Once upon a time there was an idea that a healthy part of a middle class individual’s retirement should be secured via a defined-benefit pension program that would be provided by his employer and that his employer would be encouraged to provide thanks to implicit subsidies in the tax code. That paradigm was very similar to the paradigm of employer-provided health insurance, and over time it’s tended to unravel for similar reasons. Except the pension case is even worse than the health care case, because we’ve been able to make employer-provided health care semi-viable through “continuity of coverage” rules and COBRA to let people transition from one employer-provided plan to another.
So defined benefit pensions are dying off. One natural substitute is tax-preferred individual savings vehicles like the IRA and the 401(k). Those have some conceptual virtues, but also considerable practical drawbacks since they’ve created a vast rent-seeking market in extracting management fees from careless middle class savers. They also have a lot of undesirable instability. I retire comfortably in March of 1999, you retired wiped out in March of 2001.
The natural supplement to the problems with individual retirement savings and substitute for the problems with defined-benefit corporate pensions is a large public sector program. Every working person gets a bit less take home pay than they would have otherwise had, but in exchange gets a guaranteed annuity when they’re retired. And fortunately for us we have a program that’s already more or less structured like that. It’s called Social Security. And as the defined benefit pension paradigm fades away, the natural and proper thing would be to rely more on Social Security as a vehicle for ensuring adequate living standards for senior citizens. The fact that this is happening more or less simultaneously with a demographic transition in which the elderly will be a larger share of the population is interesting, but doesn’t fundamentally defeat the analysis.
