|
E-mail this page to a friend!
Guest Opinion
A Warning for Social Security Reformers
By Bernard Wasow, senior fellow and
economist at The Century Foundation
Nov. 17, 2004 - While the administration is
preparing its drive to replace part of Social Security with private
investment accounts, an obscure government agency is planning to go to
Congress to ask for a bail- out. The Pension Benefit Guarantee
Corporation (PBGC), which guarantees private pension plans, just
announced that its net liabilities are double earlier estimates, more
than $23 billion.
"...it is imperative that Congress act
expeditiously so that the problem doesn't spiral out of control," said
PBGC executive director Bradley D. Belt. These net liabilities are
likely to balloon to much higher levels if troubled airlines continue
their slide into bankruptcy.
Are Social Security privatization and trouble at
the PBGC related? You bet. The trouble at the PBGC illustrates the great
risks involved in retirement planning, risks that have swamped enough
private pension plans to require a Congressional bailout. Yet the Bush
administration is proposing to wind down the only part of retirement
income that is secure -- guaranteed against the business cycle,
inflation, and corporate malfeasance -- and replace it with risky
private accounts, with no guarantees at all.
When Social Security was introduced in 1935, it was
understood that public pension benefits would never provide a
comfortable retirement income. Private pensions and private saving would
constitute the other two legs of the "three-legged stool." Nearly 70
years later, with average Social Security benefits at about $10,000 per
year, Social Security can hardly be called generous.
Private pension plans still are essential to a
decent retirement, but they increasingly are moving away from guaranteed
benefits (and even these guarantees were subject to change) toward
employers' contributions to employees' saving for retirement. Among the
remaining "defined benefit plans," enough have gone belly up to create
the crisis at the PBGC. Traditional private pension plans -- at Pan
American Airways, Bethlehem Steel and other failed companies -- are
sufficiently underfunded that Congress is being called in to bail them
out.
Individual private accounts are no more secure than
the pension accounts set up by companies to pay traditional retirement
benefits. Some private accounts will crash and burn, just as some
corporate accounts have proved inadequate. In fact, there is every
reason to believe that individual private accounts will on average
produce lower returns than professionally managed corporate pension
funds.
The demise of Enron illustrates these risks. Not
only were employees blindsided by the collapse of their high-flying
employer, but a large group of them had accumulated unbalanced 401k
individual retirement accounts, heavily invested in Enron. Their
retirement accounts went up in smoke at the same time as they lost their
jobs. Couples on the verge of retirement saw their private retirement
accounts lose hundreds of thousands of dollars in days. All they had
left was Social Security.
Even a well-diversified retirement account cannot
avoid the fluctuations that knock 20 or 30 percent, or more, off the
value of the market every few decades. Anyone who had to postpone their
retirement after the dotcom bubble burst in 2000 is still waiting for
the market to recover.
The bankruptcy of the PBGC, with its anxious call
for a Congressional bailout, should send a clear signal to the debate
about Social Security: we still need social insurance to guarantee a
minimum retirement income. Private accounts produce too many risks, too
many surprises, for us to count on them as a replacement for Social
Security guarantees.
Bernard Wasow is a senior fellow and economist at
The Century Foundation, a nonpartisan public policy institution with
offices in New York City and Washington, D.C.
Click to More Senior News on the
Front Page
Copyright: SeniorJournal.com |
