Your Defined Benefits = My Obligations?
By Arnold Kling
Under the law, companies facing shortfalls must bring their plans up to full funding over the next seven years. Those that fall short will be forced to take steps such as freezing the accrual of new benefits for current plan members.
The letter asks Congress for changes to the pension reform law, such as giving companies more time to reach full funding. It also seeks accounting changes that would allow companies to spread losses to their plans over longer periods of time, a process that would temper the effect of sudden drops in plan values.
This refers to companies with defined-benefit pension plans, which are plans that promise to pay specific benefits, even if the funds in the plans lose money. The companies think that it is onerous that they should be expected to actually have to take steps to keep their promises. Instead, they want to go on as if everything is fine, and leave somebody else to pick up the tab if it isn’t.
And who are the tab-picker-uppers? Naturally, the taxpayers, under the Pension Benefit Guarantee system.
Everyone who promises defined benefits thinks that somebody else needs to help them keep their promises. That somebody else is you and me.
We will be picking up the tab for corporate defined-benefit plans (starting with General Motors), for state and local defined-benefit plans, and then for Social Security and Medicare. “We” means anyone who tried to earn money, live within their means, and invest prudently.
We are headed toward a huge conflict between the ants and the grasshoppers. The grasshoppers are going to take more and more away from the ants. At some point, the ants may start to fight back.
[Update: Alex J has a comment that deserves to be pulled up into the main body. He writes:]
To add my own spin here, our ants need the division of labor in order to be productive. This requires public cooperation. The “grasshoppers” don’t need cooperation among themselves in order to do nothing. Cooperation is easy (for the government) to disrupt. The non-productive have more motivation to seek the reins of power; the productive are busy being productive. Therefore, we have reason to believe that this is not a fight the ants are in a position to win.
I think we have two ways to win. Communications technology might allow cooperation to be shielded from government interference. I doubt this will work all that well, since soiling ones own nest is cheap and easy. With luck, and some deft persuasion, people might attach personal meaning to being productive and supporting other productive people, rather than grasping for handouts and supporting handouts for others. Here, the problem is that voting people attach personal meaning to their political affiliation. Politicians get traction by being seen to redistribute, rather than sitting back and allowing production.
[UPDATE: A commenter points to a valuable piece from 2005 by Roger Lowenstein]