American Enterprise Online | 6.15.05
Alan W. Dowd
Last week, the Senate Finance Committee held a hearing on the precarious state of pension funding at some of the nation’s larger employers, paying special attention to a few airlines. The head of the government’s Pension Benefit Guaranty Corporation (PBGC) reported that more than 1,100 plans are currently showing a shortfall of $50 million or more, with the total tally ranging between $353 billion and $450 billion.
Those companies that fail to make good on their pension promises usually toss their debts over to the PBGC, which collects premiums from participating corporations to pay for bankrupt pensions. According to the PBGC, it is already responsible for the current and future pensions of 1.06 million Americans (and counting). Thanks to a spate of bankruptcies and bad pension management, PBGC is now carrying a debt $23.3 billion (and counting), and the taxpayers may be asked to bail out these failed pensions.
In response to those depressing and daunting numbers, some senators have shifted into action. One senator concluded, “We need to fix this broken pension system to protect employees.” Another argued that “workers lives and retirements have been ruined.” He criticized the way companies like United Airlines “used illusory investment gains…to hide and disguise the true financial condition of the pension plans…The time to act is now.”
Two senators have introduced a bill that would allow commercial airlines to restructure their unfunded pension liabilities over 25 years and transition workers from corporation-funded pension programs—which, as the PBGC explains, promise to pay a specified monthly benefit at retirement based on salary and years on the job—into 401k-style plans that invest a mix of corporate and employee monies to build a retirement nest egg.
As the Baltimore Sun reported, still another senator proposed prohibiting “executives from protecting their own pension plans in a lock box while dumping workers’ plans onto the PBGC.”
All of this makes good sense. It’s not fair for executives to play by one set of rules and workers another. It’s not right to promise a worker one thing and give him something less once he becomes a retiree. And it’s foolish to ignore a problem or defer it to someone else in hopes that it will go away.
Of course, isn’t that exactly what some senators are saying we should do when it comes to our national pension system, the one we call Social Security? I think the answer is yes. And it pays to recall that the numbers swirling around Social Security make the PBGC shortfall look like pocket change:
- By 2018—just 13 years from now—Social Security will be paying out in benefits more than it collects in the form of taxes.
- Every year we play kick the can with the problem adds an additional $600 billion to the cost of fixing it.
- Between today and 2031, the number of people calling in their Social Security pensions will rise from 37 million to 71 million.
- There were once 16 workers to support every Social Security pensioner. Today, there are about three. In the coming decades, the ratio will shrink to two to one.
Are there any solutions to a problem this big? Yes. Raising taxes is a solution—not an ideal one, in my view. American workers and employers are already shoveling 12.4% of every worker’s salary into the system (just one of several taxes—hidden and overt—that Americans pay). And while no one wants to go back to the days when seniors died in poverty, there’s something wrong about requiring a waitress or barber who earns a little over minimum wage to fork over even more of their pay to subsidize the retirement of someone with two houses and $900,000 in stocks and bonds—especially if the same redistribution system won’t be there when they retire.
That raises the issue of means testing—basing Social Security retirement benefits on need rather than universal participation. While this might help ease some of the strain on Social Security, it might also consign Social Security to the realm of a poverty program, which would further undermine its long-term durability and sustainability.
Raising the retirement age is yet another option. Already, the Social Security Administration has bumped up the retirement age from 65 to 67. But with Americans living longer, the retirement age probably needs to go much higher: The White House notes that in 1935, the average American didn’t even live long enough to collect benefits. “Today, life expectancy is 77 years.” A recent New York Times piece details how Americans who reach 65 in 2005 or so, can expect to live to 83. This creates a burden on the system that is increasing every year because we are living longer. It also creates an opportunity because the economy needs workers—and technology enables older workers to contribute to the workforce well past the arbitrary and artificial retirement age of 65.
Finally, giving workers a chance to invest some of their Social Security monies in growth-bearing accounts (such as mutual funds) is not a risky scheme. President Clinton, for instance, proposed the creation of retirement savings accounts to allow “Americans to invest as they choose.” The Clinton and Bush investment accounts are different in form but similar in purpose and function: both aim to ease the burden on the decades-old Social Security system by giving more Americans an opportunity to tap into the wonder of compounding interest and economic growth. (In fact, President Clinton proposed investing a portion of the late-1990s surplus into the stock market, as he put it, “just like any private or state government pension would do. This will earn a higher return and keep Social Security sound for 55 years.”)
The federal government’s Thrift Savings Plan offers participants a number of investment choices, including blue-chip stocks and lower-risk options. A similar system could be added to the Social Security retirement mix, and it could help ease some of the strain on the system. As William Tucker recently explained in The American Enterprise magazine, Chile, Argentina, Peru and Colombia have already opened their social security systems to market forces—and lived to tell about it.
In fact, after almost 25 years, the Chilean system is humming. Under Chile’s model, 10 percent of every worker’s earnings are deducted and deposited into the Pension Savings Account program, although workers are allowed to invest more. From there, workers choose from one of several mutual-fund-style plans to invest their money, depending on their tolerance to risk. “Since the system was inaugurated in 1981,” according to Tucker, “the average annual return on investment has been 13 percent.” That’s triple what was originally forecast and far better than the flat or negative return many Americans can expect from their Social Security contributions. In fact, the average Chilean retires “with 78 percent of his or her working income.” Few Americans can boast of such a nest egg.
Maybe a mix of these options will solve our looming national pension problem. One thing is certain: Doing nothing is not a solution. To borrow a phrase, “The time to act is now.”
Employee Pension Preservation Act of 2006, thomas.loc.gov.
Baltimore Sun, “Airlines scolded for lax funding of pension plans,” June 8, 2005.
ArizonaCentral.com, “Budget officials tell Senate panel to tighten rules on pension plans,” June 8, 2005.
Statements of Max Baucus and Charles Grassley, June 7, 2005, finance.senate.gov.
Carolyn Lochead, “Social Security rehab died first under Clinton,” San Francisco Chronicle, April 11, 2005.
Social Security Factsheets, www.whitehouse.gov.
Bill Clinton address to Congress, January 20, 1999.
Bill Clinton address on Universal Savings Accounts, April 14, 1999.