pensions

I came across this article in the New Yorker and thought I should pass it along to you:The Risk Pool

As you know one of my current beefs is the demise of the middle class, and what I see as the Republican party attack on it.

This article explains at depth one consequence of the wrong headed notion that markets and private enterprise are necessarily better, i.e. more efficient, providers of services. In the case of pensions, and health care, that is simply not true. The American private pension system is failing as more and more companies renege on the deals they made with their workers years back. Now, after productivity gains and renegotiation of the original contracts the burden of paying pensions to all their retired workers is bringing down many of our largest companies.

The reason is simple arithmetic: as companies reduce their workforces, for either good or bad reasons, the base of employees available to support the retiree population is similarly reduced. Thus the profit per employee needed just to pay benefits to people who are no longer contributing to those profits grows. Sooner or later the burden reaches unsustainavble levels and the company is forced to adjust. If the company is still profitable it might attempt to what IBM did: simply stop some of its benefits. In other cases the company may be forced into bankruptcy.

Both the retirees and the current workforce lose when these adjustments happen. But the most damage is done to employees who are close to retirement: they might find themselves having to make up extremely large gaps in their planned retirement packages. Sometimes they may have to put off retirement altogether.

America is not facing this pension problem square on because it cannot face the inevitable: that the most effective way to fund pensions, and health care, is to spread the cost and the risk across the widest possible population. This means some form of nationwide plan. This is an actuarial fact, not a political statement. Any private plan cannot match the risk spreading capability that the entire population can represent, so, by definition, it will be less efficient at some point.

As the article points out the union leadership back in the 1950’s realized this. Shortsighted corporate management didn’t and has stuck us with the problem.

The middle class, which is so much under pressure from out of control costs in health care and now reduced pension prospects needs to wake up and force the issue onto the political agenda.

Before the costs reach astronomical proportions. So that would be now!