I imagine that for most people, the word ‘pension’ calls to mind a large set of painfully uninteresting things. So let me explain why this is relevant and interesting and in fact something that you really, really cannot afford to ignore: this book elucidates why we are fucked.
Working backwards from where we are now: most of us don’t save nearly enough for retirement. It doesn’t help that wages for the median household have barely risen over the last 30 years or so.
The United States basically has three types of retirement systems:
* Social Security: replaces c. 40% of pre-retirement income for the poor, less for wealthier folks
* Defined benefit: you get a certain known amount throughout your retirement
* Defined contribution: you pay in a certain known amount, but you don’t necessarily know what you’ll get when you retire.
“Defined contribution” is basically your 401(k): you put in a fixed amount with every paycheck, but it could well be wiped out by a stock-market collapse. “Defined benefit” is practically synonymous with “pension”. Over time, pensions are going away and 401(k)s are insufficiently taking their place.
Steven Sass’s book is a thorough review of pensions from their inception in the late 1800s to the present day. Actually, it’s not quite the present day; it’s the Clinton era, when even as sober a scholar as Sass could find himself taken in by dot-com fantasies. Employees were now part of a dynamic economic world, says Sass, and they often wanted to be compensated with equity. Such was the dream, but it turned out to be illusory. I suspect that if Sass wrote this book today, 15 years or so later, his story would be quite a lot different.
In a much earlier era, a pension was run in a boring way: companies would contract out their pensions to boring insurance companies, which invested in boring securities like bonds which yielded low returns but featured low risk. Insurance companies are tightly regulated by the states they’re in; in return for following prudent investing standards, the government agrees to step in and make them whole if they melt down. Seems like a sensible place in which to put one’s retirement savings.
But capitalism, as I’ve come to realize, will eventually do as capitalism does. Soon enough, the companies that had been contracting out to insurance companies thought to themselves (imagine here large companies like AT&T or GM, at the height of U.S. economic power), “I’m just as safe and secure as an insurance company. Why should I put my pension in the hands of some dumb insurer, when I can run it myself, do a better job, and save the maintenance fee?” But employers didn’t follow the prudent investing standard that insurers followed: they wouldn’t, for instance, just set aside all their employees’ funds in a separate bank account, managed by someone at arm’s length from the company. Often their pensions were just accounting fictions, on a different piece of paper from the piece of paper holding their revenues and expenses. If they needed to, they’d raid the one piece of paper to supply the other piece of paper. That’s an altogether different beast than a pension run by a government-regulated insurance company.
Then there was the question of how, exactly, to fund the pension. For many years, pensions guaranteed you a certain fraction of your pre-retirement income, averaged over the last ten years of your employment. Since workers tend to earn the most at the end of their careers, this guaranteed generous payouts, and made it hard to predict in advance how much to set aside in the pension account. So another, more sustainable alternative was to guarantee a certain fixed amount of retirement income for every dollar paid in throughout the worker’s career.
Let’s back up even further: why would employers bother at all with a system like this? Turns out that pensions solved two large problems:
* They were a way of guaranteeing employee loyalty over a lifetime: if you knew, in particular, that you’d earn retirement income that grew with your *final* pre-retirement income, you’d stick around longer.
* They were a way of shuffling workers out the door once they’d grown old and lost productivity (i.e., they’d become “superannuated”).
In short, they were a way of managing employment throughout the capitalist life-cycle: workers train, build their skills, work for many years, spend a few years in retirement, and die. You really can see, encoded into pensions, capitalism as she is lived in the lives of her consumable raw materials.
But as I said, capitalism will do as capitalism does. As the 20th century wore on, companies came to find bonds too boring, and they found raiding the pension account too tempting. When Studebaker closed its plant in South Bend, Indiana in 1963, it turned out that its pension fund was so poorly funded that the company couldn’t pay employees what it had promised them. So Congress stepped in and created ERISA, the Employee Retirement Income Security Act, which placed certain requirements on pension funds so that a Studebaker-like collapse could never happen again.
As a close friend has so evocatively put it: capitalism picks its nose like this (whereupon the actor reaches his right arm behind his head to grab his left nostril). Or maybe it’s more accurate to say that American society does that, with capitalism as the machine by which we do the picking. Rather than simply guarantee Americans retirement security, through a massively beefed-up Social Security system, we go through this dance:
1. Allow the market to solve the problem on its own.
2. Realize that the market won’t solve the problem on its own, given the way incentives are naturally structured.
3. Put in place regulations to encourage the market to solve the problem on its own, by leaning on the incentives somewhat.
4. Eventually realize that, when there are mountains of money on the line, nothing but draconian regulation will lean hard enough in the right direction.
5. Go to 1.
You see this in pensions, and you see it in health care: rather than just *providing health care for Americans*, we provide tax incentives to encourage companies to provide health insurance for their employees. The outcome is, if not predictable, at least completely obvious in retrospect: we don’t cover our population very well, and we do it for a lot more money than any other nation.
So okay, we’ve chosen to provide our social welfare system through employers. That’s bad enough; what do we do about those who can’t work, for instance? But what I have also never understood is why companies like this system. Pension obligations have brought many companies to their knees; so have health-care expenses. Wouldn’t companies prefer to shift the burden onto the American public as a whole, and get those giant obligations off their books? It’s not as though General Motors is fundamentally skilled at running a pension system or choosing among health-care plans. Why not let someone else take care of that? In particular, why not make it Medicare-for-all and Social Security-for-All and be done with it?
That’s not the way it’s turned out, of course. Social Security remains in a purely manufactured fiscal danger zone, and ObamaCare takes the first tentative steps toward severing the link between insurance and employment.
Workers are left holding the bag, at least on pensions. We now have to decide how much to save in our 401(k)s, and how to allocate our savings; and smart people tell me that 401(k)s are usually terribly managed, with lots of fees going to the people who run them; so smart investors will shift money from their 401(k)s to an IRA whenever they change jobs. Are you keeping track of all the things you need to be keeping track of? If not, you should probably hire a financial advisor to navigate all of this for you. He’ll just skim some management fees off the top, of course …
I am frustrated. I wish I could end on a happier place than that, but alas.
Actually, I can find a happy place: Sass’s book is really very, very good. I found it gripping throughout, even while it’s covering its topic in great detail. It’s an excellent reference if you want to understand how pensions have been and could be structured, and how pensions have been prudently managed in the past, and why that prudently managed system eventually collapsed.
One can pull a particularly valuable point from Sass’s book: the next time people tell you that Social Security can’t survive the aging of the population or the slowing of American wage growth, point them to Sass’s book. These problems have been well understood for at least half a century. [book: The Promise of Private Pensions] is a necessary handbook in the retirement-security war.