Involuntary risk
Morality in a recessionary world
It used to be that the American retirement system relied on a so-called three-legged stool of assets: Social Security, a pension, and private savings. Changes in our economy over the last 50 or so years have cut away at two of the legs.
Our personal savings rate dropped to the low single digits for much of the 00s and most Americans don’t have access to a good pension (much less a career-track job). That’s why so many of those forty and older are suddenly scared to death about their retirement. With the precipitous decline in markets, few have truly adequate savings to bridge the gap between their 401k (if they have one) and Social Security.
Corporations have struggled, too. Those that invested their pension funds bullishly now have billions in liabilities they can hardly afford to cover. That’s why so many are reinvesting more conservatively. State and local governments, however, are doing just the opposite:
But states and other bodies of government are seeking higher returns for their pension funds, to make up for ground lost in the last couple of years and to pay all the benefits promised to present and future retirees. Higher returns come with more risk.
“In effect, they’re going to Las Vegas,” said Frederick E. Rowe, a Dallas investor and the former chairman of the Texas Pension Review Board, which oversees public plans in that state. “Double up to catch up.”
State and local governments employ about 14.8 million people. These employees tend to belong to strong unions that often negotiate for health and retirement benefits comparatively better to those found in the private sector (when they are offered at all).
But a good pension contribution plan isn’t much help when the bottom falls out. Because employees can’t control the investment portfolio, state and local workers are forced to take on an inordinate amount of risk–one that we now recognize can be crippling.
What’s the solution? Giving employees some measure of control over the pension mix seems like a coordination disaster, and there is no guarantee that a majority vote would prevail in favor of a more conservative mix.
That said, giving workers a choice about what risks they incur lessens the apparent moral harm when stock market swoons wipe them out. But many have argued that the current recession shows exactly why we need to give individuals less, not more, choice over how they save for retirement. It’s too easy to underestimate far-off risks, even when so much is at stake.
A more sensible approach would be to enact more stringent regulations about retirement investment–both for public and private funds.
It seems like we’re relearning the lessons that led to the creation of Social Security during the New Deal. It’s not good to be poor when you’re old, and it’s worth forcing people to insulate themselves from that risk. Liberty reaches its its limits when the capacity for informed choice is similarly limited.
-Sam
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