Pensions: How Much Risk Should Workers Have to Bear?

By Robert Kuttner

We are now living through the first serious stock-market downturn since the shift from traditional "defined benefit" employee pensions to 401(k)s that leave employees and retirees with more choice, and, of course, more risk. The grim joke is that after people get their latest portfolio statements, they now have "201(k)s."

Employees near retirement age, who watched their holdings soar during the roaring '90s, now face a rude awakening. Many people in their 60s are having to postpone retirement. And recent retirees are often finding they have far less to live on than they expected.

All this should occasion a serious national debate about employee benefit and retirement policy. This debate has not been clearly engaged, but we face a three-way choice: Given that stock prices fall as well as rise, do we shelter employees and retirees: (a) by moving back in the direction of defined-benefit plans, where the corporation does the financial planning on behalf of employees and bears the risk? Or (b), do we rely more heavily on social insurance, where risk and cost are spread to the entire society? Or (c), do we train the next generation, starting with 25-year-olds entering the labor market, that life is about risk and expect them to master their own financial planning? In the years after World War II, large employers functioned as a kind of private welfare state, offering generous pension and health plans. Large corporations, often under pressure from unions, did all this to foster loyal workers. They could afford to do so in that era, thanks to a set of economic conditions that have now evaporated.

FREE-FOR-ALL. First, the workforce was younger, so health and pension costs were lower. Second, most large companies were substantially insulated from fierce price competition. Major industries were either regulated (airlines, utilities, banks, telecommunications, broadcasting, energy production, hospitals) or were domestic oligopolies sheltered from foreign trade (autos, steel, rubber). Either way, their profit margins and long-term viability were secure.

In two decades, such preconditions have collapsed into a free-market free-for-all. Changing employee and retiree demographics have only added to cost pressures. To contain expenses, companies have displaced risks and costs onto employees. This shift is consistent with the prevailing ideology, namely, that workers should be freer economic agents. But often the rhetoric of choice is just a handy rationale to pass the risk.

Two decades ago, over 40% of private-sector employees were covered by a company-financed pension plan, according to the Labor Dept. Today, only about 20% are. Meanwhile, the percentage of workers with 401(k)s has grown from almost nothing to 33%. But the median 401(k) account had only $16,000 in 1998, according to the Federal Reserve's latest Survey of Consumer Finances.

No large New Economy corporation founded in the 1990s offers a traditional pension plan, where workers are guaranteed a defined pension based on a formula reflecting salary history, years of service, and inflation adjustments.

BAD TIMING. Corporations are also capping other employee benefit costs by shifting to so-called cafeteria approaches, where an employee gets a fixed sum as a fringe benefit and can choose among health, child care, disability, and other possible benefits. This punishes employees with special needs or those whose lower incomes make it hard to supplement capped company benefits.

Health plans may also be going the way of pensions. In the late 1980s and early '90s, employers faced annual hikes in health insurance premiums of 15% to 20%, about double the rate of inflation. Thanks to managed care and a passing of costs to employees through higher co-pays and reduced covered benefits, these annual increases subsided in the mid-1990s to less than the rate of inflation. But all the easy savings have been made, and costs are once again escalating by double digits.

Some employers are now considering "defined contribution" health benefits, in which an employee gets a fixed sum as premium support and buys his or her own insurance. The Bush Administration has a similar cost-capping strategy in mind for Medicare.

Shifting risk to individuals, though, is more problematic than it seems. Life takes unpredictable turns, and people sometimes make uninformed choices. Moreover, high-risk employees, cut loose from the collective security of a corporationwide health plan, often find that insurers will not offer coverage at affordable prices. And given the vagaries of financial markets, new retirees may be innocent victims of nothing more improvident than unlucky timing.

So which way should we as a society go? Back to more paternalistic corporations, with expanded social insurance, or rugged individualism in the face of unknowable risks? This may be one of the most important issues facing America in the years ahead.

Robert Kuttner is co-editor of The American Prospect and author of Everything for Sale.

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