September 27, 2008 /New York TIMES
OP-ED CONTRIBUTOR
Save Pensions [sic]
By TERESA GHILARDUCCI
THE meltdown in the financial industry isn't merely a housing story
populated by panicked home owners. Near retirees' and retirees' lives
have been turned upside down, too, as their risky 401(k) savings
accounts erode.
It's too bad that, in their plan to bail out investment firms,
Treasury Secretary Henry Paulson and the Federal Reserve chairman, Ben
Bernanke, do not address the problems of older workers and retirees.
The Treasury-Federal Reserve proposal should give not only investment
banks but also retirees and those close to retirement the option to
clear the junk — bad mortgage-based securities and their derivatives —
out of their 401(k) accounts and invest in government-guaranteed
bonds.
Then, once the current losses are stemmed, the federal government
should protect Americans from further risks to the savings they set
aside for their old age by creating a more secure system of
investments for retirement accounts.
For the past 20 years, traditional pension plans, which paid benefits
based on an employee's years of service and pay, have been gradually
replaced by individual accounts loaded with stocks and more exotic
holdings, which provide benefits based on fluctuations in the
financial markets. Today, only 18 percent of the work force, at most,
including government workers and most private unionized workers, still
have old-fashioned "defined benefit" plans.
[strictly speaking, 401(k) defined-contribution plans (and the like)
are not pensions ("traditional pension plans") since the latter are
defined-benefit plans, representing a contractual commitment to their
beneficiaries.]
This transformation has largely been the result of government policies
that have encouraged, through tax breaks, the creation of 401(k)-type
plans and promoted an approach to investing that favors risky stocks
and bonds held in high-fee commercial accounts.
As the financial market implodes, the risks of this approach are
becoming all too clear.
Policymakers in Washington should help Americans replace their risky
accounts with new pensions more like the old kind with defined,
predictable benefits. How would they do this? By setting up
government-managed retirement accounts for every worker who does not
already have an old-fashioned pension. Here's how it would work: Each
person would contribute 5 percent of his or her pay. And the
government would provide an annual deposit of, say, $600, and also
guarantee a 3 percent return, added to the inflation rate. (In a year
with 4 percent inflation, for example, the guarantee would be 7
percent.) The account would begin to pay out in fixed intervals when a
worker began to collect Social Security benefits.
The government would pool the proceeds from all the accounts into a
sovereign wealth fund, and get its 3 percent rate of return (probably
more) by investing in a diversified portfolio of both safe and risky
assets. The government is large enough to handle this risk.
By getting rid of tax breaks for those 401(k)'s (most of which are set
up for wage earners in the top 20 percent), the federal government
could save at least $80 billion. That would easily cover the $600
contributions to pension accounts.
Such accounts would help the people who need help the most — the 50
percent of American workers with no pensions or even a 401(k) or
similar plan. All workers need and deserve access to secure pension
savings, protected from unforeseen ups and downs in the American
economy and colossal messes in financial markets.
Teresa Ghilarducci, a professor of economics at the New School for
Social Research, is the author of "When I'm 64: The Plot Against
Pensions and the Plan to Save Them."
Copyright 2008 The New York Times Company
--
Jim Devine / "Nobody told me there'd be days like these / Strange
days indeed -- most peculiar, mama." -- JL.
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