Does anyone have numbers on what United employees’ retirement benefits would be worth if they had been in a defined contribution plan like a 401(k) all along rather than a broken defined benefit pension? That is what I’d like to know.
Alex Tabarrok has nailed the lesson of the failed United pension plan. Yglesias, on the other hand, is piling confusion atop confusion.
Alex Tabbarok takes the opposite view and holds that the moral of the increasing unviability of defined-benefit pensions is that we should eliminate our defined-benefit public sector pensions as well. Frankly, I think this is a bit silly. If one aspect of your finances is becoming riskier, that’s a terrible moment to transform a different aspect of your finances into a riskier system as well. It’s particularly foolish if the risks entailed are essentially the same. Under privatization, your Social Security benefits will be down at the exact same time your 401 (k) account is down, i.e., just when you need it most.
Frankly, I think Matt is being more than a little silly. Most personal account plans encourage annuitization of at least some of the assets in the plan upon retirement. (The Cato plan would require purchase of an annuity that provides a stream of checks at at least 120% of poverty. You can cash out the extra, buy a boat, send your granddaughter to college, or leave it in the market.) If the market goes down, your annuity pays the same as ever. It would be a good idea not to buy an annuity right after the market takes a dip. And, hey!, you don’t have to. Matt pretends as if the market is a giant unpredictable roulette wheel that has not developed sophisticated financial instruments for managing the modest risks of investment. He also pretends that the personal account plans do not include some means-tested assistance to people whose personal retirement savings and investments leave them below a critical threshold. But they do. There is simply nothing left in his point once the actual features of the actual world relevant to the argument are fairly acknowledged.
Now what needs to be brought into the picture here is that the federal government is not like a big corporation. Governments don’t go out of business. Governments don’t experience unexpected new competition for their customers. Corporations can’t just generate new revenues by taking a vote. And of course corporate managers are supposed to have a different attitude vis-à-vis their employees than elected representatives have vis-à-vis their constituents.
This makes no sense. Governments CONSTANTLY go out of business (while the state abides), and new governments bring new policy. See, sometimes there are differently constituted congresses with different policy preference profiles. And there are different Presidents with different policy preferences. Etc. Which is why people get so very excited about elections. And which is why there is a lot of policy volatility. I assume Matt voted for Kerry because he wanted him to implement different policies from Bush’s. No?
And Matt would not be up in arms about the prospect that Social Security might fundamentally change in nature and structure if it was not the case that it could change fundamentally in nature and structure. If government, like Everest, is unmovable, then why all the high-toned rhetoric about saving the jewel in the crown of the New Deal, yadda yadda?
Matt also seems to entertain the fantasy that government can raise revenues simply by turning up the tax spigot. But government does not exist in a blissful parallel plane where economic logic does not apply. Even fairy folk respond to incentives. Surely he has heard of optimal tax policy.
Now, it is true that the government is not like a big corporation. It is less efficient, suffers from far more severe principal/agent problems, is more inclined to corruption, and is rather more like an extortion racket.
Tabarrok didn’t make an argument, so I’ll ignore him.
Yglesias did. He said defined benefit plans are good things, that private corporations (even with tax subsidies and heavy regulation) aren’t good at delivering them, and that shows why Social Security is good.
You seem to be saying that financial markets can easily deliver the equivalent of defined benefit plans. But you don’t show that. You just show that the Cato plan has some (inferior) defined benefit element.
Why so-called libertarians think coercing people into defined contribution schemes is better than coercing them into defined benefit schemes (where the government has a real advantage), I still don’t get.
No doubt United Airlines, GM and many other failing U.S. companies will receive funds under the right-wing plan to loot S.S.
Provided, of course, that they make the proper payment to Tom DeLay and the rest of Will’s masters…
You appear to believe that the markets now have “sophisticated financial instruments for managing the modest risks of investment.” This is a vague statement, but seems to be the argument that derivatives render a market meltdown less likely (if not a Japan-like scenario). While fancy derivatives can reduce volatility, the risk to the market at large is that something unexpected happens, everyone’s models go south, and it’s LTCM * 1000.
As far as “optimal tax policy” as an argument against taxing more for social security down the road–do you really believe a couple percent of GDP in across-the-board tax hikes would launch USia over the Laffer peak? Because I don’t want higher taxes to pay for the elderly either, but I can’t buy that line.
Will, could you explain how the Cato plan requires you to buy an annuity that pays 20% above the poverty line, and “you don’t have to”? Matt’s worried about what happens if the market falls right before you have to buy the annuity.
Also, it seems like the Cato plan is biting the moral hazard / risky investments bullet: “He also pretends that the personal account plans do not include some means-tested assistance to people whose personal retirement savings and investments leave them below a critical threshold.” Is this right?
Gareth, The problem, as the United meltdown and Social Security show, is that defined benefits plans cannot offer the equivalent of a defined benefits plan.
Part of my point was that YOU CAN BUY A DEFINED BENEFITS PLAN in the form of an annuity on the market. Do I really need to show that?
Intrapersonal transfers through mandatory savings are better than interpersonal transfers through taxes and welfare payments for a number of reasons. Stopping someone from consuming their money for a period of time is morally better than simply taking it away. That’s a limitation rather than an outright violation of a property right. Furthermore, involvement in investment markets gives everyone a direct stake in the performance of the economy and closes the gap between the investing and non-investing classes. Because the market is our deepest source of interdependence, mutuality, and cohesion, it is better that everyone have a vested interest in it. Additionally, people have a greater sense of efficiacy and self-respect when their own money pays for their own retirement. Etc.
Will, your first sentence above makes no sense. Also, does the Cato plan force people to annuitize their account assets by a specific age, or not? Forced annuitization really does seem to create timing problems, and you compound the confusion in your original post by sloppily writing “encourage” when you mean “require,” an error more usually found among statists who don’t see the difference between choice and coercion.
I think you have a good general point here, though, that hasn’t been stated explicitly. Namely: the sort of private actors that are best at providing sound defined benefits plans are those that sell perpetual annuities on the market to all comers. There are a variety of reasons why these annuities are more secure than corporate employee pensions. One is that they don’t have the moral hazard problems caused by the PBGC and its weird system of poorly-calibrated premiums and ham-handed regulation. And the fact that the PBGC– whose entire reason for existence is assessing the actuarial soundness of defined benefits plans– is not very good at its job adds (along with the repeated underestimates of the long-term costs of SS) to the evidence that government isn’t good at providing these plans either.
Now the mass-thievery proponents respond to this, I think, by saying “yeah, but government can tax its way out of its mistakes, thus lowering the risk of failure of its plans to even less than the best private providers.” This seems to be what Matt Y. means by “Corporations can’t just generate new revenues by taking a vote.” And it’s true as far as it goes, but is of little comfort to those of us whose see our taxes repeatedly raised to pay for our parents’ profligate mistakes.
I’m also seeing frighteningly little about the role the unions had in creating the DB pension debacle.
And you can buy that annuity from AIG, a triple-A rated insurer. Oh wait, a single-A rated insurer…
just one more jab, I’m pretty sure Matt’s point about governments not going out of business was that governments don’t go bankrupt, not that they don’t change policies or administrations as you interpreted it.
Nicholas, I meant that defined benefits plans are having a very hard time paying the benefits they have defined. That’s the problem with them.
But a big part of the reason that United is having trouble paying the benefits it has defined is competitive pressure of a sort that the US Government does not really face. United needs people to keep buying tickets for more than it costs them to provide, and cannot ensure that this happens as long as Southwest exists. It doesn’t have the power to will customers into existence.
While the US Government doesn’t have absolute power to do so, it has at least the theoretical ability to raise payroll taxes and restore solvency. What are people going to do, say “hell no, I’m not paying” and move to Australia?
What are people going to do? People, who do not like having their taxes raised, will punish politicians who raise them. That’s what people will do. So the power to raise payroll taxes is, yes, theoretical. I, for one, will die in the last ditch before my payroll taxes are raised. More likely is that people are going to cut benefits for other, richer people who do not need “old age insurance.” A la Pozen. So a partial “default” on the defined benefit promise is what people war going to do.
With the possible exception of NAMBLA, it’s hard to imagine a political group thats been less effective than CATO and the libertarians these last 4 years, and I think Will’s attitude shows us why.
Pensions are failing because companies are failing. The very companies the LINOs want to put our SS in. Will the last libertarian leaving reality please turn out the lights(powered by government subsidized electricity)?.
Will, I am prepared to concede that it is harder to keep a DB plan solvent, if you will (finally) concede that, from the point of view of the individual, it has advantages that a DC plan with the same expected return does not.
Buying an annuity before retirement (particulary in an unregulated market) does not spread the risks a DB plan based on best or average earnings does.
What about this proposal? We freeze SS contribution rates, and give a trustee board discretion to fiddle with benefits if necessary. The right stops talking about beer funds, accepts that the Trust Fund is a legitimate claim on future general revenue, and further accepts that the general fund needs to be brought into balance, by tax increases if need be.
Hard to imagine a group “less effective than CATO”?
Hmmmm… is that why you have the President using nearly every waking moment to stress the benefits of private accounts, SS reform is now a regular topic on the nightly on the news, and Congress is promising to get a bill together this summer?
And that’s just one issue.
Keep trying MB… you’re bound to get something right one of these days. You know what they say about a million monkeys typing and Shakespeare.
Hehe, I was just reading “Will in the World”
Bush has increased the size of the federal budget faster than any president in the last 50 years. Don’t confuse talk with reality.
Claiming Bush as some kind of libertarian hero is liking a cop claiming victory because he got a serial killer to whisper “I love you” as he guts his victims.
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Tabarrok didn’t make an argument, so I’ll ignore him.
Yglesias did. He said defined benefit plans are good things, that private corporations (even with tax subsidies and heavy regulation) aren’t good at delivering them, and that shows why Social Security is good.
You seem to be saying that financial markets can easily deliver the equivalent of defined benefit plans. But you don’t show that. You just show that the Cato plan has some (inferior) defined benefit element.
Why so-called libertarians think coercing people into defined contribution schemes is better than coercing them into defined benefit schemes (where the government has a real advantage), I still don’t get.
No doubt United Airlines, GM and many other failing U.S. companies will receive funds under the right-wing plan to loot S.S.
Provided, of course, that they make the proper payment to Tom DeLay and the rest of Will’s masters…
You appear to believe that the markets now have “sophisticated financial instruments for managing the modest risks of investment.” This is a vague statement, but seems to be the argument that derivatives render a market meltdown less likely (if not a Japan-like scenario). While fancy derivatives can reduce volatility, the risk to the market at large is that something unexpected happens, everyone’s models go south, and it’s LTCM * 1000.
As far as “optimal tax policy” as an argument against taxing more for social security down the road–do you really believe a couple percent of GDP in across-the-board tax hikes would launch USia over the Laffer peak? Because I don’t want higher taxes to pay for the elderly either, but I can’t buy that line.
Will, could you explain how the Cato plan requires you to buy an annuity that pays 20% above the poverty line, and “you don’t have to”? Matt’s worried about what happens if the market falls right before you have to buy the annuity.
Also, it seems like the Cato plan is biting the moral hazard / risky investments bullet: “He also pretends that the personal account plans do not include some means-tested assistance to people whose personal retirement savings and investments leave them below a critical threshold.” Is this right?
Gareth, The problem, as the United meltdown and Social Security show, is that defined benefits plans cannot offer the equivalent of a defined benefits plan.
Part of my point was that YOU CAN BUY A DEFINED BENEFITS PLAN in the form of an annuity on the market. Do I really need to show that?
Intrapersonal transfers through mandatory savings are better than interpersonal transfers through taxes and welfare payments for a number of reasons. Stopping someone from consuming their money for a period of time is morally better than simply taking it away. That’s a limitation rather than an outright violation of a property right. Furthermore, involvement in investment markets gives everyone a direct stake in the performance of the economy and closes the gap between the investing and non-investing classes. Because the market is our deepest source of interdependence, mutuality, and cohesion, it is better that everyone have a vested interest in it. Additionally, people have a greater sense of efficiacy and self-respect when their own money pays for their own retirement. Etc.
Will, your first sentence above makes no sense. Also, does the Cato plan force people to annuitize their account assets by a specific age, or not? Forced annuitization really does seem to create timing problems, and you compound the confusion in your original post by sloppily writing “encourage” when you mean “require,” an error more usually found among statists who don’t see the difference between choice and coercion.
I think you have a good general point here, though, that hasn’t been stated explicitly. Namely: the sort of private actors that are best at providing sound defined benefits plans are those that sell perpetual annuities on the market to all comers. There are a variety of reasons why these annuities are more secure than corporate employee pensions. One is that they don’t have the moral hazard problems caused by the PBGC and its weird system of poorly-calibrated premiums and ham-handed regulation. And the fact that the PBGC– whose entire reason for existence is assessing the actuarial soundness of defined benefits plans– is not very good at its job adds (along with the repeated underestimates of the long-term costs of SS) to the evidence that government isn’t good at providing these plans either.
Now the mass-thievery proponents respond to this, I think, by saying “yeah, but government can tax its way out of its mistakes, thus lowering the risk of failure of its plans to even less than the best private providers.” This seems to be what Matt Y. means by “Corporations can’t just generate new revenues by taking a vote.” And it’s true as far as it goes, but is of little comfort to those of us whose see our taxes repeatedly raised to pay for our parents’ profligate mistakes.
I’m also seeing frighteningly little about the role the unions had in creating the DB pension debacle.
And you can buy that annuity from AIG, a triple-A rated insurer. Oh wait, a single-A rated insurer…
just one more jab, I’m pretty sure Matt’s point about governments not going out of business was that governments don’t go bankrupt, not that they don’t change policies or administrations as you interpreted it.
Nicholas, I meant that defined benefits plans are having a very hard time paying the benefits they have defined. That’s the problem with them.
But a big part of the reason that United is having trouble paying the benefits it has defined is competitive pressure of a sort that the US Government does not really face. United needs people to keep buying tickets for more than it costs them to provide, and cannot ensure that this happens as long as Southwest exists. It doesn’t have the power to will customers into existence.
While the US Government doesn’t have absolute power to do so, it has at least the theoretical ability to raise payroll taxes and restore solvency. What are people going to do, say “hell no, I’m not paying” and move to Australia?
What are people going to do? People, who do not like having their taxes raised, will punish politicians who raise them. That’s what people will do. So the power to raise payroll taxes is, yes, theoretical. I, for one, will die in the last ditch before my payroll taxes are raised. More likely is that people are going to cut benefits for other, richer people who do not need “old age insurance.” A la Pozen. So a partial “default” on the defined benefit promise is what people war going to do.
With the possible exception of NAMBLA, it’s hard to imagine a political group thats been less effective than CATO and the libertarians these last 4 years, and I think Will’s attitude shows us why.
Pensions are failing because companies are failing. The very companies the LINOs want to put our SS in. Will the last libertarian leaving reality please turn out the lights(powered by government subsidized electricity)?.
Will, I am prepared to concede that it is harder to keep a DB plan solvent, if you will (finally) concede that, from the point of view of the individual, it has advantages that a DC plan with the same expected return does not.
Buying an annuity before retirement (particulary in an unregulated market) does not spread the risks a DB plan based on best or average earnings does.
What about this proposal? We freeze SS contribution rates, and give a trustee board discretion to fiddle with benefits if necessary. The right stops talking about beer funds, accepts that the Trust Fund is a legitimate claim on future general revenue, and further accepts that the general fund needs to be brought into balance, by tax increases if need be.
Hard to imagine a group “less effective than CATO”?
Hmmmm… is that why you have the President using nearly every waking moment to stress the benefits of private accounts, SS reform is now a regular topic on the nightly on the news, and Congress is promising to get a bill together this summer?
And that’s just one issue.
Keep trying MB… you’re bound to get something right one of these days. You know what they say about a million monkeys typing and Shakespeare.
Hehe, I was just reading “Will in the World”
Bush has increased the size of the federal budget faster than any president in the last 50 years. Don’t confuse talk with reality.
Claiming Bush as some kind of libertarian hero is liking a cop claiming victory because he got a serial killer to whisper “I love you” as he guts his victims.