I was reminded of this work the other day when the Wall Street Journal printed the figure you see below. There are lots of ways of showing the risk shift, but this is one of the most intuitive: the shift from DB (defined benefit, or guaranteed) pension plans to DC (defined contribution) plans (most commonly, 401(k)s, named after the line in the tax code that defers taxation on contributions to such accounts). It’s a clear picture of a shift in the locus of retirement security from the firm to the worker.
The shift was particularly sharp in the 1980s and ’90s. It has since decelerated, but the gap between DB and DC is wider than ever. Only 13 percent of private-sector workers have DBs now, compared with 38 percent in the late 1970s.
The theme of the WSJ piece is that the DC “revolution” has failed to ensure widespread retirement security. The early proponents of the movement “didn’t anticipate … that the tax-deferred savings tool would largely replace pensions as big employers looked for ways to cut expenses … the proliferation of 401(k) plans has exposed workers to big drops in the stock market and high fees from Wall Street money managers while making it easier for companies to shed guaranteed retiree payouts.”
A former actuary, Gerald Facciani, who advocated for DCs back in the Reagan years, now argues that “The great lie is that the 401(k) was capable of replacing the old system of pensions. It was oversold.”
Such observations seem particularly germane as the 115th Congress gets seated and team Trump prepares to take the reins. Which begs the question: how could a significant (albeit minority) share of the electorate that’s increasingly exposed to and suffering from the long risk shift possibly elect leaders that threaten to exacerbate and hasten the shift?
In part, because the salesmanship behind the shift has been highly effective in convincing people that bigger risks mean bigger rewards. “Why settle for a stodgy old fixed pension when you can play the market, just like Trump and his merry band of billionaire cabinet appointees? You don’t want government health care; you want to shop for your own health care with your own skin in the game, right? And let’s dispose of that hammock of a safety net so you’ll have the incentive you need to get out and take one of the excellent jobs that’s just waiting for you.”
“Forget minimum wages and overtime standards — they just hold you back. Your freedom requires liberation from such regulations! A consumer protection bureau?! What kind of bold, adventurous shopper would ever need such patronizing hand-holding?”
“A regular job with an employer?! How constraining. You need a ‘gig’ job where you’re your own boss.”
That ideology carries over into financial markets in a particularly interesting way. Here the sales job maintains that market regulations stifle investors’ animal spirits, crush innovation and overprice risk. “Get rid of the oversight, and watch the innovators come up with all kinds of sexy trades, so complex that even they don’t understand them!”
In reality, what happens next is that runaway optimism combines with dense complexity to underprice risk, inflating bubbles that implode into recession.
But do the risk shifters suffer? Of course not. They’re too big to fail and so, with hardly an apology, they’re getting ready for the next economic shampoo cycle: bubble, bust, repeat.
I see all of this happening now in real time, with Congress preparing to repeal Obamacare. The Affordable Care Act is an anti-risk-shifter, a policy designed to shift the locus of the insecurity of no or inadequate health coverage back onto the government sector, which, due to its power to pool and regulate, is the far better sector to place that risk (which is why I’d lower, not raise, the Medicare eligibility age).
Same with retirement risk. As I read the WSJ article, my inner wonk was screaming: We already have a great, efficient, much-loved, fully vested, progressive, guaranteed pension plan. It’s called Social Security. If we want to relegate retirement insecurity to the past, we don’t need new saving schemes and tax incentives. We need to strengthen and expand Social Security.
Trump and the Republicans are anxious to repeal Dodd-Frank financial reform and cut the Consumer Finance Protection Bureau off at the knees. They’re preparing to pass a huge, regressive tax cut that I believe is ultimately designed to generate lasting deficits that will then be cited to justify the cutting of Medicaid, food stamps, Medicare, and Social Security.
With that, the risk shift will be complete.
What’s remarkable is that this is all happening at a time when even conventional wisdom recognizes that structural economic changes — globalization, technology, inequality, immobility, persistent underemployment, “secular stagnation” (persistently weak demand) — have made economic life tougher for many in the workforce. Such changes would seem to demand a politics that would drive the risk shift in the opposite direction, off the shoulders of households that are increasingly exposed to growing structural risks of displacement and loss, and back onto firms and governments.
As the new Congress and White House settle in, that sure isn’t the politics we have. But it is much closer to the agenda most of us voted for and it is the one we must demand.