Millions of Americans who have defined contribution retirement plans, such as 401(k)s, suddenly find themselves with a lot less money for retirement, courtesy of the stock market shakeout. The one piece of the retirement package that's rock solid is, of course, Social Security, whose payouts are independent of the stock market and are government-guaranteed. However, this may not last. President Bush has just appointed a new commission to explore the future of Social Security, and most of its members want at least partial privatization, as does the President.
Last month, in this space, I explored three contending principles about how society should provide for retirement. One approach rests primarily on the social insurance inherent in Social Security. The second relies heavily on the corporation. This is a kind of "private welfare state," with the employer in the role of beneficent provider. In the 1950s and '60s, when large corporations and their earnings were stable, an increasing percentage of American employees received generous pensions based on their wage or salary histories and job tenure. The retirement payout was guaranteed by the employer, much the way government guaranteed Social Security.
This type of private retirement coverage is ending fast. Heightened competition and an aging workforce have led corporations to shed pension obligations in favor of optional defined contribution plans, in which the employee takes on the risk for market ups and downs. Unlike traditional corporate pensions and Social Security, these "pensions" can actually run out of money if the retiree lives too long or if the market heads south at the wrong time.
This shift prefigures a third approach, which is increasingly popular in Washington: People should be financially responsible for their own retirement. In this view, it's not a good idea to rely either on a nanny state or a nanny corporation, especially given the new corporate flux and impermanence of employment. Workers, at a young age, should begin putting away money for retirement. They should learn how to become investors. In this third approach, government plays a role by using tax policy to encourage savings, both via individual retirement vehicles--such as IRAs or privatized Social Security--and through tax policy favoring 401(k)s. But that's it. The rest is up to the individual. In this view, everyone becomes a capitalist and accumulates a real nest egg, for retirement, for life's contingencies, and to pass on to children.
It's a seductive argument. But while private retirement savings, invested as prudently or speculatively as the individual wishes, should be part of everyone's planning, they should not be the whole story. Here's why.
First, this third approach largely gets corporations off the hook. In the postwar boom, company-financed retirement plans were, in effect, a substitute for comprehensive tax-supported social insurance. Their erosion has been tantamount to an income shift from workers to corporations and a risk shift from corporations to citizens.
Second, Social Security is a lot more than a government-organized personal-savings program. Unlike 401(k)s or privatized pension schemes, Social Security is deliberately redistributive; lower-income workers get a higher payout than if the formula were mechanically based on lifetime earnings. That's why Social Security is such an effective antipoverty program. Third, you can't outlive Social Security, no matter how many years you collect and no matter the state of the stock market. And fourth, Social Security provides other benefits, such as life insurance and disability coverage. This is the difference between social insurance and privately organized retirement vehicles.
GOOD IDEA. Now, a libertarian might respond that these features all can be purchased from private vendors. But, of course, not everyone can afford them. And no private vendor offers a competitively priced product that includes everything Social Security does. Nor is every new 24-year-old worker sensible and provident.
What society really needs is a balance between these three approaches to retirement. For starters, retain the corporate role. We might mandate that corporations give workers totally portable pensions, with a minimum mandated contribution by the company. Private, tax-sheltered savings vehicles, such as IRAs, are a good idea, too. But these should be seen as add-ons and not substitutes for social insurance. They should not be financed by diverting the current payroll tax that underwrites Social Security.
Diversion of payroll tax to wholly or partly privatized accounts is the course favored most by President Bush and his appointees to the new commission. But, happily, the commission is due to present its report on the eve of the next congressional election. Despite the apparent appeal of privatization and the shifting of risk and reward to the individual, most Americans and their elected representatives still value the stability of Social Security.
By Robert Kuttner