Grasshoppers and Ants

When George W. Bush launched Social Security reform with his promise of new personalized savings accounts for everyone, he did not seem to grasp that most Americans already have such accounts. During the past generation tax-exempt 401(k) and IRA accounts--the individualized "defined contribution" approach--became the principal pension plan for working people, displacing the traditional company pension provided by employers who assume the risks and promise a "defined benefit" to workers at retirement. The do-it-yourself version of pensions is a flop, as many Americans have painfully learned. When older employees look at their monthly balance statements, they are more likely to experience fear than Bush's romanticized thrill of individual risk-taking.

Picking stocks for themselves has left many employees, perhaps as many as 40-45 percent, without an adequate nest egg for retirement. When Bush explains further that he intends to divert trillions from Social Security to finance his "ownership society," it makes people even more nervous. Social Security pays very modest average benefits--roughly equivalent to the federal minimum wage--but it is the last safety net. For nearly half of the private-sector workforce, it is the only safety net. The far more threatening problem is elsewhere--shrinking pensions, collapsed personal savings and soaring costs for health insurance.

The bleak reality is reflected in those 401(k) account balances. Of the 48 million families who hold one or more of the accounts, the median value of their savings is $27,000 (which means half of all families have less than $27,000). Among older workers on the brink of retiring (55 to 64 years old) who have personal accounts, the median value is $55,000. That's only enough to buy an annuity that would pay $398 a month, far short of middle-class living standards. What's strange and disturbing about their low accumulations is that these older workers have been investing during the best of times--the "super bull market" of soaring stock prices that lasted nearly twenty years. The Congressional Research Service summarized the sobering results: Median pension savings "would not by themselves provide an income in retirement that most people in the United States would find to be adequate."

This grand experiment was launched nearly twenty-five years ago by Ronald Reagan, but with very little public debate because the pension changes were obscured by more immediate controversies--Reagan's regressive tax cuts and massive budget deficits. His Treasury under secretary explained the reasoning: "The evidence of the past suggests that people do not behave like grasshoppers. They are much more like ants." For lots of reasons, most Americans turned out not to be like the proverbial ants, storing food for winter. People either misjudged their future need for savings or couldn't afford to put much aside or bet wrong in the stock market and got wiped out. But corporate managements turned out to be the true grasshoppers, living for the moment and ignoring the future. Companies took advantage of the 401(k) innovation to escape their traditional responsibility to employees. They dumped old defined-benefit pension plans and adopted the new version, which requires much smaller employer contributions and thereby reduces labor costs dramatically. Good for the bottom line, bad for the country's future.

"The whole thinking was: Let's relieve the employers of this burden and empower individuals," explains Karen Ferguson, longtime director of the Pension Rights Center in Washington. "The problem is, it has failed--and failed miserably--and no one wants to say that."

Pension protection is actually shrinking, despite the proliferation of 401(k) accounts and the alleged prosperity of the 1980s and '90s. In the private sector, fewer employees participate in pension plans of any kind now than twenty years ago, down from 51 percent to 46 percent (the defined-benefit company pensions that once covered 53 percent now protect only 34 percent). The value of pension wealth, meanwhile, fell by 17 percent for workers in the middle and below, mainly because their voluntary savings were weak or nonexistent, yet soared for those at the top--"an upsurge in pension wealth inequality," economist Edward Wolff of New York University observed.

In sum, pensions became less valuable. And fewer families have one. That helps explain why Bush's plan encountered popular resistance. In these circumstances, whacking Social Security benefits or raising the retirement age does not sound like "reform." But neither political party has yet summoned the nerve to acknowledge the implications of the failed experiment or to propose serious solutions.

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