David Brooks had what I regarded as a thoughtful column today. He writes convincingly about the Federal budget cutting where the Republicans in the House seem to be going after everything but Social Security and Medicare (and Defense too, though that is a different animal). This approach simply won't do the job of bringing the budget into balance as a long term proposition.
I did a Google search on "Third Rail of Politics" and found this piece from NPR. Apart from the remark that thinking FDR was a good President makes you left of center (it seems to me it makes you smack in the middle but that is not my point here) I thought it a good piece. People who have paid into the Social Security trust fund their entire lives feel they completely deserve the benefits that have been promised them, regardless of the fact that Social Security is a pay as you go system and the capacity of the system to deliver on those promises is diminishing rapidly as baby boomers near retirement, where overall there will be many more retires and many fewer workers paying into the system on a relative basis. There was a good West Wing Episode about this where it created the impression that if there were just a few Democratic and Republican members of Congress who were willing to fall on their collective swords, the issue could be resolved and afterward they'd become heroes for having done so. That episode aired well before the financial crisis. Now the situation is more dire, but it doesn't appear that the there will be anyone riding a white horse to come to the rescue.
I've been thinking about these issues a lot, as a new retiree with main source of income from the State University Retirement System, which is fiscally a lot sicker than Social Security. By law I'm entitled to my annuity. But by anybody's reckoning the system is bankrupt. Something's got to give.
And I've been doing some soul searching on what that is or should be. There is a fundamental national problem that is still not getting nearly enough discussion - the personal savings rate is way to low. We need as a society to be saving more. People who are envisioning alternatives need to think through how a system with a reasonable personal savings rate would work. Would people save mainly through where they work - via company pension plans? In the 1980s and 1990s, there were many examples of hostile takeovers where the raiders would gut these pension plans and then drive the company into bankruptcy. If you look at the the system as a whole rather than the individual opportunism of some players, that system doesn't work. More recently we've seen people lose as much as 50% of the value in their 401K plans, after the stock market tumbled, another huge disincentive. If people are going to save for their retirement they need assurance that the value will be there when they do retire. What type of arrangement can really provide this? The Republicans remind us fairly regularly that if the government bails out failure that creates a huge moral hazard for the investors. That is certainly true. But if you send people to the market for their savings and they get wiped out through no fault of their own, what then?
I am in a defined benefit pension plan where the benefits are tied to the salaries from the last four years of employment and where there was gaming of the system due in large part to a pratice that in my opinion should have ended a long time ago. Faculty are paid on a 9 month salary, which is the number that is quoted, but where they can earn up to two ninths more (and sometimes three ninths more) via getting paid in the summer from a research grant, summer teaching, or an administrative stipend. Some faculty do this sort of thing throughout their careers, but others only do it near retirement to boost their annuity. Though its all part of the State of Illinois, the University and Retirement System are separate entities. So that one would burden the other in a way that might not be healthy overall doesn't seem to have ever come to the fore to inhibit the gaming. Instead, they've phased out the defined benefit form of pensions, which given my comments in the previous paragraph doesn't seem optimal to me either.
My view is that there needs to be a two piece system - defined benefit up to a cap, what that should be I don't know but it probably needs to be reasonably modest, and defined contribution beyond that for those who choose to save more than required. Then money that is in pension funds needs to be immune from corporate raiding.
There is another aspect of this entirely, which is that more and more seniors were probably knowledge workers and are likely in reasonably good health even after they are retired. These people are potentially quite productive but the system doesn't know how to utilize them and hasn't found a way they can contribute. At present, with so much slack in the labor market, nobody really wants to think about finding interesting ways to employ seniors. But as a long term proposition simply having the human resource go idle is incredibly wasteful. So a way to tie pension payment to some form of useful service provision make sense to me. I don't see anyone talking about things this way, which means it probably is politically impossible. But that doesn't mean it isn't right. There is a tendency when talking about government programs to just focus on the program. We'll never get to a reasonable solution that way. We've got to see the whole picture and try to address the issues that way.
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