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.