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A very happy unintended consequence: Changing public employee retirement plans to defined contribution should help speed “privatization” of Social Security

By: gawken (Diary)  |  March 4th, 2011 at 08:58 AM  | 

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The struggle to deal with bloated public pensions continues. Less reported, but equally as important,  is that already several states and many local governments have already instituted reforms: putting new hires into defined contribution/401k type plans.  And some have already taken the step of freezing existing defined benefit plans for current employees, and settign up defined contrubution plans for future benefits. This trend will no doubt continue, and at an accelerated pace.

The core constituency of the Democrat party is the government workers unions. The  Democrats in Congress ( elected overwhelming with union funds and manpower) are the roadblocks to privatizing Social Security. At some point it will be impossible to justify denying the vast majority of American workers the same opportunity that government workers will soon be enjoying.

If we are fortunate in 2012 to have a Republican in the WH, and GOP control of Congress, any attempt to reform Social security must include privatization. It makes no sense to debate raising the retirement age, or any of the other remedies mentioned, without the one reform that could significantly help put Sociual Security on a sound financial foundation.

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  • Gary Cooper

    Good points. I am for some privatization of social security. It should be a safety net for those that truly need it – seniors who have paid into the system for decades and rely on it to survive and the truly disabled who can’t contribute to society via the job market.

    For those who are under 55 and can still contribute into society, they should be given the amount they have paid into SS up to that point and allowed to place it into any account that can incur interest (savings, bonds, 401K, social security trust, etc). If they wish to keep putting money in social security so they can have that safety net, then they should be allowed too and it go into a trust that the politicians can’t touch and that the individual can access at age 55. If they require funds before, then they can access it like workers do their 401ks and take out loans. That way it’s not only a safety net after 55, but the option is there if you need it before age 55.

    Eager to hear your thoughts on that.

  • drfredc

    There would be at least two other positive ‘unintended’ consequence of evolving government unions to defined contribution/401k type plans.

    With Union Bubba’s retirements based upon investment performance, they’ll have to get serious about promoting a better business/capitalist environment — translation => low corporate taxes and less onerous regulations… It’s likely with a dynamic growing economy that everyone’s pension would quickly grow beyond anyone’s expectations…

    The second consequence with unions vested in a thriving capitalist system would be the demise of the Democrat’s Class Warfare Parade. Bubba’s whose pensions depend upon thriving capitalism would not put up with taking down the source of their retirement. In turn, this would likely spell the rise of a different Democrat party. Without class warfare and heavy regulations to pound at the electorate with, even the Greens would likely find themselves out in the cold.

    One place to start any such endeavor is to get Congress to drop it’s defined benefit plans… Go figure that when the pol’s pensions aren’t touched by their trashing of productive capitalist behavior that Congress in both parties engage in all sorts of unproductive stuff. Make their pension’s sensitive to the economic outcomes and you’ll see a quick change of heart when it comes to bashing business.

    IMHO, the best place to tweek such a change would be at the Pension Guarantee Trust level. By X date certain, they will no longer guarantee any defined benefit pensions along with providing a fair and equitable means to convert ALL existing defined benefit pensions into 401k defined contribution pensions according to actual contributions into such plans — not inflated last year bloating of pensions as is common in some venues. Yes, this could even include pensions of retired folks… Converting would remain an option — however the taxpayer wouldn’t be on the hook if any defined benefit pension went bankrupt. As a fine point, instead of 401ks which are taxed upon withdrawal, go the Roth route, tax upon contribution… We need the revenue now, not later…

  • podkayne3000

    whatever else we do, we have to end the defined benefit concept. Maybe the government should stay out of that fight (“small government is beautful”), but regular people, ministers, business groups, etc. should educate people about the reality that predicting the future is for fortune tellers.

    The idea that human beings can know whether X will be able to pay $Y per month to John Doe 20 years from now is arrogant nonsense. Man proposes, God disposes.

    Here, for example, is a blog entry that talks about some of the problems with offering a traditional pension plan. And the blog entry doesn’t even really get t the idea that predicting the future is hard. But the crux of the matter is that, if Robert Heinlein wasn’t exactly sure in 1961 what the world was going to be like in 2011, no way does a corporate pension fund manager know what the world is going to be like in 2061.