked their entire adult lives for, or sacrificed some of their ‘consumption today’ to invest in 401(k) plans that they anticipated having. Granted, 401(k) plans are meant to be supplemental to other retirement investments, and I bet that many savvy workers invested this way thinking that they were hedging their bets against their employer’s retirement compensation and what they anticipated getting from Social Security. And, oh yes – think that ESOP plan is safe? Think again.

The Broken Promise in the October 31, 2005 issue of Time gives a scary overview of how employees have been bilked out of their entire employee-sponsored retirement plans. These are employees that thought they were planning well for their Golden Years, so as to not be a burden to society and their loved ones. Thanks to Congress’ love of big business at the expense of the mass of citizen workers, these people are now left destitute. These would be the workers that would not have had to pull upon a Social Security insurance-type payment, but now would have been forced to draw upon this program. If there continues to be no strong laws and rules for corporations that offer retirement plans, 401(k)s, ESOPs, etc, then there will be no impetus to save through these avenues. What then would the options be? Not everyone has the wherewithal to invest in real estate, not everyone is comfortable with buying and selling on the open market.

In light of what employers are currently permitted to perpetrate against their own employees, I think that there had better be some serious financial education of our youth well before any changes to Social Security are made.

"Thanks to Congress’ love of big business at the expense of the mass of citizen workers, these people are now left destitute."

I have a couple of comments on this. First, I think your analysis is based upon an incomplete picture. Congress created a program a few years ago to insure private company pension plans on the event that a company's plan went under. I suspect Congress moved in this direction because of a private pension failure or threat of failure, and the politics suggested helping out those who were relying on the pension for their retirement. So, the failure of a private pension plan need not be as catastrophic as you suggest. For example, a private plan might go under and people would get say 50% of what they have been planning on. Through the Congressional insurance program for private pensions, an additional 30% might be covered by the insurance program. It is also relevant to know that industry faces an earmarked tax or a premium payment for the insurance fund.

At the same time, it is to be expected that by creating the insurance program, Congress has created incentives for private companies to undertake more risky behavior with respect to pension choices. This is the moral hazard problem. I think it can be expected that Congress has created incentives that over time will lead to more private pension failures than would otherwise have been the case.

That is bad enough, but it appears from news reports and reports by a few in Congress, that government has made choices that amount to underfunding this insurance program. To the extent this is true, I suspect there is a pretty good chance that private pension funds that fail will eventually have to be "bailed out" by general tax payer dollars.

One additional comment is that I want to emphasize your attention to Congress with respect to such policies. Our system of political economy has 2 branches of government involved with creating legislation. It often seems to me that our public conversation focuses almost entirely on the President as responsible for all the good and all the ills of public policy (regardless of the specific person in the office). But without Congress there would be no law. The President cannot write legislation, only Congress has that power. Perhaps if we paid more attention to Congress, where legislation is actually created and passed (barring Presidential veto), our government choices would be marginally improved.
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