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

[Rick Wilson]

You probably already know this, but you got some backup recently from the president of the UAW:
http://www.detnews.com/apps/pbcs.dll/article?AID=/20060901/OPINION03/609010308&SearchID=73255529985835

Viva Reuther and keep it up!

[David Lawton]

1. SS is the big risk pool, but it is only a safety net.

2. Conservatively managed pension funds might have worked, but future costs are too unpredictable and funding is always at the mercy of companies.

3. The teamsters had a pension and look where it got a lot of its members! I question whether Walter Reuther was looking at union members or the benefit of the union. To control the pension would be a powerful force.

4. What is missed is what is happening now - a large shift away from company controlled funds to 401k funds that are funded and vested concurrently with the employment, independently invested, transparent, and not dependent on the company's future success. That is the real story and should be the direction the country continues to follow for retirement benefits.

thanks for a thought provoking article.

[eyeresist]

An enjoyable piece, but of course it won't convince the partisans. I've come to the conclusion that the success of the West is due to three things: capitalism creating wealth and encouraging innovation; parliamentary democracy bringing some accountability to governance, with check & balances limiting negligence and abuse of power; a good social welfare system providing a safety net for victims of economic downturn and those unable to support themselves. These three elements prop each other up like a teepee of freedom and prosperity.

Of course, it all depends how you define success. The social benefits of a well-run welfare system are if anything a gut-level deterrent to modern conservatives. I hope your article will persuade some that social benefits can, in turn, produce economic benefits.

[Monica Ricci]

You asked the question, "as a retiree, would you rather rely on the federal government or General Motors?"

My answer would be it's not the federal government's job or GM's job to provide for me or anyone else in retirement. That's MY job as an individual. I'd prefer to have ALL my money in my pocket where I can invest it as I choose for my OWN future, as opposed to pumping a large percentage of it into a "security" system where I get no control of it and it gets redistributed to the masses. ~Monica Ricci

[Bob Strickland]

Mr. Gladwell, I thought this piece was well written and provocatively argued. However, I found it's central thesis to be a result of flawed analysis.

I think your central mistake is in trying to inappropriately mix macroeconomics and microeconomics. The dependency ratio is a useful tool for looking at demographics on a national level and understanding their impact on that nation's economy. However, it simply doesn't apply to a private pension managed by a corporation like GM.

You quoted a senior manager from Bethlehem Steel as saying, "we are making as much steel as we ever have"...but with far less people. Your implied conclusion is that because there are less people working in relation to the number drawing pensions, that the dependency ratio was unfavorable and causing difficulty with their huge pension obligation. You are a wonderful writer, and fascinating generalist theorist, but I don't think you have a solid understanding of corporate finance and accounting.

In a company, there is revenue produced, and then expenses have to be drawn from that. Major categories are labor expense, supplies, debt service, etc...and yes...pension funding. IF a company is producing as much product as ever, and selling it at a fair price, the fact that they are doing it with far less people than they used to is going to HELP their ability to fund their pension...not hurt it. If they could do it with NO people at all (absurd extension to make a point), their ability would be further enhanced. Why? Because a major category of expense has been reduced, leaving a larger share of the revenue for funding the pension. Think of total net revenue as a large pie. If the piece called "labor expense" is reduced in size significantly, without affecting production volume, then that simply leaves more of the pie to devote to the other pieces....like pension funding. The reason these companies got in trouble is because of what Drucker implied in the quote you used...basically, that it is highly risky, and somewhat arrogant, as a manager to look 40 years or more into the future and feel that you are going to be experiencing the same market success that you now are experiencing. In other words, they made poor use of actuarial tables set against inappropriately optimistic business models. Make sense?

Now, that being said, I want you to know that I fully agree that a national health system and national pension would be an improvement if it was done well. My reasons are based on both ethics and economics. Our health system is immoral and a disgrace, and the cost is strangling small business, entrepreneurship, and careers in the arts. Pensions are also important, for similar reasons. However, the reasons they are in trouble has everything to do with bad business and managerial incompetence, and not much to do with the economic principle of dependency ratios.

Would love to hear your thoughts on these thoughts. My email is rs4ropebottom@hotmail.com.

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