The Risk Pool

     A few thoughts on my piece in this week's New Yorker on pensions, "The Risk Pool"-- a piece which I note, to my great amusement, has already been dubbed by one blogger ""the worst Gladwell piece ever.""

     If you haven't read it, it's an argument against the peculiarly American notion of tying retiree benefits to individual companies, which, as the current plight of General Motors shows us, is a recipe for disaster. I think that all insurance and pensions systems, to maximize effeciency and security, should be based on the largest risk pool possible--preferably the whole country.

     One of the predictable responses to this is that this is the idea behind Social Security is--and look at the problem that program is in. I have to say, though, that what reading I have done into the Social Security issue hasn't convinced me that the program is in all that much trouble--that is, with a number of not entirely painless (but not debilitating) adjustments now, we can avoid a lot of the trouble down the line. Put it this way: would you rather, as a retiree, put your faith in the federal government or General Motors?

     I was on a NRP talk show today with Olivia Mitchell of the Wharton School who, it's safe to say, has forgotten more about the pension issue than I will ever know, and she pointed out that its not pensions we should we worried about so much as retiree health care. But even there. General Motors is currently $40 billion behind in funding its retiree medical obligations. The federal govermment is behind as well. But I'd still rather take my chances with the feds than with GM.

     A couple of other, small points. One of the drawbacks of the New Yorker, as I think I've said before, is that we don't get to provide footnotes. So here, in lieu of that, are a couple of notes from The Risk Pool piece.

      I learned an enormous amount from Jennifer Klein's  "For All These Rights: Business, Labor, and the Shaping of America's Public-Private Welfare." If you're interested in reading more about the origins of our crazy quilt pension system, I recommend it highly. I was also heavily influenced by Jacob Hacker's work, in particular "The Divided Welfare State." I didn't actually get a chance to mention Hacker in the piece, and I'm sorry about that. But he has a wonderful new book coming out, and I'm hoping to write about it sometime this fall.

Comments

[Chris]

What's the deal with retiree health care? Does Medicare still kick in at 65, or did companies like GM opt out of the system and are now on the hook?

[Guy K. Haas]

http://gladwell.typepad.com/gladwellcom/2006/08/the_risk_pool.html says "I was on a NRP talk show today with Olivia Mitchell...."

Non-Reading Public?

[Dane]

Gladwell,you mentioned you'd rather "take chances with Feds than with GM",which is to say,presumably,you concede that The Feds are not better off in the handling of this issue.So what you've been proposing all along is actually to choose the lesser of two evils.
Do you mean to say we need our Social security system after all,we just also need a wise,rational and decisive overhaul of it.
In your piece,you even went so far as to suggest that Toyota,say,pool their risk/benefit with that of GM in order to balance and offset negative effects brough on by worsening dependency ratio(which you also in no uncertain terms pointed out run in circles-it goes up,before it goes down).In theroy I don't see the point of finding faults.But to put it in real context,things are much more complex and much harder.There is no way you could persuade a market competitor to saddle itself with additional debts(which you argued have direct impact on the bottom line,at least as measured in the short term) just to make them better off in the 'FUTURE".As you may know,CEOs are not known for their vision into,say,30 years.You'd be lucky if you have someone who is even bothered to care about your business in 10 years.By the way,before reading your new yorker piece,I ALSO got to read James' Financial page piece,which is about the wierd fad of "take public companies private" recently popular among public company CEOs.To drive a bargain deal,they go out of thrir way to make their MBO target look awful.Would you call this vision?I don't think so.So to pool together pension risks of different companies is not a very realistic option.Greed sires short term vision,which in turn preempts any constructive precautions or contingency mentality needed to fend for the future.
Which leaves us only the Government-sponsored Socical security system.

[rone]

"Put it this way: would you rather, as a retiree, put your faith in the federal government or General Motors?"

That's like asking me if i'd rather roll in pigshit or catshit. I think we need to reëvaluate the whole pension plan thing, because you can't trust the government, and you can't trust the companies because you can't trust the government.

[Petey]

Best Gladwell piece ever. (Or at least the Most Important Gladwell piece ever.)

[Vidar Masson]

Is it possible that the US lead in the world economy is because companies and the government have investing these dollars instead of saving them for the retirees?

[Adam]

Think it is interesting. If it is the worst Gladwell piece, it still clears the bar for intelligently provocative reading.

[Aaron]

I had no trouble with the link. Fantastic that the New Yorker is allowing use of the article.

[Jeff Schmidt]

Social Security was designed to do NO MORE than keep people leaving the workforce out of poverty.

A safety net.

Pensions were designed to provide people a RETIREMENT.

A hammock.

Big difference.

[mcgurky]

Malcolm,

Would you care to comments on Winterspeak's points about the paygo system? He is correct in pointing out that you do not address differently structured systems as options. This thread is provocative and we should hash out the alternatives...

Thanks!

[Tad Hawkins]

I don't know that I would say "worst Gladwell piece ever" -- maybe more like "least well-argued piece ever." Your whole dependency ratio argument as applied to corporations like G.M. is false. For a country that must support it's non-workers by taxing it's workers there is a direct connection between the number of workers and the amount the country has available to support the non-workers. Not so for a company like G.M. because it does not support it's non-workers -- retirees and beneficiaries -- by taxing it's workers but rather from funds that are part of the company's profit. There is no necessary direct connection between the number of workers employed by a company and it's profit. You say that G.M. suffered BECAUSE it successfully reduced the number of workers it needed to produce a given amount of cars by a large percent thus having less workers to pay for retire benefits. But that's just wrong. G.M. can't pay their retiree obligations because they have no profits. The number of current workers they have is irrelevant to their ability to pay or not pay for former employees' benefits. If Rick Wagoner could produce umpteen-billion cars single-handedly after having invested in a 100%-automated assembly line he could be wildly profitable and be able to afford all those old retiree costs and have the worst dependency ratio possible. G.M.'s problem is not that they've reduced the number of their workers but that they haven't reduced the number enough. Of course, there is more complexity to the explanation of why G.M. is not now profitable or at least profitable enough to afford it's retiree commitments, but not employing enough current workers is not part of the equation.

[Drew]

I find it interesting that the "dependency ratio" is based upon worker bodies, but shouldn't it be based upon "effective" workers? That is, if workers are more efficient today, why can't fewer workers support more retirees?

For example:
If in 1980 company X has 100,000 workers and annually clears $Y (in today's dollars) after everything but pensions are taken out, but because of increased productiviy can reduce its workforce to 20,000 workers by 2000 and somehow clear a slightly greater $Y after everything but pensions are taken out, isn't that ideal? It's not the dependency ratio that is most important, necessarily, but rather a) how profitable the company is, b) how much the promises the company has made have grown, and c) are the increases in efficiency that produce layoffs large enough to compensate for these new dependents. If the company, after everything but pensions, clears more today than it did 20 years ago (that is, assuming everything is adjusted for inflation) and has the same number of dependents, there should be no problem even if the current number of workers is much much smaller. That is, unless the specifics of the pension system are changed, a reduced workforce size does not necessarily spell doom for the pension.

In fact, it could spell greater profits for the company in the long run--if efficiencies continue to rise and the size of the workforce continues to plummet and the company still clears a bit more in everything but pensions, the amount they will pay in pensions will decrease every year as their the bulk of retirees shuffle off their mortal coil and the number of people laid off begins to curve toward some asymptotic level.

I think the heart of the matter with most of these pensions is exactly what Gladwell quoted the #2 at Bethlehem Steel saying in 1955: a combination of too rosy predictions about future profit/sustainability and a sustained effort to underfund pensions are what necessarily did-in private pensions.

Of course, I could be completely wrong, but I think the problem has been slightly over-simplified (as www.winterspeak.com suggested). However, the piece is still a good one, and I've forwarded it to several friends (thanks again, New Yorker staff, for letting us get to it free--even though I have a subscription).

[Brian Baron]

I find the politics of this whole issue baffling -- whatever the merits of the specifics of the piece, it's clear that large American corporations, which tend to be run by Republicans, would be among the chief beneficiaries of national pension and health care systems. But they're also the chief antagonists whenever such an idea is proposed, and they've been so effective that any Democrat with national aspirations has to stay miles away in order to remain politically viable (can anyone imagine Hillary proposing a national health care plan in 2008?). Is this a Nixon goes to China kind of thing -- we'll never get a rational system until the old one is so messed up that a Republican has to propose fixing it? In other words -- we won't get health care or pension reform until business decides it in its best interest?

[Cristabel]

I wonder how long-term this pension issue will really be considering that most American companies are no longer offering pensions to those of us considered to be members of the gen-X generation and younger? Once the hurdle, however painful it may be, of keeping the pension promises to Baby Boomers has been cleared, corporate-sponsored pensions and health care benefits in retirement will be a thing of the past (I'm speaking as a non-union employee). Younger Americans are all on defined-contribution plans now, if anything.

Which is why Social Security is a real concern. Although a few changes (such as age of eligibility) would do much to ensure its solvency, there is no political will to make those changes since those in power are closer to receiving Social Security than not.

[Joe Marier]

Count me as another one who doesn't get what the dependency ratio has to do with corporate pensions. Money is money, whether it comes from paying your people less or making more.

Seems to me that the problem is people living longer, pure and simple. The pensions were not funded for 30 year retirements, were they?

[Rick Wilson]

Thanks for the piece. As a native West Virginian and a huge Walter Reuther fan (he's a native son), I think you (and he) nailed it. The original goal of Reuther and the best of the labor movement was for universal coverage. Separate agreements regarding pensions and health care was a fall back.

[Daniel Lippman]

Malcolm, you said "I was on a NRP talk show today with Olivia Mitchell". I think you meant to say "NPR". Also, post the link to "The Risk Pool" on your blog.

[Mike WInter]

So Walter Reuther sold his union members down the river by agreeing to a scheme he knew could not work in the long run??? And for this we are supposed to laud him as a visionary????

ps - Mcgurkey nailed it. The REAL issue is that GM is not PROFITABLE.

[Graham Schmidt]

Malcolm, I'm usually a huge fan but I also had some issues with this piece. As a pension actuary, it's tough these days listening to defined benefit plans constantly coming under attack. Both your and Mr. Winterbottom's comments blaming many of the problems of pension systems on dependency ratios and pay-go funding are inaccurate. Almost all pension funds (both corporate and governmental) are NOT pay-go; unlike Social Security these plans are "pre-funded". Contributions to the plans are calculated using actuarial funding methods which require assumptions about future member behavior and investment returns. If the actuary does a reasonable job in the long-term of setting these assumptions, then the funding method computations will result in a level of contributions such that an employee's retirement benefit should be fully funded (i.e. have enough accumulated assets to pay their retirement benefit for their remaining lifetime) by the time that employee retires!
Unfunded liabilities can occur in a pension fund for numerous reasons: the actuary uses inaccurate assumptions (such as underestimating improvements in mortality or overestimating investment returns), there are large retroactive benefit increases or a company or government avoids making their required contributions. In these cases, dependency ratios can matter, because the shortfalls must be made up over a smaller payroll base. However, most pension funds (both public and private) are reasonably well funded - just a couple years ago most plans were considered "fully" funded, and after the recent market downturns most plans still have enough assets to cover at least 80% or 90% of their liabilities. This is hardly a crisis, but unfortunately, well-funded pension plans do not make for very interesting (or scary) headlines.

Now retiree healthcare - there's a problem. Almost all private and public employers have paid for post-retirement medical plans on a pay-go basis, therefore little or no assets have been accumuluted during the employees' working lifetime to pay for their benefits. However, the biggest problem here has actually been the huge impact of medical cost inflation, which has vastly outstripped general inflation for quite some time. Containing medical costs is obviously a problem that we as a society are going to need to deal with at some point - and the solution to this problem will have to apply not just to post-retirement medical care, but medical care in general...

[Gerald Patterson]

I very much enjoyed the New Yorker piece and thought it quite thought provoking.

The only thing Walter Reuther was wrong about, when he accepted the deal for individual company pensions was that the pendulum swung the other way, politically, and Unions became unable (or, in some cases, unwilling) to continue to make gains in America's workforce. Had they been successful the single- payer private pension could have been a reality in this oountry.

I agree with the comments by Graham Schmidt about the knocks that pensions have been taking the last few years.

For many years I was a trustee on a Taft-Hartley pension plan as well as a T/H health plan so I am familiar with how these plans (or the British moniker for them: 'schemes') are supposed to work. With careful long range planning, a conservative approach to benefit improvements, a diversified base of employers (such as the Taft/Hartley model)and diversity in investments I think pension providers can avoid the demographic pitfalls that Mr. Gladwell speaks of in his article.

Having said that I must confess to having grave concerns not only about Social Security and Medicare but also the likely enormous unfunded liabilities that lurk in this nation's state and municipal pension plans. I welcome the FASB's upcoming rule that will obligate non-Federal governments to disclose the extent of their liabilites. I suspect this will entice taxpayers to sit up and take notice since we are the demographic that will be footing the bill if we reside in the United States and pay taxes, whether we are employed or retired.

There has been much discussion and review about what to do to fix our Social Security system. I was not a fan of the privatization proposal to create personal accounts tossed out by President Bush when he thought he had some political capital to burn.

I do favor some very limited means testing as well as recognizing our current generations longevity by upping the retirement age by several more years. We should also commence moving up the age 62 early retirement option. (Question here to ponder: With all of our environmental problems now coming in to focus will our grandchildren actually enjoy longer lifespans?) It also seems prudent to allow access to Medicare outside of the United States. Several million United States citizens reside off-shore now. Will it really hurt us to outsource retirements? For many of us it would represent the final adventure of a lifetime and could keep down our personal retirement costs by living in a country where it is less expensive than our current popular retirement communities.

It seems to me that over the years our economic vitality has been given a powerful boost by immigration. Any solution to a demographic problem for retirement in our nation will also require a more liberal philosophy about allowing immigration than the one being espoused now by the Republican to close our borders.

[squished18]

As a retiree, I may put more faith in the federal government than General Motors. However, I would also put more faith in Berkshire Hathaway than the federal government.

[Donald Sayenga]

Malcolm,
If you are going to function from New York City, you need to be told the "cables for the George Washington Bridge" came from the now defunct steel mill at Kinkora New Jersey (aka Roebling NJ) not from Sparrows Point (p.32)
Don Sayenga

[Donald Sayenga]

Malcolm,
Something else occurs to me. It is one of the "little things". It is the artificial dollar exchange rates of Chinese currency, Korean currency, and formerly to a much greater degree Japanese currency. These rates bear upon the ability of companies like GM, BS, etc. to be competitive and also remain profitable in a global market.
In the Depression of the 30s the yen/dollar ratio was about 3-1 but after WWII the rate was artificially fixed at maybe 100 times that.
Don Sayenga

[ask_billy]

Please, get rid of the comment section. They pick at peripheral points forgeting larger ideas. Please, please stop forego the comment section.

[NeoKen]

GM over promised pensions likely believing profit would grow forever or that some future management could hide behind bankruptcy law. GM employees foolishly believed their lavish benefits were earned and possible in the long term.

Other companies and employees see these mistakes and adjust.

The minute this is instead done by the federal government, backed by force and law, the cycle of adjustment stops or slows so much as to seem stopped.

The benefits then become politicized, with all that involves (usually anything but productivity and usefulness of the people involved).

A better national pension system would be to not have one. Welfare for poor, whatever the age or reason. Individuals saves for themselves or in groups (risk pools) they decide to join. If they choose unwisely they are backstopped by welfare.

Of course with this system, future retirees would scrutinize any plan for risk. As they should.

--NeoKen