Shifting the Risk Burden to Workers

Jacob Hacker talks about the shift of risk from employers to workers as health and retirement benefits are redefined and wonders, as we all do, what system will emerge to replace the old and restore economic security:

There goes the rug, by Jacob S. Hacker, Commentary, LA Times: The announcement by IBM that it would freeze its traditional pension plan, shifting all workers into 401(k) plans by 2008 ... was ... the latest in a string of increasingly desperate attempts by companies as diverse as GM, United and Verizon to get out from under mounting pension and healthcare burdens. ... We are seeing the death throes of a corporate insurance system that, for decades, set the United States apart from other rich capitalist nations. And with this system's slow but steady demise comes a massive shift of risk from employers onto workers and their families.

Contrary to conservative complaints about an unrestrained government, the United States has one of the smallest public welfare states in the advanced industrial world. Yet many times more is spent on private benefits than in any other nation — almost a tenth of the nation's economy. And benefits offered by employers are extensively subsidized and regulated by government. ... Indeed, if America's tax code and private benefits are taken into account, U.S. social spending is slightly higher than average compared with other rich countries — higher, in fact, than the spending of Denmark.

Yet this distinctive private system is in peril. ... Employers once championed private benefits as an alternative to overbearing public programs. The editors of Life magazine described them in 1949 as "ransom devices to buy off the welfare state." Today, however, the workplace welfare system that once stood as a shining beacon of America's singular path looks more like a dimming light on a failed byway. Take retirement pensions. In 1975, the vast majority of pensions looked like mini-Social Security systems. .... These were the kinds of pensions for which the federal government created a backstop insurance program in 1974, the Pension Benefit Guaranty Corp.

Twenty-five years later, almost all pensions are of the "defined-contribution" variety ... such as 401(k)s, that are voluntary, uninsured and have no guarantees. Much ink has been spilled comparing the investment returns of 401(k)s and old-style pensions (according to a study of returns from 1985 to 2001 by economist Alicia Munnell, the dinosaurs have actually won, outperforming their upstart competitors by about 1% a year). But the central issue for economic security isn't the return but volatility. Some people do well with 401(k)s; others do poorly. The difference, in a word, is risk.

Employers also want to cut back health insurance coverage, which they say hurts their competitiveness. In 1979, nearly 70% of workers received health insurance coverage from their employer. Twenty years later, the proportion had dropped to just over 50%, and it continues to fall. Among workers earning roughly $8.50 an hour, the drop has been even steeper: from 46% coverage to 26% coverage. Even companies that have retained coverage have made workers pay a larger share of the costs — in essence shifting some of the risk from their own balance sheets to employees' checkbooks. Not surprisingly, the ranks of the medically uninsured have expanded steadily ... and health costs and crises are now a factor in nearly half of America's 1.5 million personal bankruptcies a year.

Still, faith in America's unique system lives on, whether in calls for corporate responsibility by the left or paeans to spontaneous market solutions by the right. The harsh truth suggested by IBM's pension freeze, however, is that no amount of hectoring or tax breaks will resurrect the old bargain that once provided tens of millions of American workers with a private umbrella of economic protection. The unanswered question, in an age of growing economic insecurity, is what, if any, bargain will take its place.

Update: Here's a good follow-up piece in the Financial Times about similar problems in Britain along with a proposal to solve them (it's free). Also, devs ad - good comments. I think some of your answers are here. After experience with insured private retirement programs in Britain, and noting the demise of employer provided defined benefit programs, Ros Altmann from the London School of Economics calls for "decent basic state pensions for all" and explains how to pay for them:

Use wasted billions to reform our state pensions, by Ros Altmann, Commentary, Financial Times: The British pension model is unique and it has failed. The crisis in UK pension provision is worsening and the demise of traditional final salary pensions is throwing the inadequacy of our state pension system into stark relief. The reason Britain has just about the least generous state pension system in the industrialised world is because it has relied on employers shouldering ever-increasing responsibility for old-age income support with generous final salary pension schemes.

Our system of contracting-out encouraged millions of people to swap their state pension rights for private pension promises they were led to believe were guaranteed. However, the regulatory framework to protect these privatised social welfare benefits was inadequate and the costs and risks of private pensions have proved too high to be relied on. Both employers and governments are guilty of raiding these funds, leaving many mature schemes with huge deficits, members with no pension and hampering corporate competitiveness. ...[A]s lifelong employment disappears, average job tenure declines, global competitive pressures intensify and corporate ownership changes frequently, managers cannot justify continuously trying to run down the up escalator in an attempt to provide long-term welfare benefits.

As traditional pensions disappear, radical overhaul of the UK pension model is vital. However, state pensions are so complex that most people cannot predict what they will receive and have no sound basis on which to plan. The low level and coverage of state pensions forces millions into means-testing to escape poverty. But this mass means-testing discourages the private savings needed to top up a poverty-level state pension, so the whole pension system has become unstable. ...

The Pensions Commission highlighted the unsustainability of our current system, but shied away from the most radical reforms, such as abolishing contracting out or providing better incentives, for fear of destabilising defined benefit pensions. If these schemes are changing anyway, why allow such concerns to hold up reform?

Adair Turner, the commission’s chairman, says a decent universal state pension, which lifts the elderly out of poverty and recognises women in their own right, would be too expensive... However, there are obvious sources of pension-related funding in the existing budget that could be diverted to finance such much-needed reform.

We are wasting billions of pounds which could be redeployed to provide decent basic state pensions for all. Pension tax relief costs £21bn a year – over half of which goes to top-rate taxpayers (mostly men) ... [I]f we need to find extra money to fund a decent, fair state pension, giving a sound basis upon which individuals can plan their later life finances, there are many ways to do so. This may require slaying some sacred cows and entail measures that will be unpopular with certain groups. However, holding up reforms out of a desire to slow the demise of defined benefit pension schemes seems a great shame because they are changing anyway. It is time for a radical overhaul of our pension system, to provide a minimum state pension to prevent poverty, offer fairer incentives for private sector workers to save more or work longer part-time and ensure a higher standard of living in old age.