“I’m so bored. I hate my life.” - Britney Spears

Das Langweilige ist interessant geworden, weil das Interessante angefangen hat langweilig zu werden. – Thomas Mann

"Never for money/always for love" - The Talking Heads

Monday, October 31, 2005

How do I make this last a lifetime?

The perils, the perils! LI, like a frostbitten salt on a ghost ship, wants to ring a little leper bell for the excellent 8000 word article by Roger Lowenstein (one of my favorite business journalists – both When Genius Failed and The Origins of the Crash keep up the best traditions of the mandarin muckraker, rather like Chapters of Erie or The Robber Barons) on the end of the pension in the NYT Mag. In my clippings about the evitable decline of the guarantor state, this article will definitely have pride of place.

Lowenstein’s article touches on an area LI avoided, in sketching out the large scale picture of the rivalry between two models of the social welfare state that deepened in the Reagan era. One of the characteristics of that era was the capture of foreign investment by American firms, which then floated the re-structuring of those firms. This, of course, happened within another re-structuring, as manufacturing finally sought the low labor costs of the third world. These two movements were in tandem. It would probably surprise a lot of Americans that the Reagan commerce department sponsored seminars for companies to show them how to move operations to Mexico. It isn’t something one expects of an American government. But of course they did.

I avoided, however, a domestic source of the transformation of investment. As Lowenstein acutely puts it:

“During most of the 90's the decline in pension coverage was barely lamented. It was not that big companies were folding up their plans (for the most part, they were not) but that newer, smaller companies weren't offering them. As the small companies grew into big ones (think Dell, or Starbucks, or Home Depot), traditional pensions covered less of the private-sector landscape. This did not seem like a very big deal. Younger workers envisioned mobile careers for themselves and many did not want pension strings tying them to a single employer. And most were able to put money aside in 401(k)'s, often matched by an employer contribution.
It happened that 401(k)'s, which were authorized by a change in the tax code in 1978 and which began to blossom in the early 1980's, coincided with a great upswing in the stock market. It is possible that they helped to cause the upswing.”
The new range of financial instruments open to people in the middle class who had pretty much forgotten their parents’ stock buying craze of the twenties might have inflated the amount of money seeking return, but the rate of return also responded to a new aggressiveness on the part of union pension fund managers. Although it seems counter-intuitive, union pension fund managers were demanding return that could only come about by making company’s much more efficient. And that could most easily be achieved by … cutting labor costs. One of the paradoxes of the Keynesian economy is that harmonizing the interests of the socially upward trending working class with the governing class could mean, in the long term, that the working class profited from its own demise. This is one of the reasons class, as a category of social analysis, is not a great predictor – there is no homogenous class interest at any one point.

But I digress into idle chatter. One of the arguments of the rightwing drive to terminate the government’s direct role in social welfare in favor of the indirect role of the guarantor state is an old neo-classical chestnut – while in the short term, certain people in the working class might be hurt by investments dependent on the higher rate of return that comes from cutting labor costs, in the long run they will benefit from the efficiencies such “reforms” will bring. This ignores a number of problems:

a, the fact that the system has formed around a market in social goods that has hyper-inflated. The causes of that hyper-inflation – in medicine and in education, for example – have been curiously neglected. It is as if it were natural that, while computers get more high tech and cheaper, medicine gets more high tech and expensive.

b, the notion of a mobilized, job switching population innovating to keep out of the poverty trap benefits a certain few. There’s really no benefit to switching jobs if you are a fireman, or a teacher, etc., etc. In other words, the amount of social return on human capital is wildly exaggerated in the pure guarantor state ideology. To encourage job switching made a certain sense in an economy liquidating its manufacturing base. But it doesn't make sense for the vast amount of the working population.

and finally, a problem absent Lowenstein’s excellent article,
c, the shift towards guaranteed benefits, which made possible the acceptance of a much lower increase in the average wage for workers, occurred at the same time that the compensations for the upper management class exploded. There is a huge cost to the increase in the share of wealth by the upper percentiles, but that cost is only visible over time – that is, the cost starts showing up as the long term guaranteed benefits devolve from the virtual to the actual. And, at this point, the concentration is entirely on analyzing that line of development that led to auto workers having to work merely thirty years on the assembly line and retiring with a lordly 18 thou per year – etc.

Lowenstein is good about comparing the supposed superiority of the benefits of the guarantor state, with its 401(k)s, against the “socialism”, as the George Will types like to put it, of the traditional pension plan. As one expected, the old rule applies: the richer we are, the poorer we are.

“A 401(k), on the other hand, promises nothing. It's merely a license to defer taxes -- an individual savings plan. The employer might contribute some money, which is why 401(k)'s are known as ''defined contribution'' plans. Or it might not. Even if the company does contribute, it offers no assurance that the money will be enough to retire on, nor does it get involved with managing the account; that's up to the worker. These disadvantages were, in the 90's, somehow perceived (with the help of exuberant marketing pitches by mutual-fund firms) to be advantages: 401(k)'s let workers manage their own assets; they were a road map to economic freedom.

Post-bubble, the picture looks different. Various people have studied how investors perform in their 401(k)'s. According to Alicia Munnell, a pension expert at Boston College and previously a White House economist, pension funds over the long haul earn slightly more than the average 401(k) holder. Among the latter, those who do worse than average, of course, have no protection. Moreover, pensions typically annuitize -- that is, they convert a worker's retirement assets into an annual stipend. They impose a budget, based on actuarial probabilities. This might seem a trivial service (some pensioners might not even realize that it is a service). But if you asked a 65-year-old man who lacked a pension but did have, say, $100,000 in savings, how much he could live on, he likely would not have the vaguest idea. The answer is $654 a month: this is the annuity that $100,000 would purchase in the private market. It is the amount (after deducting the annuity provider's costs and profit) that the average person could live on so as to exhaust his savings at the very moment that he draws his final breath.

So the question arises: what if he lives longer than average? This is the beauty of a pension or of any collectivized savings pool. The pension plan can afford to support people who live to 90, because some of its members will expire at 66. It subsidizes its more robust members from the resources of those who die young. This is why a 401(k) is not a true substitute. Jeffrey Brown, an associate finance professor at the University of Illinois at Urbana-Champaign and a staff member of the president's Social Security commission, notes that as baby boomers who have nest eggs in place of pensions begin to retire, they will be faced with a daunting question: ''How do I make this last a lifetime?''”

By a happy coincidence, you can compare Lowenstein’s article with a solid conservative ideologue’s sense that the nation has to gird up its loins to sacrifice retirement (except, of course, for the golden parachute crowd): Sebastian Mallaby’s “Why do the dirty old vecks need more than a pot to piss in, oh my droogs” – oops, I got the title wrong. Curiously, Mallaby’s article about the decline of savings entirely neglects mentioning that, since 1980, we have been living within the heady framework of Reaganomics – hence setting up the cardboard leftwing analysis, giving us weasel statistics about the upward climb of “household income” (a nice way of disguising the fact that household’s now are putting two breadwinners, instead of one, in the labor market), etc., etc. Such low level mendacities are necessary to promote a counterfeit vision of poverty as the nation itself becomes wealthier. It is rather like the hypnotists pendulum, which you are supposed to concentrate on, forgetting all other contexts and sensory inputs. Amazing how it works. One should always remember that the Washington Post is the happy hunting ground of James Glassman, a man whose prophecies of 36000 Dow were so touted on the right partly because the pure guarantor state, with each man an "owner," only benefits a few if you don't postulate an increase in the value of equities that can only be achieved by a combination of the Ubermensch and Warren Buffett.

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