August 23, 2006
From the desk of Jane Galt:Pension problems
Co-blogger Winterspeak had a post this week on his other blog about Malcolm Gladwell's latest article. Even if it weren't a very good post (but oh, it is) I would recommend you read it just to enjoy his use of the phrase "as mad as a box of mittens", which is, as far as I know, a first for economics writing. Days after first reading it, I am still rolling its verbal deliciousness around my mouth.
Now Malcolm Gladwell has responded:
One of the predictable responses to this is that this is the idea behind Social Security is--and look at the problem that program is in. I have to say, though, that what reading I have done into the Social Security issue hasn't convinced me that the program is in all that much trouble--that is, with a number of not entirely painless (but not debilitating) adjustments now, we can avoid a lot of the trouble down the line. Put it this way: would you rather, as a retiree, put your faith in the federal government or General Motors?
On that narrow question, Gladwell is right: it is better to have a government pension than a GM pension, because it is more likely that the government will be around in fifty years than GM (or any other company, no matter how good it looks today). Corporate pensions both have a higher failure rate, and are more volatile than goverenment pensions: Social Security will end up giving everyone a moderate haircut, where in the private system some people get a full pension and others get the scraps doleed out by the Pension Benefit Guarantee Corp.
But Mr Gladwell's article is flawed in a number of ways, some of which my co-blogger touched on. For starters, he attributes Ireland's success as the "Celtic Tiger" to falling birthrates, which (temporarily) reduced the dependancy ratio. He utterly ignores a more parsimonious explanation, which is that Ireland slashed its marginal tax rates in 1987, including a cut in the corporate income tax to 10%, which turned it into Europe's first outsourcing destination. If you look at the handy spreadsheet
I have uploaded, containing data on Irish growth from 1980-2005 obtained from the invaluable Economist Intelligence Unit, you will see that this fits the Celtic Tiger period much better than a 1979 relaxation of birth control restrictions. Moreover, since there is much evidence that economic growth causes falling birthrates by raising the opportunity cost of childrearing, even if there were a correlation it would be hard to say which way it ran. This also applies to his arguments about Asia and Africa.
Second of all, he attributes pension problems to higher productivity, which allows manufacturers to make more stuff with fewer people, and thereby increases their dependency ratio. This is daft. Increasing productivity also increases profits, allowing companies to pay more benefits using fewer workers; in fact, by decreasing fixed costs such as health care, it should make it easier to support retirees. GM's problem isn't that it's just too darn productive; it's that it's too darn unprofitable, thanks to foreign competition.
Many of his other assertions are equally weak. He implies that regional agreements, in which all the tool-and-die makers or auto plants in a given region, work better than company level agreements. But multi-company pensions such as these are creating huge problems: they drain capital from productive companies to prop up failing ones (see UPS), make it hard for new entrants to come in (because they have to take on gargantuan pension liabilities to do so), and ultimately make union shops uncompetitive. This is what is happening in the construction industry in New York, where open shop companies can offer lavish wages and 401Ks to their workers and still outbid union shops, because they don't have the extensive pension liabilities.
Nor does this make much sense:
Under the circumstances, one of the great mysteries of contemporary American politics is why Wagoner isn’t the nation’s leading proponent of universal health care and expanded social welfare. That’s the only way out of G.M.’s dilemma.
But we have nationalised health care for GM's retirees right now. Mr Gladwell may have heard of the programme: I believe it's called Medicare. This has done absolutely nothing for GM's dire fiscal situation, because GM's unions force it to offer benefits that are more lucrative than the national system. Unless we outlaw private insurance, as Canada does, it's hard to see how this would fix the problem.
I believe Mr Gladwell is right that our health insurance, our pensions, and our paychecks should not all come from the same place, particularly a corporation that may not be around when the bills come due. But that doesn't mean that they should come from the government; as P.J. O'Rourke once said "I mean, they can't even deliver our mail and it's got our address right on it and everything." The government solves the longevity problem by introducing huge problems of its own. Pay-as-you-go (PAYGO, in pension lingo) for starters: no private employer would today be allowed to get away with issuing its own corporate debt to its pension fund. Nor treating pension contributions as income without reducing that income by the amount of the accrued liability. Nor making promises without establishing assets to pay for them. Our government is encouraging the ignorant to save less than they will need for retirement. This is morally, if not legally, criminal.
I'll close with Winterspeak's response to Mr Gladwell's response:
Gladwell's first argument -- that it is betted to trust a government who will only renege slightly and shaft other people on your behalf rather than trust a company who will renege a lot and shaft you is true as far as it goes. It's also a weak position when there are perfectly good zero-shaft options out there (private accounts) which, if administered correctly, would have low operating costs and mandatory contributions.
The only dimension on which government pensions are better than private savings lies in the redistributionary potential of government programmes--which Winterspeak, and many of my readers, may think of as a bug rather than a feature. Personally, I think there are people in this country who are too poor to save, and I would like to see them taken care of in their old age. But that is an argument for a forced savings scheme coupled with a minimum, means tested pension--not this vast and crippled attempt by middle-class Americans to pick their own pockets. As Mickey Kaus says, "Sending checks to everyone is a nice thing to do. But we can't afford every nice thing to do."
Posted by Jane Galt at August 23, 2006 3:19 PM | TrackBack | Technorati inbound linksGet past Gladwells deficient economics.
The most useful point is very simple. You employer is a terrible candidate for insurance company. All the debate about DB vs. DC pensions just begs the question -- where should I turn, in fair contract, expecting return in fractional centuries?
The very qualities that make an insurance company attractive -- conservative, reliable, risk-avoiding to the point of boring -- make them niche employers (appologies to my friends at Manulife ;-).
Posted by: Michael Buckley on August 23, 2006 7:41 PMGet past Gladwells deficient economics.
The most useful point is very simple. You employer is a terrible candidate for insurance company. All the debate about DB vs. DC pensions just begs the question -- where should I turn, in fair contract, expecting return in fractional centuries?
The very qualities that make an insurance company attractive -- conservative, reliable, risk-avoiding to the point of boring -- make them niche employers (appologies to my friends at Manulife ;-).
Posted by: Michael Buckley on August 23, 2006 7:42 PMCan someone just remind me real quick -- I'm not trying to be flippant, really -- why people put so much stock in what Gladwell has to say? I mean, the "GM vs. feds" false dichotomy alone is almost enough for me to ignore him.
Posted by: Person on August 23, 2006 8:26 PMPerson,
That's exactly right. I was thinking, while waiting for the "Comments" to load, "Who wastes so much time with what M. Gladwell has to say?"
Seriously, a true waste of Time & Energy
Posted by: Mark E Hoffer on August 23, 2006 8:49 PM
Isn't Mr. Gladwell the fellow that issues those "Ten Worst Dressed" awards once in a while, or am I confused again?
Gladwell really is a fabulous writer; his is some of the most lyric narative prose since McPhee. But his understanding of basic economics really appears to suck rocks.
This is the second article in which he has waved an interesting idea (this time "dependency ratio", last time "moral hazard") about, then enunciated some grandiose scheme, apparently without noticing that the scheme not only isn't justified by the idea, but really isn't much related to it at all.
Posted by: David Wright on August 23, 2006 8:59 PM
Speaking of moral hazard, I wonder when we'll get a good discussion of the now-beginning-to-pop housing bubble? Greenspan and Helicopter Ben should be dragged up in front of a committee or three, or perhaps a grand jury, for some pointed questions...
one of the great mysteries of contemporary American politics is why Wagoner isn’t the nation’s leading proponent of universal health care
Actually, no, there is no mystery.
All three Big Three automakers were major, loud, out-in-front proponents of universal health care when Bill Clinton proposed it, Hillary Clinton was architecting it, and the Democrats controlled the Presidency and both houses of Congress. They recognize being able to rid themselves of their UAW-negotiated health plans (both for current hourly workers and the Medicare supplemental coverage for retirees) in favor of such a system would be quite in their interests.
The reason they aren't making noise now is because, with the Republicans running the presidency and both houses of Congress, it would not only be futile to do so, but it would alienate the people in power.
It's hardly a mystery that companies would not engage in quixotic political quests when it would detract from forms of rent-seeking more likely to bring a return.
Posted by: Warmongering Lunatic on August 23, 2006 11:15 PMHi -
Um, isn't the problem really that GM must finance a capital-based pension scheme, while social security is the usual pay-as-you-go transfer system?
If social security were capital-based, then everyone would be facing the sort of problems that GM et al are facing: the capital needed to ensure that the pensions are adequately funded is a) not trivial and b) is, as far as the company is concerned, non-productive use of capital.
This, of course, places GM (and anyone else who finances a pension plan!!!!) at a competitive disadvantage in terms of those who can use their capital more productively, under c.p. conditions.
What this really means is that management was really stupid to have agreed to unions' demands for this, and the unions were just as imbecelic in demanding such a scheme, which for them ultimately will kill the goose that laid their golden eggs.
Mad as a box of mittens, isn't it?
John
Posted by: John F. Opie on August 24, 2006 6:16 AMIt was mr. Blackwell that had the worst dressed list. Gladwell is one of the most important and influential writers in America, if he is spreading bad ideas it is imperative to refute them. His perspective seems to me very New York; stylish, intelligent, interesting, and unworkable.
Posted by: sourcreamus on August 24, 2006 1:53 PMIf you have read the Wall Street Journal over the past few months and just collected the headlines on GM you would have seen a pattern. They included the infamous "Jobs Bank" for UAW workers to be paid without working, The high pay of GM workers considering the buyout offered by GM, and a comparison of a GM Plant and Nearby Toyota Plant in Texas.
In every one you see the cumulative effects of GM management caving to UAW demands in the past. Health Care is a very small part of this but helps disguise the real costs of the labor stability pacts of the 1970's and1980's. The impact of these high costs pushed GM, Ford and Chrysler into focusing on the products they could make high margins on with little competition. These were Trucks and SUV's. In sedans, there were now 10-12 competitors in each category, many with lower direct costs.
In practice, labor turned employment into an entitlement rather than pay as you go. Total disaster in any are but Government.
Posted by: David Moelling on August 24, 2006 3:25 PMJane Galt wrote:
"But that doesn't mean that they should come from the government; as P.J. O'Rourke once said 'I mean, they can't even deliver our mail and it's got our address right on it and everything.'"
For some years now the U.S. Postal Service has been "privatized". It is now officially not part of the U.S. government. Does your use of O'Rourke's line mean that you didn't notice any difference from the "privatization"?
Posted by: Anon on August 25, 2006 1:03 AMAnon at 1:03 AM: "the U.S. Postal Service has been 'privatized'."
I don't think we should call it privatized. The USPS:
- is exempt from most taxes;
- is not subject to SEC reporting requirements;
- can borrow from the U.S. Treasury at rates much lower than real corporations are allowed; and
- enjoys a government-enforced and profitable monopoly on slow mail.
USPS rates are set at levels by the federal government that guarantee its survival.
The USPS is even worse than a normal government agency. The USPS has cross-subsidized - used its letter-delivery profits to expand other business lines in which it has no monopoly. Rep Sam Ryan makes this point about the USPS practice of cross-subsidizing:
"Normally this would be considered predatory monopolistic behavior, and illegal. But the postal service is exempt from antitrust law."
Sorry, but this is not privatization as the term is generally used.
Posted by: JohnDewey on August 25, 2006 6:18 AMCorrection: Sam Ryan is not a Congressman but a Fellow at think tank Lexington Institute.
Posted by: JohnDewey on August 25, 2006 6:22 AMGladwell writes in his New Yorker article on dependency ratios:
"'The introduction of demographics has reduced the need for the argument that there was something exceptional about East Asia or idiosyncratic to Africa,'” Bloom and Canning write, in their study of the Irish economic miracle. “Once age-structure dynamics are introduced into an economic growth model, these regions are much closer to obeying common principles of economic growth.”
"This is an important point. People have talked endlessly of Africa’s political and social and economic shortcomings and simultaneously of some magical cultural ingredient possessed by South Korea and Japan and Taiwan that has brought them success. But the truth is that sub-Saharan Africa has been mired in a debilitating 1-to-1 ratio for decades, and that proportion of dependency would frustrate and complicate economic development anywhere. Asia, meanwhile, has seen its demographic load lighten overwhelmingly in the past thirty years."
This is a good example of missing the point. If you go down to Wal-Mart or Costco and pick out the most sophisticated product made in China, you'd find, say, a laptop computer. And if you picked out the most sophisticated product in the store made in West Africa, you'd probably find, say, a shirt. That the worker's income from making the shirt has to be spread over more dependents than the income from making the laptop computer is, indeed, a problem for the African shirt-maker's family's well-being relative to the Chinese laptop maker's family's well-being, as Gladwell points out, but it's hardly the main problem.
The big problem is that while China is now internationally competitive in the same products that Japan was competitive in during the 1990s, West African countries are now competitive only in the same manufactured products that England was globally competitive in during the 1770s.
The big problem is that while China is now internationally competitive in the same products that Japan was competitive in during the 1990s, West African countries are now competitive only in the same manufactured products that England was globally competitive in during the 1770s.
Yeah, but ... at least they don't have to buy those goods with slaves anymore!
Posted by: Person on August 26, 2006 10:21 PM