Small Steps, but Not Nearly Enough

By James Kwak

Floyd Norris says some sensible things in his column from last week on the retirement savings problem: Defined benefit pensions are dying out, killed by tighter accounting rules and the stock market crashes of the 2000s. Many Americans have no retirement savings plan (other than Social Security). And the plans that they do have tend to be 401(k) plans that impose fees, market risk, and usually a whole host of other risks on participants.

But even his cautious optimism about some new policy proposals is too optimistic. One is the MyRA announced by President Obama a couple of weeks ago. This is basically a government-administered, no-fee Roth IRA that is invested in a basket of Treasury notes and bonds, effectively providing low returns at close to zero risk. The other is a proposal by Senator Tom Harkin to create privately-managed, multi-employer pension plans that employers could opt into. The multi-employer structure would reduce the risk that employees would lose their pension benefits if their employer went bankrupt.

These are steps in the right direction, but modest ones. The underlying problem with private sector defined benefit plans is that the employee takes on counterparty risk, where the employer is the counterparty. In this case, the pension plan is insulated from the risk that a company will fail, which is an improvement, but not from the risk that the plan itself will fail due to a market downturn (of the kind we have recently seen). There is language about allowing the plan to reduce benefits in such a scenario, but this of course undermines the benefit of a defined benefit pension in the first place.

The underlying problem with individual retirement savings vehicles (in addition to all the usual problems like fees, bad investment choices, leakage, etc.) is that many people just don’t make enough money to save for retirement. In this country we like to think of the ability to save as some kind of moral virtue, but in reality it’s primarily a function of your income. There is no comparison between saving 10 percent of a $250,000 annual income and 10 percent of a $15,000 annual income. What’s more, the MyRA caps out at $15,000, after which point you’re on your own in the Wild West of asset management predators firms.

MyRAs could get people in the retirement savings habit, which is useful if they start making upper-middle incomes, but not enough if they are stuck in the lower middle class.  At the end of the day, the only way to ensure some degree of decent retirement income for low earners is to have a partially redistributive pension system (or a much higher minimum wage), and the only way to avoid the solvency risks of defined benefit plans is to have a federal government guarantee. (It should be no surprise that Social Security has both.) MyRAs and Harkin’s plan can help at the margins, but they won’t solve those fundamental problems.

8 responses to “Small Steps, but Not Nearly Enough

  1. Everyone seems to miss the point about efficiency, if you make (or legislate) things that don’t break down, or need much maintenance, you then have more discretionary money to spend or save for the future.
    Today everything is made to break with that one hidden weak link, everything looks good of course, until you have to trash it and get another one. This forces the lower classes into poverty until they buy a baby stroller and put all there worldly goods into it, till the last day.

  2. Yeah, all it takes is passing the right law and then all will be right with the world.

    This isn’t just bad economic reasoning, it’s childishly bad.

  3. @Paddy – for once I agree with you – you can’t legislate “morality”.

    One of the “tween” girls forced into sexual slavery and brought to NYC for the Stupid Bowl was, of course, desperate to get some “authority’s” attention to her miserable plight – so she figured, like most teenagers do, that getting attention for doing something “bad” was still getting attention –

    so she bought a Big Gulp and lit up a cigarette and paraded down the street. Well, the only attention she got was from a busybody babushka who STILL found the Big Gulp and cig MORE offensive than the kind of “business” that the tween was recruited into as a “worker”. “…you should not spend your money on gulps and cigs…”

    Pharisaism – call it what it is….it is neither just nor fair nor sane – it’s the blunt force trauma upon culture and civilization that TYRANTS use…

    People with real culture and proof that they built the civilization that they LIVE in, have earned a right to SOME common sense and sane law and order.

    The ONLY laws that stick and are worth their weight in gold are the ones that human beings consistently experience – NOT A THEORETICAL IDEA – as a “good” for their health and happiness – JUSTICE is a real experience! More real than lust :-)

    Meanwhile, when there are no LEGAL consequences, spite and vindictiveness spew out of corps and their sycophants with increasing and exponential ease – since nothing happened of any consequences to the bottom line of the other polluter – they just declared bankruptcy – we can all flush our “toxic assets” for someone else to clean up, right?

    Let’s change the law….

    http://rt.com/usa/wvirginia-chemical-spill-again-water-617/

    Want savings? Stuff it in the mattress…

  4. Let’s not blame the decline of defined benefit plans on accounting rules and the stock market. They have been eliminated because they can be, i.e. business can eliminate another cost when labor is weak because of government policy and high unemployment, together with an over-funded anti-union, anti-worker movement ( Koch, Chamber of Commerce, etc.). Read the news today about how a billionaire is funding an anti-public pension plan series on PBS. Pension plans have died because of market power, pure and simple.

    The answer? Require them or require payments by employers into a government supervised or union supervised (with appropriate oversight) system. The income gap resulted from the gap in political power and the willingness of those with political power to sell out to economic power. Economic power will not be given up. It must be taken by legislation or other means. Sharpen up the guillotines.

  5. Tom Geghagen says something interesting about health care and benefits including pensions. He says before we lost the industrial unions we practically had universal health care (and pensions were much more common) With health care and other benefits, employers knew if they didn’t provide benefits the place would quickly “go union .” We had more manufacturing then of course . But almost everyone had heath care under LBJs Great Society, seniors with Medi-Care , poor people with Medi-Cade and most employees . We also went from being creditors to debtors, when we lost the unions which he quips with “we lost our union cards and were given credit cards.”

  6. Noticed that the frequency of posts by Kwak have increased of late. That is a good thing. Would also like to read more from Mr. Johnson.

  7. yup