Post by JR on Sept 30, 2012 9:49:04 GMT -6
bostonoccupier.com/2012/04/23/what-future-for-pensions/
BY PAN ANGELOPOULOS
Compared to its Northern European counterparts, the US welfare state has always been considered inadequate. After decades of ‘reforms’ pushed through aggressively by the Reagan, Clinton, and Bush administrations, it now rests on a fragile base, offering a paltry social wage. What remains is the legacy of a New Deal that did not go far enough.
This is not solely an American phenomenon; on both sides of the Atlantic, welfare retrenchment gains pace as neoliberalism advances. As the provision of social services and a safety net by the state recedes, workers’ livelihoods become increasingly subject to the vicissitudes of the market. Whereas the social democratic (or Keynesian) state was based on citizens’ rights, universal benefits and a rising standard of financial and material provision, the neoliberal state is discretionary, means-tested, and minimalist. House owning, pension owning, share owning, and private medical insurance are regarded as substitutes for public housing, state pensions, income support, and free health service. ‘Popular capitalism’ replaces the welfare state, and what has taken decades of struggle to achieve is clawed back.
Today, in the midst of the Great Recession, the logic of re-commodification is reaching new extremes, while capital seeks to force working people to pay for its crisis through substantial cutbacks to social welfare. Against all odds, the backbone of the US welfare state has survived though. The widespread support enjoyed by Social Security (its entitlement, averaging $1,100 per month, saves nearly half the US senior population from destitution) means that it has not yet suffered the austerity or privatization that would paralyze it. As alarmism over the deficit and debt grows though, Social Security will be targeted for deep cuts that will undermine both its legitimacy and what should be the right to a decent, comfortable retirement. Old-age poverty rates, already remarkably high (especially among women), are sure to go through the roof.
Deficit hawks, using projections that combine distant horizons with arbitrary assumptions, assert that Social Security is a drain on public finances, and that privatizing it and raising the retirement age will reduce costs and improve pensions (this is often accompanied by a rhetoric that sets young against old). As former New Left Review editor Robin Blackburn shows in Age Shock though, these arguments just don’t hold water. The record of private pension provision, which has grown tremendously since the early 1980s with the proliferation of Individual Retirement Accounts and 401(k)s to supplement the subsistence stipend that Social Security offers, is dismal.
Private provision comes in two forms: defined benefit (DB), which guarantees a specific pension entitlement calculated in terms of salary and years of contribution (this is also the way many once-generous public schemes in Europe work), and defined contribution (DC), which offers only whatever pension can be purchased in the money markets for the sum in the pension pot at retirement. Up until the 1980s, most corporate and public plans were DB; these employed risk and asset-pooling and offered guaranteed pensions and health care benefits. Since then there has been a shift to DC plans, together with growing pension wealth inequality and income erosion in retirement. These plans no longer guarantee pensions, while the market risk is entirely borne by the contributor-worker. In the case of a stock market collapse, the results can be catastrophic: in the three years following March 2000, after the dot-com crash, US pension and mutual fund values dropped by nearly a half; in 2008 global retirement funds dropped by 20 per cent in one week. Moreover, with DC plans employers’ contributions plummet (about half of what they contribute to DB schemes), while costs for workers are higher because of hidden fees and heavy administrative, marketing, and customization charges. Meanwhile, the private sector DB schemes that survive are threatened by ‘vulture capitalism’ – corporate bankruptcies carried through with the aim of dumping pension liabilities. This has occurred repeatedly in the steel, airline, and auto industries, with often-catastrophic results for the workers affected.
The privatization of what is left of public pensions is thus an ill-suited option; the result would only be to reduce retirement incomes and to increase inequality and insecurity. In an ageing society though, ensuring a future for decent pensions at around 70-75 per cent of average income (allowing for the dignity of financial independence that would permit the pursuit of creative, socially worthwhile activities) poses a real challenge. By 2035 retirement incomes will need 15 per cent of GDP, but there will be a shortfall of around 4 per cent, with the revenue deficiencies of private schemes accounting for two-thirds of this. As Blackburn argues, the phenomenon of an ageing society is better seen as common shock, not an individually (and privately) insurable risk. Addressing it requires more than protecting Social Security; there will need to be more collective insurance, additional sources of revenue, and a new development of welfare principles. Public systems must be at the centre of the effort to remake pension provision. They are efficient and cost effective (the Social Security Administration caters to over 150 million employees and 50 million beneficiaries with a staff of 68,000 – about the size of a single large insurance company), and simply need good benefit formulae and adequate revenue sources to deliver good results.
The innovatory solution to pension woes, to prevent the return of pauperized old age, requires a basic state pension (Social Security), financed largely by ‘pay-as-you-go’ and providing a guaranteed basic income, supplemented by a universal, pre-funded secondary pension financed by a tax on capital. Credits for care work, child-rearing, and educational or cultural contribution would help remedy the problem of lower pensions for women in the current system. The basic state pension and the secondary pension would supply around 45-50 per cent and 30 per cent of median income respectively. How would the revenue be raised? Social Security will not experience any significant revenue shortfall in the future (of the 4 per cent of GDP shortfall in 2035, it would account for less than 1.5 per cent). Raising the contribution rate though, which is currently 12.4 per cent, by 1 percentage point and increasing the annual income threshold above which no further Social Security contributions are payable (it is currently just under $90,000) would generate substantially more revenue.
The novel aspect of this plan is the universal secondary pension. The idea comes from the visionary economist Rudolf Meidner, who helped design Sweden’s social democratic economy (‘Rehn-Meidner model’). In the 1970s Meidner, anticipating the new social expenditures that would be entailed by an ageing and learning society, proposed the creation of strategic social funds – ‘wage-earner funds’ – to be financed by a levy on shares. The policy had the strong support of the left wing of the Social Democratic Party and the trade unions, but was bitterly opposed by the Conservatives and the powerful Swedish Employers Association. The Social Democratic government diluted the proposal so that the social funds were financed by a modest tax on profits, and in 1992 it was dismantled altogether, although the plan had been successful in several respects (increased collective savings; higher economic growth, capital formation, and pensions; lower unemployment and inflation).
Today the plan would be similar: all listed corporations employing more than twenty people or with a turnover of over $10 million would be required to issue new shares equivalent to 10-20 per cent of its profits to a network of social funds. This would both raise employers’ contributions and make tax avoidance more difficult, while the levy would be an asset tax not an income-related tax, hence it would not subtract from corporate cash-flow, nor threaten investment and employment. It would be a sort of capital gains tax on any profits-related growth in company value, falling entirely on the corporation’s owners – thus the rich, who own most shares (the wealthiest 1 per cent of US households owns two-thirds of all assets and receives one half of all share dividends and capital gains). As conventional tax sources would not be drawn upon, there would be more funding for education, health care, and social infrastructure.
The public social fund network would hold the shares it received for the long term, and use the dividend income they generate to pay pensions. The funds would produce wealth as well as redistribute it, promoting investments in productive capacity, environmental protection, and public infrastructure. Organized on non-commercial lines, the funds would not only de-commodify pension provision, bringing it back into the public sphere, but also lead to a degree of real popular control over the economic process, as companies would gradually become worker-owned in a collective sense. Essentially, the network of social funds would gradually accumulate claims to the future social surplus at the expense of capitalists and rentiers. Altogether, the Meidner plan would entail a radical reconceptualization of terms like ‘nationalization’ and ‘worker control.’
The plan outlined above (Blackburn has shown with meticulous detail that it is financially viable in the US, Europe, and Japan) would, by providing strong public pensions, help solve pension woes and achieve solidarity between generations by keeping constant the ratio of average income to pensioner income. By taxing the wealthy it would reduce inequality and increase the living standards of the lower classes. The plan would also gradually socialize investment and parts of the economy in a novel way. Of course, this would only be one step in this direction, its success depending upon the broader balance of class forces and the outcome of fundamental political battles. To be sustainable, the system of social funds would have to be only one element of a broader public utility finance system, with publicly owned and accountable banks, a national investment bank, and a different kind of central bank its core. More broadly, there would have to be public provision and de-commodification of major areas of social welfare, to ensure free access to decent health care and education for working people and pensioners. These are lofty goals, but vital to achieve if we are to begin creating a new, different society.
(POSTER NOTE: The author above is suggesting something somewhat different from the Meidner Plan. The Meidner Plan called for the redistribution from 20% of business profits directly, while the author is suggesting merely mandatory voting share issuance regardless of the operating situation. However, if this plan doesn't affect corporate cash flow, as opposed to income taxes payable, then why is "the taxpayer" paying into the funds?)
BY PAN ANGELOPOULOS
Compared to its Northern European counterparts, the US welfare state has always been considered inadequate. After decades of ‘reforms’ pushed through aggressively by the Reagan, Clinton, and Bush administrations, it now rests on a fragile base, offering a paltry social wage. What remains is the legacy of a New Deal that did not go far enough.
This is not solely an American phenomenon; on both sides of the Atlantic, welfare retrenchment gains pace as neoliberalism advances. As the provision of social services and a safety net by the state recedes, workers’ livelihoods become increasingly subject to the vicissitudes of the market. Whereas the social democratic (or Keynesian) state was based on citizens’ rights, universal benefits and a rising standard of financial and material provision, the neoliberal state is discretionary, means-tested, and minimalist. House owning, pension owning, share owning, and private medical insurance are regarded as substitutes for public housing, state pensions, income support, and free health service. ‘Popular capitalism’ replaces the welfare state, and what has taken decades of struggle to achieve is clawed back.
Today, in the midst of the Great Recession, the logic of re-commodification is reaching new extremes, while capital seeks to force working people to pay for its crisis through substantial cutbacks to social welfare. Against all odds, the backbone of the US welfare state has survived though. The widespread support enjoyed by Social Security (its entitlement, averaging $1,100 per month, saves nearly half the US senior population from destitution) means that it has not yet suffered the austerity or privatization that would paralyze it. As alarmism over the deficit and debt grows though, Social Security will be targeted for deep cuts that will undermine both its legitimacy and what should be the right to a decent, comfortable retirement. Old-age poverty rates, already remarkably high (especially among women), are sure to go through the roof.
Deficit hawks, using projections that combine distant horizons with arbitrary assumptions, assert that Social Security is a drain on public finances, and that privatizing it and raising the retirement age will reduce costs and improve pensions (this is often accompanied by a rhetoric that sets young against old). As former New Left Review editor Robin Blackburn shows in Age Shock though, these arguments just don’t hold water. The record of private pension provision, which has grown tremendously since the early 1980s with the proliferation of Individual Retirement Accounts and 401(k)s to supplement the subsistence stipend that Social Security offers, is dismal.
Private provision comes in two forms: defined benefit (DB), which guarantees a specific pension entitlement calculated in terms of salary and years of contribution (this is also the way many once-generous public schemes in Europe work), and defined contribution (DC), which offers only whatever pension can be purchased in the money markets for the sum in the pension pot at retirement. Up until the 1980s, most corporate and public plans were DB; these employed risk and asset-pooling and offered guaranteed pensions and health care benefits. Since then there has been a shift to DC plans, together with growing pension wealth inequality and income erosion in retirement. These plans no longer guarantee pensions, while the market risk is entirely borne by the contributor-worker. In the case of a stock market collapse, the results can be catastrophic: in the three years following March 2000, after the dot-com crash, US pension and mutual fund values dropped by nearly a half; in 2008 global retirement funds dropped by 20 per cent in one week. Moreover, with DC plans employers’ contributions plummet (about half of what they contribute to DB schemes), while costs for workers are higher because of hidden fees and heavy administrative, marketing, and customization charges. Meanwhile, the private sector DB schemes that survive are threatened by ‘vulture capitalism’ – corporate bankruptcies carried through with the aim of dumping pension liabilities. This has occurred repeatedly in the steel, airline, and auto industries, with often-catastrophic results for the workers affected.
The privatization of what is left of public pensions is thus an ill-suited option; the result would only be to reduce retirement incomes and to increase inequality and insecurity. In an ageing society though, ensuring a future for decent pensions at around 70-75 per cent of average income (allowing for the dignity of financial independence that would permit the pursuit of creative, socially worthwhile activities) poses a real challenge. By 2035 retirement incomes will need 15 per cent of GDP, but there will be a shortfall of around 4 per cent, with the revenue deficiencies of private schemes accounting for two-thirds of this. As Blackburn argues, the phenomenon of an ageing society is better seen as common shock, not an individually (and privately) insurable risk. Addressing it requires more than protecting Social Security; there will need to be more collective insurance, additional sources of revenue, and a new development of welfare principles. Public systems must be at the centre of the effort to remake pension provision. They are efficient and cost effective (the Social Security Administration caters to over 150 million employees and 50 million beneficiaries with a staff of 68,000 – about the size of a single large insurance company), and simply need good benefit formulae and adequate revenue sources to deliver good results.
The innovatory solution to pension woes, to prevent the return of pauperized old age, requires a basic state pension (Social Security), financed largely by ‘pay-as-you-go’ and providing a guaranteed basic income, supplemented by a universal, pre-funded secondary pension financed by a tax on capital. Credits for care work, child-rearing, and educational or cultural contribution would help remedy the problem of lower pensions for women in the current system. The basic state pension and the secondary pension would supply around 45-50 per cent and 30 per cent of median income respectively. How would the revenue be raised? Social Security will not experience any significant revenue shortfall in the future (of the 4 per cent of GDP shortfall in 2035, it would account for less than 1.5 per cent). Raising the contribution rate though, which is currently 12.4 per cent, by 1 percentage point and increasing the annual income threshold above which no further Social Security contributions are payable (it is currently just under $90,000) would generate substantially more revenue.
The novel aspect of this plan is the universal secondary pension. The idea comes from the visionary economist Rudolf Meidner, who helped design Sweden’s social democratic economy (‘Rehn-Meidner model’). In the 1970s Meidner, anticipating the new social expenditures that would be entailed by an ageing and learning society, proposed the creation of strategic social funds – ‘wage-earner funds’ – to be financed by a levy on shares. The policy had the strong support of the left wing of the Social Democratic Party and the trade unions, but was bitterly opposed by the Conservatives and the powerful Swedish Employers Association. The Social Democratic government diluted the proposal so that the social funds were financed by a modest tax on profits, and in 1992 it was dismantled altogether, although the plan had been successful in several respects (increased collective savings; higher economic growth, capital formation, and pensions; lower unemployment and inflation).
Today the plan would be similar: all listed corporations employing more than twenty people or with a turnover of over $10 million would be required to issue new shares equivalent to 10-20 per cent of its profits to a network of social funds. This would both raise employers’ contributions and make tax avoidance more difficult, while the levy would be an asset tax not an income-related tax, hence it would not subtract from corporate cash-flow, nor threaten investment and employment. It would be a sort of capital gains tax on any profits-related growth in company value, falling entirely on the corporation’s owners – thus the rich, who own most shares (the wealthiest 1 per cent of US households owns two-thirds of all assets and receives one half of all share dividends and capital gains). As conventional tax sources would not be drawn upon, there would be more funding for education, health care, and social infrastructure.
The public social fund network would hold the shares it received for the long term, and use the dividend income they generate to pay pensions. The funds would produce wealth as well as redistribute it, promoting investments in productive capacity, environmental protection, and public infrastructure. Organized on non-commercial lines, the funds would not only de-commodify pension provision, bringing it back into the public sphere, but also lead to a degree of real popular control over the economic process, as companies would gradually become worker-owned in a collective sense. Essentially, the network of social funds would gradually accumulate claims to the future social surplus at the expense of capitalists and rentiers. Altogether, the Meidner plan would entail a radical reconceptualization of terms like ‘nationalization’ and ‘worker control.’
The plan outlined above (Blackburn has shown with meticulous detail that it is financially viable in the US, Europe, and Japan) would, by providing strong public pensions, help solve pension woes and achieve solidarity between generations by keeping constant the ratio of average income to pensioner income. By taxing the wealthy it would reduce inequality and increase the living standards of the lower classes. The plan would also gradually socialize investment and parts of the economy in a novel way. Of course, this would only be one step in this direction, its success depending upon the broader balance of class forces and the outcome of fundamental political battles. To be sustainable, the system of social funds would have to be only one element of a broader public utility finance system, with publicly owned and accountable banks, a national investment bank, and a different kind of central bank its core. More broadly, there would have to be public provision and de-commodification of major areas of social welfare, to ensure free access to decent health care and education for working people and pensioners. These are lofty goals, but vital to achieve if we are to begin creating a new, different society.
(POSTER NOTE: The author above is suggesting something somewhat different from the Meidner Plan. The Meidner Plan called for the redistribution from 20% of business profits directly, while the author is suggesting merely mandatory voting share issuance regardless of the operating situation. However, if this plan doesn't affect corporate cash flow, as opposed to income taxes payable, then why is "the taxpayer" paying into the funds?)