Riding Into the Sunset
Pro-Life Pension Reform
The Pension Rights Center just conducted a year-long "conversation on coverage" that pulled together experts from business and labor, the insurance industry, Wall Street finance, academia, AARP and other interested sectors. The workshop sessions produced a long list of worthy ideas for patching up the broken system, but that was the problem: The proposals basically involved incremental tinkering with the status quo, not universal, mandatory solutions. To get all these diverse interests to join the conversation, Karen Ferguson confides, the center had to stipulate that "mandatory" would not be discussed.
"The bottom line is that the companies always have the upper hand, even though they've gotten huge subsidies and tax benefits," she explains. "The system is voluntary, so companies can always opt out." Indeed, the politics of pension reform is usually a discussion about what new favors and concessions should be granted to employers to get them to do the "right thing" for their employees. This political logic led to the current failure. "Voluntary" is a loser, as the past twenty years amply demonstrated, because it gives companies controlling leverage over what is possible. And even well-intentioned executives will always have to choose between the company's self-interest and its employees (guess who usually loses). Only the government has the reach and power to design and oversee a pension system that truly serves all. During the past generation, most corporations discarded their obligations under the old social contract. It seems only fair they should forfeit political control too.
Plausible plans in addition to Fogel's do exist that offer genuine solutions. A universal savings system that covers everyone because it is mandatory could prove to be as durable (and popular) as Social Security. It balances equity by subsidizing the savings of lower-income workers. It creates authentic individual ownership and incentives to save more for the future, consume less in the present. It operates free of Wall Street profiteers and under government supervision, adhering to well-established principles of sound investing. Employers could be discouraged from further abandoning their obligations by penalties in the tax code. Many other nations, large and small and far less wealthy, have created such systems. Americans would need to craft their own distinctive version.
One promising example, designed by economist Christian Weller for the Economic Policy Institute, proposes a modest savings rate of 3 percent of wages, but combined with the existing Social Security benefits, it would approach the level of retirement security envisioned by Fogel. The government would contribute substantial savings for low earners and also match additional contributions made by the workers or their employers. Weller estimates this would cost around $48 billion a year--less than half the federal tax subsidy now devoted to all pension plans. Weller's design is robustly equitable, scaled to help the bottom rungs most and top income earners least. Combined with Social Security, low earners (wages of $24,000 or less) would enjoy a pension that replaces 83 percent of their peak working wages. Average earners would get 60 percent replacement, high earners only 48 percent. This makes sense, because higher-income families have much greater opportunity to augment pensions with other sources of income and savings. The working poor do not.
Essentially, Weller has updated and expanded a mandatory savings plan that was proposed nearly twenty-five years ago--a last gasp from the Carter Administration. Reagan's election and laissez-faire politics snuffed the idea. While still modest in scale, Weller's design represents a meaningful start toward Fogel's larger vision of a 15 percent savings rate. Since the Social Security tax now collects 12.6 percent of wages jointly from workers and employers, it is not plausible at this point to add another 15 percent to labor costs for pension savings. However, as the new pension system matures and public confidence is established, a gradual transition can be pursued that adds little by little to the personal savings rate, offset by equivalent reductions in the payroll tax for Social Security--thus yielding greater savings and lower taxes. Both government systems would continue in place, one as the fundamental safety net of social insurance, the other as the universal, expanding pillar for comfortable retirement.
Ghilarducci thinks much of the accumulating wealth could be stored and invested by large private pension funds, organized by unions or other groups for workers at multiple employers (much like TIAA-CREF's role for universities). A successful existing model is the unified pension systems for the building and construction trades. Co-managed by unions and companies, they encourage industry and labor to collaborate on joint training and other productivity-enhancing endeavors that can raise the quality of work and wages.
While most politicians don't dare embrace a "mandatory" solution--not yet, anyway--it is not self-evident that ordinary Americans would reject one, if properly educated about the alternatives. Most people are conflicted. They know they need to save more--retirement is a very meaningful investment for them--but it's very hard to accomplish, given the competing pressures. They like the concept of personal accounts but are also aware of their vulnerability as amateur investors. In her conversations with union presidents, Ghilarducci finds they are more in favor of an "add on" national pension than raising the payroll tax for Social Security. "You can sell workers if their name is on it," she concludes. "If you had a system that says you must contribute 3 percent of wages to your mandatory savings account, you would actually have two-thirds of the workers grateful that they are being forced to save. You wouldn't get that if they were forced to pay another 3 percent in taxes into Social Security."
The retirement question--choices of mandatory or voluntary, universal or incremental--embodies a classic dilemma often facing liberal politics. Do reformers pursue the larger, more provocative approach that invites greater resistance but would fundamentally solve the problem? Or do they opt for smaller, safer measures that have a better chance of adoption and will demonstrate good intentions, if not a genuine remedy for society? For several decades, it seems obvious, most Democrats have chosen the side of caution: thinking small, offering symbolic gestures, avoiding fights over fundamental solutions. One can see where this strategy has gotten the party. The gestures are no longer taken seriously, since they don't lead anywhere. The public no longer associates Democrats with big ideas or principled commitments to authentic reform. We await incautious politicians with the courage to pursue their unfashionable convictions.