Tom Sgouros: Sharing Risk on the Pension Crisis
Tuesday, October 25, 2011
Over the past couple of years, I've had a recurring conversation with people about the pension system. They tell me they've worked out the math and there's no way the pension system can deliver what it's promised and that switching from a defined-benefit plan to defined contributions like a 401k is the only reasonable way to go. Each time, it turns out this person has seriously misunderstood what a defined benefit plan is all about, and I think the misunderstanding is instructive.
A defined contribution pension plan, like a 401k, is where you know what goes into the plan, but what comes out is dependent on how well your investments do in the meantime. With a defined benefit pension system, you know what you're going to get at the end of it. Or rather, you think you know. Not to be too terribly bleak about it, but there is a pretty good chance that any individual pensioner will never see a dime from their pension contributions. I'm not talking about the current pension "crisis," here.
I'm just pointing out that we don't all get to enjoy a long and happy retirement, because some of us die first. Since all their money is in the same state retirement fund, a Judy the janitor who hopes to get a good pension for 30 years will in part be the beneficiary of the fund's investments, but also of Tim the teacher who will die at age 68 but doesn't know it yet. Social Security is also a defined benefit, so it works this way, too.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTA defined benefit pension is not, as so many would have us believe, simply a way for the state to assume the risk of providing a pension in the future. Certainly the state assumes some of the risk, but a defined benefit plan is also a way for the retirees and employees to share that risk among themselves. By contrast, with a defined contribution plan, you're on your own. Your risk is your own, and that's that.
I suppose that's all well and good in some areas of our lives. We all have to make decisions about our lives, and having to live with the consequences of our decisions is part of growing up. But can this be an organizing principle behind an entire world? Do we want it to be?
On our own?
In truth, none of us are truly on our own. I don't just mean in the sense that Elizabeth Warren put it so well when she recently pointed out, "There is nobody in this country who got rich on his own. Nodody." It works in the other direction, too. Among our citizens are people who made bad choices, as well as people who make good choices, but failed anyway. And here's some news: those people don't disappear. You may feel no responsibility towards these failures, but that doesn't mean you are not affected by them.
Communities with lots of poor people are unattractive both to businesses looking for customers and employers looking for employees. Schools with lots of poor students find themselves beset with problems like absenteeism and poor nutrition that ultimately affect the quality of education for all their students. Hospitals in areas with lots of poor people have their emergency rooms clogged with non-emergencies. There are hundreds of ways in which all of our lives are linked, like it or not.
In other words, imagining that we're each on our own, for better or worse, is not only mean but it's dumb, too.
What do we owe?
In yesterday's New York Times, a superficial and pointlessly gloomy article about how Rhode Island's finances look from 35,000 feet asked this:
"In some ways, the central question is not only what the government owes to pensioners but what citizens owe to one another."
Is this even an open question? In a purely practical sense, over the last couple of decades, our governors and legislators have answered that question, and the answer is nothing -- nada, zero, zip. According to them, the citizens of Lincoln and Barrington owe nothing to the citizens of Central Falls, our rich citizens owe nothing to our poor ones, and our young ones owe nothing to the old. This perspective has been embedded in the laws our state has passed during the past 20 years.
Over those decades, we've cut taxes for rich people and cut services for poor ones (repeatedly). We hear that Central Falls can't pay its bills and all we do is pass a law to say the bondholders have priority over retirees. The cost of health care oppresses us all but all we do is take it away from some people. All that's happening now is that we're watching the consequences of those decisions play out.
When life and health insurance were first introduced in this country, they were hailed as a revolution, a way to care for one another. There were plenty of socialists among the cadre of people selling insurance in the 1920s because the idea of sharing risk widely made a lot of sense to them.
Defined-benefit pensions were invented by insurance companies for the same reason: to share risk among many people so that all would benefit. Here's more news: pensions were invented and became popular because they filled a need, and helped redefine old age to be something other than just a time of penury. We can pretend otherwise, but all we will eventually do is rediscover the need. I'd like to hope we can do so not through hard experience, but lately it seems like that hard experience is in our future.
Tom Sgouros is the editor of the Rhode Island Policy Reporter, at whatcheer.net and the author of "Ten Things You Don't Know About Rhode Island." Contact him at [email protected].
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