Prior to the union movement, almost nobody had a pension. What they had was an extended family: When grandpa and grandma became too old to work, the younger members of the family took care of them. They still had knowledge and wisdom, and even if they became senile, they were taken care of as best as could be managed. If they lacked such an extended family--and many did--they died, destitute. It was a rare individual who could build up sufficient resources to take care of himself in his dotage over a single lifetime. Those that did, mostly in the form of land, were called "nobles" or "landed aristocracy", and they generally had extensive perquisites from the king.
The invention of the pension was a brilliant stroke. It was a deferred cost for employers, so it was an easier pill to swallow in a tough negotiation. And it was fairly cheap: even if the employer had to pay out of pocket, it was far cheaper than the equivalent wages: an employee who worked for 40 years would likely only collect a pension for 10 or 15 before they died, so carrying a former employee on pension cost 1/4th to 1/3d of their equivalent wages. Moreover, by investing a small amount of capital long in advance, a pension fund could be built up to cover easily forecast costs for very low present investment. In the 80 years between the great depression and the great recession, completely secure investments could return 5% or more. By effectively pooling the resources of all these employees, the group could take advantage of size to achieve higher diversity and security.
But not everybody worked for a company big enough to afford such a pension. So the government stepped in and created Social Security: the biggest pension pool ever, able to access the most secure possible investments. They taxed payroll to pay for it. And it worked! Social Security is, by far, the most effective anti-poverty program.
There are those who want to end Social Security and many of them want to put an end to all group pensions. Their argument is that they don't want to pay for someone else's pension. That seems to make sense, until you consider the numbers: an individual worker, putting away 6% of wages at 5% interest above inflation, will have about 4 years wages saved up after 30 years. It gets better if you keep at it for longer: about 7 years at 40 years and 9 years at 45. But how many people start saving for retirement at age 18? or even age 30?
On the other hand, as the fund gets bigger, it becomes more and more self-sustaining. A fund can be completely self-supporting if the amount collected by beneficiaries is less than the interest received. With 5% interest, this is 20 times the total benefits. This is entirely realistic. A mature, thousand-employee company is likely to have 150 former employees getting pensions. At $30K each, that's $4.5M, about $4500 per current employee. Even if the fund is not that big, current contributions can be proportionately smaller.
So what happened? A few companies decided that they could get a tiny advantage by not providing a pension. Their competitors felt they needed to compete, and this was abetted by the companies that handle the pension funds themselves wanting to take advantage of these huge pools of money to make more risky investments--risks that would not be allowed by a competent pension fund manager. Many companies literally stole their employees pension funds to make risky bets. And devices like 401(k)s were devised to seemingly offload pensions from employers to employees, while exposing them to rapacious investment advisers. At this point, 401(k) can only be seen as a colossal failure. While most people have one, very few have enough in it to survive for more than a few years. Without Social Security, most of these people would have nothing at all. The folks that did this to them should be subject to criminal prosecution. Unfortunately, they got their lobbyists to change the laws.
Everybody should save for their own retirement. Of course. It's not very expensive, and even if you have a group pension, it's at least a safety net. But it's far less cost effective than the group pensions. The only people who can really afford to live on a self-funded pension are the same as they ever were: the very wealthy.
No comments:
Post a Comment