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Blue Model Blues
Of Death and Pensions

The economists Anne Case and Angus Deaton—authors of a groundbreaking new study showing that middle aged whites without college degrees are dying at far faster rates in America than in other developed countries—were generally cautious about attributing causality to their widely discussed findings. However, as the Atlantic‘s write-up highlights, they did speculate about whether America’s ongoing shift from defined-benefit pensions to a defined-contribution retirement model has something to do with the apparent agony of the white working class:

The United States has moved primarily to defined-contribution pension plans with associated stock market risk, whereas, in Europe, defined-benefit pensions are still the norm. Future financial insecurity may weigh more heavily on US workers, if they perceive stock market risk harder to manage than earnings risk, or if they have contributed inadequately to defined-contribution plans.

We don’t claim to know what did or didn’t cause the shocking uptick in mortality that Case and Deaton demonstrate, but we think it would be a grave mistake to read the paper and conclude that a return to the defined-benefit pension model is the answer to America’s social ills. This system was sustainable in midcentury “blue model” America, but it is not suited to the realities of the American economy today, for two reasons that Walter Russell Mead articulated in an essay last month.

First, defined-benefit pension programs strongly favor long-term workers. In the heyday of this retirement model, a worker’s pension size was determined by the number of years he spent at a company, and he needed to stay for a certain number of years to be eligible for any retirement benefits at all. The reality of the 21st-century American economy, where even the most established companies are under intense pressure from globalization and technological innovation, is that workers need to have the flexibility to move from one job to another. This is much more difficult under a defined-benefit system.

Second, defined-benefit pension plans are only as strong as the companies that guarantee them. This might have been tolerable in blue model America, where a handful of giant, stable companies dominated each industry, and it might still be tolerable in European countries, which a gigantic regulatory state blocks or slows American-style creative destruction. But in a post-blue American economy at the forefront of global innovation where companies rise and fall at the blink of an eye, a defined-benefit pension system is a risky bet, and could cause many people to lose everything.

None of this means that the shift away from defined-benefit pensions has not been painful for many workers—it has. And as the post-blue economy takes shape, companies and policymakers must think about ways to make the transition easier. Among the changes that should be considered: auto-enroll programs, where companies automatically deduct from employees’ paychecks and place money in 401(k)s; an increased focus on financial education in public education, so that workers can invest retirement plans more effectively; and more intelligent regulation of the part of the financial service industry that deals with 401(k) plans.

The decline of the post-blue economy has created its share of challenges, including reduced financial security among less-skilled workers. But the right answer is not to double down on a system that is on its way out, but to develop new institutions and policies that will allow Americans to thrive in the twenty-first century.

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  • Andrew Allison

    It’s noteworthy that the rate for Hispanics has followed the 2% per year decline of other countries. I suspect that Hispanics in that age group have, in general, even less defined benefit pension benefits than non-Hispanic whites. Could it be that the presumably stronger familial ties among Hispanics accounts for the difference. The real issue with respect to defined benefit veresus contribution is that, as the appalling savings statistics make clear, even with the incentives provided via, e.g. IRAsAmericans won’t save voluntarily.

  • Anthony

    Related: why poor white Americans are dying of despair. theweek.com/articles/587242/why-poor-white-americans-are-dying-despair

  • http://www.quora.com/Richard-Treitel/answers Richard T

    A wonky idea I came up with a few years ago: GDP bonds for purchase by 401(k) and similar plans, not to mention Social Security. Each bond is a promise on the part of Uncle Sam to pay the holder a trillionth of the nation’s GDP in the year of redemption, or perhaps by a state government to pay a ten-billionth of that state’s GDP. Prices are set in the market; governments decide how many bonds to issue.

    Such a bond is as close to a defined benefit as we can realistically get, if we accept that the total transfer from young to old must be limited. There is risk, but everybody shares it. The incentive points the right way: anyone who votes for pro-growth measures will be rewarded when they retire. The number of bonds issued is a clear statement — perhaps too clear! — of how heavy the burden of pensions is going to be.

  • Jim__L

    Welcome to the equity risks taken by “the 1%”. Remember to keep them appropriately diversified!

    I like 401(k)s. They’re the closest to “common ownership of the means of production” we’re likely to see, and the closest to communism I’m comfortable with.

    • FriendlyGoat

      It’s certainly true that the drip-drip-drip of fees associated with 401(k) plans, the drip-drip-drip of money leaking out of markets to high-frequency traders, and the buy-high, sell-low outcomes for many retail investors (including in 401(k) plans) are more features of capitalism than communism. Now something more like communism might have had the Social Security Trust Funds buying total-market mutual funds since the Reagan/O’Neill “fix” of the eighties resulting in funding of higher benefits, for instance, and THAT would have probably given you permanent indigestion.

      • Jim__L

        The SS trust fund is a fiction, always has been. It’s why my generation generally says, “Social Security won’t be there when I retire. Medicare probably won’t either.”

        The Boomers, as a generation, are robbing us blind.

        • FriendlyGoat

          It’s hard for me to understand what is “fiction” about the citizens and their employers having paid almost three trillion more in dedicated payroll taxes than the Social Security and Medicare programs have paid out.

          Sure, we all understand that those funds are in government bonds, essentially a loan to the potential payers of income and estate taxes and (so far) spent in the combined federal budget. Liberals understand those bonds are loans to be paid back to the programs through the (income and estate) taxing power of the United States government. Conservatives like to claim it’s all just one big pool, that payroll taxes are fair game to spend on “anything”, and that—-basically—–the payers of those payroll taxes are fair game to be treated as chumps which can be fleeced due to their ignorance.

          This is one of the many reasons I am not a conservative.

          As for the “boomers robbing us” thing, I always like to ask people who make that claim whether they have any parents or grandparents actually collecting benefits.

          • Jim__L

            Careful… if you think that treasury bonds are loans that are to be paid back, instead of piled up and rolled over, you’re sounding like a TEA Partier. 😉 If you’re not an Establishment Republican, frankly I can’t blame you.

            That said, high-end taxes — even confiscations — aren’t enough to cover that repaying that three trillion, much less the ~$20T we owe total. To pay that back, we’re going to have to trim benefits.

            In my family, there are as many seniors collecting benefits as there are those in my generation working. There are also as many kids.

            I’m in the “sandwich generation”, as it’s called. Fortunately, my folks and grandparents were sensible enough to put money away outside of the Social Security system. 401(k)s, and all that… And now there is talk about penalizing them on their Social Security (“means testing”) because they had a good sense to forgo living too richly to save money for their retirement.

            It’s almost as if the Left wants to structure incentives so that everyone is a government client…

          • FriendlyGoat

            Well, I didn’t ask you about your up-line family members using SS and Medicare to be snarky. I asked about it because it really does seem to me that many whole families are better off with these things than without them—-including the younger members who feel somewhat robbed. Is it not true that seniors living off Social Security and not spending down for living costs and medical costs are preserving the inheritances of younger people?

            I don’t mean the huge legendary inheritances. I mean Mom and Dad or grandparents maybe passing away with something in the low-mid six digits, maybe including a house. I know that isn’t the case for some people at all, and I know some people’s parents are already passed away, etc. But when I hear people saying that the youngsters are totally screwed by these programs ( and I do hear that a lot), no one ever mentions the residual effects of having the very average Moms and Dads not tapped completely dry before they pass—–So I bring it up.

            I totally agree with you that Social Security and Medicare should not be means-tested either on income or assets—–beyond what we have already done with respect to including some SS benefits in taxable income when other income is present or slightly higher premiums for Medicare B or D at higher incomes.
            Imperfect as they are as “insurance programs”, they are that and they are not “welfare”. So rich people who pay in are not to be punished on benefits for being “rich”, to my mind anyway.

            There is no question that the federal government has budget problems. The political question of our time is going to be whether we blame SS & Medicare or blame the high end tax cuts we never should have done in the first place, So far, the entitlement programs are about three trillion north of broke. So, I tend to not sympathize with blaming them for what has been mostly caused by other things altogether. As far as I know, the GOP wishes to continue reducing high-end taxation “on business” as they call it, meaning the would-be benefits go to the shareholder class—-already the richest in the history of the world. And, from what I hear, they want to do “entitlement reform” at the same time—–“saving” the Trust Funds so far into the indefinite future that not a penny from them ever has to be produced in cash. To me, those twin goals do not square.

          • Jim__L

            I’m still a bit neutral on high-end tax cuts. I’ve seen evidence each way. A lot of GOP rank and file agree that there are at least some people at the high end who could be taxed more; however, there’s not enough money there to cover the programs we’re overdoing already, unless you apply the additional taxes a lot lower down the economic scale, which I’m certainly against.

            I wouldn’t mind reforming FICA to take the caps off. Also, it might be interesting to apply FICA to capital gains. I think that it would be useful to drop capital gains to zero for the middle class to make the tax progressive, though I can’t recall if we do that already.

            It would be interesting to know if we had any common ground at this point.

          • FriendlyGoat

            Some people have said that removing the caps on earnings taxed for Social Security would go a long way toward fixing long-term solvency. I have mixed feelings about doing it because I don’t think we should either be raising the maximum SS benefits or telling people that have to pay more tax for no more benefit. I would rather hit high earnings with income tax than FICA tax.

            The main reason I recommend very high income taxes on very high incomes is to try to discourage very high incomes in the first place, not to expect that people are necessarily going to pay very high rates. If a CEO is being paid $50 million, the customers, suppliers and employees are paying for it. If the tax on income over $10 million is 80%, no board will pay the guy $50 million. That’s how it used to work and we lost it.

          • Jim__L

            Well, long-term solvency is pretty much what I’m looking for, for Social Security / Medicare. We’re in a very bad place now, with cost overruns baked into the cake. If you’re concerned about the “one big bucket of money” mentality, making sure FICA covers SS/MC independently would counteract that.

            As far as excess income goes — I appreciate your point about reining that in. Something is a little sick in our culture if we have one group of people paid thousands of times more than others. I don’t think we’ve had an honest debate about that in this country, though — one side shouts “1%” and the other side shouts “Laffer Curve”, and both think that doing things their way will have far more effect on everything than it really would.

          • FriendlyGoat

            To your last paragraph: This is why we need BALANCED politics, a thing in which liberals check conservatives, and (to a lesser degree) vice versa. Obviously, the “socialism” of Bernie Sanders does not mean communism, a “workers’ paradise” with the totalitarianism of a ruling party committee. Desirable socialism means a set of policies which merely mitigate the considerable risks for lower classes of living in a capitalistic environment.

            For me, I believe we have “enough” voices in America claiming the virtues of the Laffer Curve and “not enough” voices speaking for the lower 70%——-never mind the noise about the 1% and the 99%. This is why I spend all my hobby time speaking the liberal line. Sensible explanations on my side are lacking, and—-even with my limited capabilities—-I keep trying to make them.

            A LOT of damage was done in the Reagan era and A LOT more was done in the G.W. Bush era, including tax cuts of course, but also including smack-downs of people in the destruction of their unions and in the additions of Alito and Roberts to the Supreme Court which has caused a string of horrible decisions and precedents.

            We risk the biggest, baddest errors of them all in 2017 if we lose too much “balance” in the elections of 2016. The phenomenon of certain people being permanently ensconced in the realm of “thousands of times” (your words) what others ever earn or have is rolling over us all. This is R I D I C U L O U S—–and yet considered normal by plenty of poor people voting it in on guns, abortion, and disapproval of gay people. Arrrrghhhh. It’s nuts.

          • Jim__L

            It’s counted as normal by people to whom intangibles have value. This is something that rationalist / materialists just don’t get, as it doesn’t fit neatly into their models. At a certain point, models break down, because “The heart has its reasons of which Reason knows nothing” (thank you Blaise Pascal).

            Think about it — have you ever been an awardee in a Class Action lawsuit involving hundreds of thousands or millions of people? It doesn’t amount to much. Consider for a moment how much cash you’d really get, if the 1%’s money were redistributed. Giving up the right to bear arms, the freedom to celebrate or not to celebrate according to your conscience, condoning acts that you consider actual murder, would not net you very much. It may be irrational, but it’s not *that* irrational.

            “It profits a man nothing to give his soul for the whole world… but for Wales?” (You might want to watch A Man for All Seasons again sometime.)

            Oh, and the only thing I can tell Socialism has in common across National Socialism, Soviet Socialism, and Anarcho-Socialism, is the mixing of social classes. Dukes hobnob with their chauffeurs talking about how wonderful it is to be German, everyone calls each other “Comrade”, hotels in Barcelona have a convivial feel between all people instead of impoverished hustlers scrambling for a living among rich people whose dignity they are beneath, (or, interestingly, “There is neither Jew nor Greek, slave nor free, male nor female…”)

            I don’t think Bernie Sanders fans would accept “bitter clingers” as their social equals even if Bernie were elected and his entire policy suite implemented. More likely, as happens pretty much every time under Socialism, the lower orders are expected to toe the line according to the plans and values of their “betters”. Orwell was exactly right to observe, “All animals are equal, but some are more equal than others.”

          • FriendlyGoat

            Okay, so we’re not exactly on the same page. I’ll just tell you that I’m a Christian liberal, that I believe in balance and am hoping for balance. I’ll also tell you as someone said. “There are no free markets. There are regulated markets and then there is piracy.”
            The standard language of the political right strikes me as deceptive.
            “Small government”, they say. Not enough specificity in that for me.

          • Jim__L

            That’s true, we’re not on the same page… your picture of Small Government is about as far from mine as you can get. Big Government, to me, is no different than Big Business — almost completely unaccountable, with values and priorities very foreign to my own.

            Big enough to trust-bust, and big enough to enforce contracts… that’s about as big as Government needs to be, economy-wise. Big Government regulates, regulates, and regulates some more, regulations that are either dreamed up by some bureaucrat with no sense of business or captured by some lobbyist with no sense of public benefit. In Washington it’s even worse — they’re written by someone with no concept how their rules will affect the differing parts of the country.

            No thanks.

          • FriendlyGoat

            Oh, but trust-busting is PRECISELY the kind of thing most Republicans think is unnecessary. That’s because trust-busting is for people—–as are MOST of the unspecified regs you want rid of.

            We share the “no thanks” thing. For me, it applies to the empty tease of “small government” with no one making the darn list IN ADVANCE of what people are to lose with the GOP in charge.

  • Boritz

    Mandatory 401(k) participation is an interesting idea. What happens when someone loses their shirt i.e. contributes 300K over the years only to end up with an account balance a fraction of that? Politicians aren’t going to bail them out of their unfortunate situation in exchange for votes. Well they did bail out some unfortunates who had their entire retirement in Enron stock but that was a special one time thing.

    • Jim__L

      You’d probably have to require (or better yet, incentivize) some level of diversification.

      • CapitalHawk

        As much as I’m in favor of free markets generally, sometimes we need to recognize that not all people make optimal decisions for themselves – especially over long time horizons. We also need to acknowledge that some of this boils down to timing (i.e. luck). Retiring in 1999 and cashing out your stock portfolio resulted in a dramatically better result than if you the same thing in 2000 (or 2001 or 2002 or 2003 or…) This would have been the case even if you were diversified over a wide range of investments. Diversification used to be a good protection, but the last 10-15 years have witnessed one global synchronized business cycle and when it turns down it reduces stock valuations, interest rates on cash and cash equivalents, bond valuations, real estate values and commodity prices. Virtually the only asset class that seems to run counter to this is precious metals, and that asset class is simply not large enough to serve as a counter to all of the others.
        All of which leads me to say that we still need some portion of defined benefit income for people in retirement, a la social security.

        • Jim__L

          “We still need some portion of defined benefit income for people in retirement, a la social security”.

          True. But there have to be reforms to SS and Medicare to make the systems rational, sustainable, and something other than a cruel hoax to future generations.

          Cut the benefits back to a sustainable level, drop the nonsense about cutting FICA as a stimulus measure, index retirement age to life expectancy, and index benefits to overall birthrate and retiree / worker ratios instead of inflation.

          Social Security also has a point system to calculate eligibility; introduce a further point system that includes the productivity of a senior’s children and grandchildren as well. Seniors could get more generous benefits for up to 2.1 children and 4.2 grandchildren. This would recognize that having and raising productive kids is absolutely essential to the health and wellbeing of SS / Medicare as they’re currently structured; and in fact any retirement system at all, if you think about it.

    • SayeedMustfa

      I thought for conservatives “Mandatory” equals “tyranny”! See ACA

      • Jim__L

        Good point. Some form of incentive would be appropriate, but use of disincentives is not.

  • Anthony

    Solid knowledge and Good judgment….

  • Pete

    “We don’t claim to know what did or didn’t cause the shocking uptick in mortality that Case and Deaton demonstrate,.. ”

    Too much dope and booze.

  • FriendlyGoat

    “We don’t claim to know what did or didn’t cause the shocking uptick in mortality that Case and Deaton demonstrate”

    Well, I won’t CLAIM to know either, but being a simple-minded liberal, I’ll offer a theory. I believe a person can delve into voting patterns and discover that both white and middle-aged people tend to vote conservative more than average AND that people with high school diplomas (only) tend to vote conservative more than average. My theory would be that such voting patterns have not only “killed” such groups economically as a result of conservative tax and fiscal policy resulting from conservatives winning elections, but that such voting patterns have also killed peoples’ hopes and spirits, leading them downward to excess stress, self-destructive behaviors and earlier-than-necessary death. Many people have been voting against themselves for a long time and spending their later years wondering how the heck it didn’t work out like Grover Norquist said it would.

    Net-net, the more high-end tax cuts we enact, the more the jobs of ordinary white, middle-aged, high-school-educated people are destroyed. I will CLAIM that the dignity loss from that outcome is capable of killing anyone. Pick your disease—-stress and life disappointment will kill you.

    • Jim__L

      High-end tax cuts are the root of all evil?

      FG, I think you’re beating that drum a little too hard.

      • FriendlyGoat

        It’s an important drum, IMHO anyway. I can’t think of any good reasons why the wealth gap is widening in this country and most others except that we have been in this race to the bottom on taxes. 2017 is a year in which we could make DRASTIC ERROR on this subject, just as we did in 2001 and 2003—–error that is very hard if not impossible to fix.

        I was a manufacturing accountant in the 1970’s. I remember taxation much higher than now, including on capital gains and no S-Corps. It is not lost on me that the American middle class “peaked” almost simultaneously with the tax cuts of 1978 and many more in the 1980’s. Most people think those cuts were good. I think the reverse. Most people think tax cuts create jobs. I think the reverse of that too.

        • Jim__L

          Granting China MFN status and the habit of pursuing disruptive technologies have at least as much to do with the disparity of incomes in this country as tax policy.

          Cheap global labor hit the manufacturing industry very hard, and ruthless pursuit of disruptive efficiency (plus the huge rewards that can be reaped by the people introducing the efficient new tech) increased disparities too.

          Additionally, increasing the scale of finance, and scaling fees proportionately to deal size (instead of scaling fees with the actual work done) while simultaneously reducing competition in the financial industry, also drove astronomical increases in some incomes. Keeping interest rates near zero also serves to simply hand money to the financial sector.

          So I can think of a number of alternative explanations to the “cut taxes on the rich” theory, none of which are necessarily dogmatically Right or Left. Encouraging unions in China would help. Encouraging Expansive technologies instead of glorifying Disruptive tech would help too. Increasing competition in the banking industry (trustbusting) would help reduce the banking fee outrages, as would breaking up companies big enough to need financing on that scale. Letting interest rates float would stop the banking giveaways, although we might need to pay off some of our national debt first.

          Intuitively, it seems like taxing those who can most afford it isn’t a bad thing. I’ve seen people present evidence to the contrary, although most people who argue for the Laffer Curve unfortunately do so without presenting supporting evidence.

          I hope you have the time to give some thought to what I see as the major drivers of income disparity in this country.

          • FriendlyGoat

            There is no question that globalization has hurt the old American manufacturing base and the workers in it.

            But we have an inequality problem which isn’t entirely driven by globalization. Why do we have Certified Nursing Assistants, EMT’s and child care workers starting at near federal minimum wage in many places while college football coaches are the highest paid public employees in the country? If we had a 75% on salaries north of a million, no one would be paying them. Likewise CEO’s.

  • Episteme

    I suppose that I’m an outlier to this since (A) I’m only 35 rather 45+ and (B) my retirement savings is via an IRA since I’ve never worked anyway with 401(k) programs. However, I think I’m still thinking along the same lines (and definitely recognize the logic put forth here): even among arenas of political support for investing, there’s little programmatic support for the small investor (there’s the assumption that becomes a tautology that independent investors are large investors in the American market); pension programs are managed external to the “investor” and generally benefit from pooling, while even a 401(k) (and definitely an IRA or Roth IRA done on the side) is a project that requires more contact with the market as a small fish. I don’t know if there’s anything in the tax code, for example, that can be done to make entry into the markets easier for small-cap individuals (I’ve pondered whether deductibility on brokerage fees up to a certain point of time and income, for example, might work – especially on retirement accounts – to get people in the door who are unsure about starting accounts and don’t have the amounts in their funds to bypass main fees). It’s a case where (A) more people investing for their retirement is beneficial and (B) more investor volume in those parts of the market is generally beneficially on its own economic terms, so I think that things like tax policy could consider the issue in some manner without being overly heavy-handed.

  • Jim__L

    Also, from the “lesser of two evils” file… has pork-barrel politics been tamped down, in Washington? Funneling money to individual districts to be distributed to the population on the basis of useful work that the population does (that work imparting far more dignity than a welfare check) could counteract this trend.

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