The Death of Retirement?
— Nomi Prins
How Finance is Failing Us
London and New York: Verso Press, 2006, 309 pages + index, hardcover $34.95.
AGE SHOCK: HOW Finance is Failing Us, Robin Blackburn’s followup masterpiece to Banking on Death (2002), is another sobering and insightful examination of retirement security. In Age Shock, Blackburn delves into the realities of an ageing demographic in the midst of the disintegration, from both a monetary and social obligation perspective, of sound financial conditions for the elderly.
Through a telling mix of historical, current and future-looking data, Blackburn dissects the economic realities of growing older, in a way that is startling and unfortunately, all too true. He examines the problem as one of “graying capitalism.”
In this condition, today’s elderly do not merely have more financial risk than they had in past generations, but are also a target of a product-oriented society that renders their bank accounts fodder for promotional campaigns that serve to deflect the issue of decreasing security from those most impacted by it. Don’t worry about impending financial catastrophe, folks, take that vacation you truly deserve.
In a world where economic and changing social norms are creating an imbalance between the younger and older generation, Robin Blackburn explains why not only are public insurance programs like our social security system, and private pensions like the ever-shrinking Defined Benefit (DB) and Defined Contribution (DC) plans breaking at the seams; but how, in fact, without appropriate remedies and a new way of structuring retirement security completely, their adequacy will continue to deteriorate.
Blackburn presents sobering and expertly research about our aging society and the economic and social challenges it presents. He also bravely suggests there is a remedy that is better than what we have today: “A society with a strong and buoyant economy, with some reserves and with efficient pension and medical provisions for all, will not be daunted by the costs of an ageing society. But the costs must be met and they will not be modest.”
As in the path to sobriety from alcohol addiction, admitting the problem is half the battle, working through it the rest.
Fat and Lean Years
Blackburn constructs an innovative solution, one rather ingenious in its simple logic. His idea of share levies is reminiscent of the biblical story of Joseph’s dream in the days of Pharaoh’s rule over Egypt: Joseph had a vision that Egypt would enjoy seven years of plentiful harvest, but this would be followed by seven years of famine.
The only way to ensure there was enough food to go around when the fields were no longer fertile was to build storage units for saving a portion of the harvest in times of plenty, and then maintain adequate rations. (We leave aside the credibility of assuming that a two-milennia agricultural civilization in Egypt hadn’t figured that out already.)
Joseph told the Pharaoh of his dream and was placed in charge of creating reserves. The rest is history, and a hit musical by Andrew Lloyd Webber. Not quite pay-as-you-go scheme, but a save-as-you-can one, so that equilibrium is always maintained no matter how the year’s crops may fare. We could learn a lot from that story, and Blackburn has turned its lessons into a worthy alternative to having the elderly chose between a less financial burdensome early death and comfortable older life.
In the United States, Blackburn says, the aging problem will unfold more slowly than in Europe, because of its higher birthrate and immigration rate — and sadly, a poorer health system that fails the economically disadvantaged elderly.
He divides the ageing into different sub-categories, each of which has different economic abilities and challenges. The “young old” are those who remain economically active, or even switch gears career wise and return to pick up additional college education; the “old old” are those aged 85 and over, for whom the increase projected over the next twenty-five years is steep, doubling from 2000 to 2030, and doubling once more by the year 2050.
Blackburn focuses mostly on pension costs of ageing, and to a lesser extent general costs of ageing, taking off from his prior work Banking on Death, in which he provided an illuminating historical perspective on pension evolution. He realistically acknowledges that effectively dealing with the situation requires a broad combination of a public and private approach.
Overall, he states, pensioners receive incomes roughly equivalent to 70-75% of their former earnings, taking into account all sources of retirement income: public, state, private pensions, earnings and other savings — not enough for a worry-free existence.
Commodifying the Elderly
In a scary trend toward the commoditization of the elderly, in which the young-old are pelted by tour operators and cosmetics dealers, and the old-old by private nursing homes and geriatric equipment suppliers. The danger in this is that it shifts the focus from current problems to the future, with very high stakes; employee retirement and health benefits become economic fodder for financial opportunists.
This “Grey Capitalism,” Blackburn says, “breeds irresponsibility and insecurity. It encourages governments and employers to try to escape past promises in their effort to stay in business.”
In chapter three, “Commercial and Corporate Failure,” Blackburn further discusses the risks and costs of commercial and individual pension provision, but how they are a necessary component of funding a comfortable retirement. He provides the alarming statistic that the U.S. Treasury loses $120 billion a year in the tax breaks it provides the financial service industry to administer pensions (aka Wall Street), and costs the UK Treasury $26 billion annually.
He discusses the shrinking number of Defined Benefit pension schemes, and why Defined Contribution pensions are far more risky, particularly if they come due during stock market downturns. This is all part of the great shift in the private pension sphere from corporate to individual risk, and points to one of the questions I have with his solution, which as I mentioned earlier is brilliant, yet also places more responsibility on the corporation.
I agree with Blackburn this is necessary, but I am more cynical and less optimistic than he that it is do-able. Corporations don’t like to share, which is why, as Blackburn points out, that although DB plans keep closing under the auspices of employers offering workers fewer expensive benefits, their assets have actually grown.
DB funds held $3.8 trillion of assets in 2004, up from $1.7 trillion in 1990, demonstrating a bit of a cried wolf situation from all the corporations deleting these programs. Blackburn shows the ageing problem in the context of these plans, and explains how to keep paying on them; corporations must shed jobs, cut current benefits to new employees and perform other worker-negative acts.
This problem is exacerbated by the critically important component of secure retirement, the exploding cost of health care, one of the benefits usually given in tandem (though decreasingly so) with defined benefit or other pension plans.
As the September strike at GM showed, only after tens of thousands of layoffs can remaining union workers barter for better health coverage, the effectiveness of which is temporary at best.
Either way you look at them, Blackburn argues, commercial pension funds, DB or DC, are not optimal. Coverage is poor and of low quality, and certain DB schemes are risky: public ones because of less income accumulation offsetting their distributions, and private ones because corporations continue to restructure benefits and compensation toward the top of the firm. One way to fix this, suggests Blackburn astutely, is to acknowledge the need for universal public health coverage, to offset part of the costs of retirement benefits in general.
Chapter Six, “The Need for Strong Public Pensions,” discusses why swipes at the public social security system by leaders from Bill Clinton (who, Blackburn points out, was luckily sidetracked by Monica Lewinsky) and more recently, George W. Bush, have been thwarted. In Bush’s case, it was by a declining stock market (and popularity, I might add) and a fear among bipartisan U.S. voters that diverting 16% of its funds to Bush’s famed “private accounts” would further weaken the current social security system.
Aside from this, trusting the financial industry with more of their hard-earned money wasn’t quite the stress-free thought that Bush presented it to be.
Blackburn outlines his solutions in more detail in Chapter Seven, “How to Finance Decent Pensions,” explaining this entails fixing both the public and the private system. The public system can be fixed by raising the $90,000 threshold in the United States under which FICA (social security tax) is paid, and/or raising the 12.4% tax rate by a point or two.
Further, since both DB and DC private schemes will find it difficult to generate even 3% of GDP (overall, Blackburn says, we need the pension framework to amount to 15% of GDP), he advocates a new pension regime, which would require a progressive contribution scheme, rather than current flat payroll taxes, while those who earn below minimum wage in the United States and Britain would get contribution credits.
Such a framework would provide pension rights to caregivers, as well as employee contributions of 3-5% of income with employers matching these. The government would invest in pension funds to benefit all citizens with profits garnered from sales of public assets, betterment levies to be put into the pot on luxury apartments and mall-type complexes, as well as a wealth tax on net worth, which would particularly be useful as the inequality gap continues to widen.
The most crucial component of Blackburn’s proposed regime is a share levy, which he considers the “best and most appropriate source of finance for pension systems, namely requiring all corporations employing more than 20 people or with a turnover of over $10 million a year to issue new shares to a network of funds, with the rate of the levy to be calculated as a portion of corporate profit or shareholder value.” (271)
This, he argues, would summarily restore employer contributions, which have continued to fall precipitously since the 1970s as corporations also became stellar at tax avoidance and paying their CEOs supremely. He explains that a share levy works because it targets corporations, not individuals; instead of individuals paying tax on their shares, corporations would issue new ones, to cover the necessary benefits amounts.
The levy would be used to reinforce the Social Security public system in the United States and the SERPS (State Earnings Related Pension Scheme) in Britain. Resources raised by the levy would be added to the existing trust funds, with a central organizing body, or existing one to administer this activity. The extra money would be used to ensure a better retirement for all, additionally these new shareholders would provide more of a malfeasance watch committee on any corporation.
Indeed, the share levy could raise large sums to help our ageing society, as well as help subsidize free time and freely-chosen work. Few alternative proposals can say the same.
Limits of Corporate Funding
To some extent, this is a sensible solution. The one area that I wish the book had explored more, however, is the changing landscape of self-employed, and small business employed and freelance workers as against those working for companies, such that one need not be tied to a corporate platform in order to have a better way of saving for one’s eventual retirement.
As employees migrate away from the corporate structure, can the idea of share levies work from a financial standpoint — will there be enough flowing in, even through share issuance to sustain the number of employees finding alternative employment, or will we all have to work for corporations in the end?
One of the best parts of Blackburn’s analysis is that he doesn’t pursue the standard progressive blame-game; he develops honest arguments and smart solutions. It would be easy to merely point out that the government is shirking responsibility, providing for the rich at the expense of everyone else, or that there is no real crisis of lack of funding for social security, merely lack of will to appropriate funding for the aging rather than things like war and Wall Street.
In being honest that the problem lies beyond that, Blackburn sets out a more realistic framework within which to examine the situation and come up with possible solutions to a growing problem that isn’t going away anytime soon.
The trend that Blackburn details in his book continues unabated. According to the Employee Benefit Research Center’s (EBRI) August 2007 release, more Americans aged 55 and older are working full time due to two main factors: the need for affordable health insurance, and the need to accumulate savings in employment-based defined contribution plans.
Those aged 55 or older increased from 29% in 1993 to 38% in 2006. For ages 65-69, the increase was from 18% in 1985 to 29% in 2006. The trend is more pronounced for females than males, and for minorities more than whites.
Meanwhile, an earlier EBRI survey released in April, 2007 found that almost half of American workers are less confident about the benefits they’ll receive from traditional pension plans, because of the reduction to benefits they have already experienced. Many workers are counting on employee-provided benefits that are increasingly not available. If you throw in the increasing costs of health care and lack of current or future expected health care coverage, the worry increases — and individual savings plus 401K plans simply can’t stretch that far.
Last year, Congress passed a bill allowing companies to offer investment advice for their employees, but only half of workers feel they’d take advantage of that service, and most of those say they’d only follow advice given if it were in tune with their own gut feelings.
As our population ages and retirement security declines, it’s important to find real solutions in the present, not push them off to a tomorrow that will only be harder without a concerted desire to make it better. Blackburn’s book contributes to making that future as positive as possible, for as many people as possible.
from ATC 132 (January/February 2008)