Riding Into the Sunset
The circumstances look even more ominous--the very opposite of Professor Fogel's sunny vision--because personal savings also collapsed during the long, slow-motion weakening of pensions. Given the stagnating wages for hourly workers and easier access to credit, families typically managed to stay afloat by working more jobs and by borrowing more. Saving for the future was not an available option for many. In 1982 personal savings peaked at $480 billion, then began an epic decline. Last year the national total in personal savings was only $103 billion--down nearly 80 percent from twenty-five years ago. As Eugene Steuerle of the Urban Institute points out, the federal government now spends more money on tax subsidies to encourage the individual forms of pension savings--$115 billion last year--than Americans actually save.
The one potential bright spot in this story might be real estate--the family wealth that accumulates gradually through home ownership and the rising market value of houses. Given the current housing boom and runaway prices in the hotter urban markets, many families might salvage retirement plans by selling their homes and moving to less expensive dwellings. The trouble is, families have been living off that wealth--borrowing, almost dollar for dollar, against the rising price of their homes through equity-credit lines or refinanced mortgages. From 1999 through 2003, the value of family homes rose by a spectacular $3.3 trillion, but families' actual equity in those properties changed little because mortgage borrowing rose nearly as fast.
Thus, people financed routine consumption by borrowing against their long-term assets--that's real grasshopper behavior. And the situation could turn very ugly if the housing bubble pops and home prices fall. People will find themselves stuck paying off a mountain of debt on homes that are suddenly worth less than the mortgages. They will not only need to keep working; they might also be filing for bankruptcy.
How could this have happened in such a wealthy nation--especially during an era when stock prices were rising explosively? The basic explanations are familiar: rising inequality and reactionary economic policies, launched first by Reagan, then elaborated by Bush II and resisted only faintheartedly by Democrats. The corporate "social contract" was discarded; regressive tax-cutting rewarded capital and the well-to-do; numerous other measures fractured the broad middle class. The wages of hourly workers--80 percent of the private-sector workforce--have been essentially unchanged in terms of real purchasing power for three decades (no one in politics wants to talk about that, either). The political system continues to defer to the needs of corporations despite the torrent of financial scandals and extreme greed displayed by egomaniacal CEOs. All these factors contributed to the erosion of retirement security. Economist Teresa Ghilarducci, a pension authority at Notre Dame, remarks, "Just as wealth and income are being redistributed to the wealthy, so is leisure."
In fact, Ghilarducci argues, allowing the pension system to deteriorate serves a long-term interest of business: avoiding future labor shortages when the baby-boom generation moves into retirement. "All this retirement policy is really a labor policy," she asserts. "It's motivated by these experts who say, Hey, wait, we're going to need to do what we can to encourage people to work longer. A whole range of economists and elite opinion makers is talking about a labor shortage where, God forbid, wages would increase. That's what they're worried about--making sure there isn't a corporate profit squeeze, that skill shortages and upward wage pressures are checked."
This development is already lengthening working lives, she finds. The average retirement age, rather than gradually declining toward 55, as Fogel foresees, has turned around in the past few years and is slowly increasing. "I'm not against older people working if they want to," Ghilarducci says. "I'm against policies that force them back into the workforce because they've lost their pensions or their healthcare costs have gone up."
One need not question the sincerity of the right's ideological convictions to see that their policy initiatives are also designed to benefit important political patrons. With the transition to 401(k) accounts, corporate employers were major winners. Ghilarducci's examination of 700 companies over nearly two decades found that their annual pension contributions dropped by one third--from $2,140 to $1,404 per employee--as they shifted from defined-benefit pensions to the less expensive defined-contribution model. Not surprisingly, the traditional company pension began to disappear or shrink as large industrial companies hacked away at the uncompetitive costs. The number of younger workers with the traditional form of pension is much smaller and falling fast.
Wall Street banks and brokerages were big winners too, since they began competing for the millions of new "investors" with their individual stock accounts. This enormous influx of customers helped fuel the long stock-market boom and encouraged the exaggerated promises made by both corporations and financial firms. The overall economy was probably damaged too, because mutual funds competed for customers by going after rapid, short-term gains rather than focusing on the long-term investments financed by patient capital. When the stock-market illusions burst in 2000, the meltdown evaporated lots of retirement accounts too, especially for those innocent risk-takers who had bet their savings on NASDAQ's high-flying tech stocks.