J. Bradford DeLong is professor of economics at the University of California at Berkeley and a former Assistant U.S.Treasury Secretary.
One of the strangest claims made in the debates about social insurance now roiling the world’s richest countries is that government-funded defined-benefit pension programs (such as America’s Social Security system) are outmoded. These programs were fine, the argument goes, for the industrial economy of the Great Depression and the post-World War II generation, but they have become obsolete in today’s high-tech, networked, post-industrial economy.
Advocates of this argument propose a different model. Just as corporations today are much happier supporting workers’ pensions by contributing to employees’ private accounts, so governments should offer (or require) contributions to privately owned accounts. The value of these accounts would fluctuate with the market rather than resting on a defined-benefit scheme that guarantees a fixed real sum of resources available upon retirement.
This argument gets the economics of the situation backward. When lots of companies offer workers long-term defined-benefit retirement pensions, there are fewer advantages to the government in setting up a parallel mandatory defined-benefit scheme. After all, in such a world, workers who value a defined-benefit pension can go to work for firms that offer them.
But there aren’t a lot of companies today that are willing to do so. One reason is that companies nowadays are much more aware of their own long-run fragility than they were in the post-World War II decades. Not even America’s IBM—which prides itself on stability—wants to take the risk of offering defined-benefit schemes.
The risk from defined-benefit pensions used to be offset by two benefits for companies. First, the fact that leaving the company usually meant cashing in one’s pension at a discount increased worker loyalty. Second, optimistic assumptions about returns on pension reserves, together with large firms’ greater risk-bearing capacity, brightened the financial picture that companies could report to investors.
Today, throughout the rich core of the world economy, the risks are seen to be much greater, and the benefits are seen to be less. As a result, an ever-smaller slice of employers are offering anything like defined-benefit pensions.
This fall-off in private defined-benefit pensions is a bad thing, because the configuration of asset prices suggests that young and middle-aged workers value defined-benefit pensions extremely highly. Historically, the gap between expected returns on low-risk assets like government or investment-grade bonds and high-risk assets like stocks and real estate has been very high.
In my opinion, at least, this is partly because the memory of years like 1930 and 2000, when stocks performed very badly, occupies too large a place in investors’ minds. Workers and other asset holders place a very high value on safety, security, and predictability, so a defined-benefit pension plan is extremely valuable.
But in today’s world, only national governments are large enough to be able to ensure that the pension assets will actually be there when workers retire. I am enough of a social democrat to believe that if there is an economic service or benefit that citizens value extremely highly and that only the government can provide, then the government should provide it.
We economists know that there are many drawbacks to expanding the role of government. But the collection of payroll taxes and the writing of pension checks is the kind of routine, semi-automatic task that government can do well. It is even more important and valuable that government does it in our post-industrial, network-age society than it was in the past.
Copyright: Project Syndicate, 2006
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