Toward a Post-Blue Retirement Model

We highlighted yesterday how strained our current retirement system is; others are thinking along the same lines. Dean Baker, co-founder of the Center for Economic and Policy Research, a liberal think tank, has an interesting op-ed in the Los Angeles Times about the challenges many Americans are facing in saving adequately for retirement, and the measures some state governments are taking to devise new retirement models:

Although Social Security is a tremendously important program, and provides a solid base that retirees can depend upon, its $16,000 average annual benefit doesn’t go very far. […]

In response to this situation, Illinois is developing a state-run retirement program that will make it easier and cheaper for workers to save. Many other states, including California, are studying this option.

Although there are differences in proposals, the common goal is to create a publicly managed system that will automatically include workers whose employers do not enroll them in a plan.

Workers would have a modest amount (around 2% to 3%) deducted from each paycheck, although they could opt out if they chose. The money would then accumulate like a 401(k) during a person’s working years, with the option to receive a lump sum or draw a monthly payment at retirement.

We’re not always optimistic about economic policy experiments undertaken by states like Illinois and California at the urging of Left-of-Center economists, but these types of efforts strike us as both necessary and promising. The basic blue model retirement bargain, where workers stayed with one employer for most of their careers, then took advantage of generous defined-benefit pensions plans after age 65, is no longer tenable on a large scale (despite the best efforts of union interests to shore it up). Moreover, even if this model could be revived, it would not be desirable: In the twenty-first century economy, companies are more unstable and workers are more mobile. Tying pension benefits to employment is both risky (modern companies can rise and fall almost in the blink of an eye) and bad for worker flexibility and risk-taking (the old system discouraged job-hopping).

All this means that Americans are in the process of transitioning out of a retirement system that worked well for their parents, and creating one that works well for the twenty-first century. There will need to be several components of the new retirement system, but one key part is some kind of device to encourage private saving, like the mechanism Baker describes. The government role in such programs should be minimal—creating space for the system to work, rather than actually administering it. (We’ve seen what happens when the state tries to manage public pension funds). Still, ensuring that all citizens can save for a secure retirement is a public concern and an important function of the state. After all, it’s not in anyone’s interest for Americans to rely heavily on public assistance programs when they are too old to work.It’s encouraging to see states like California and Illinois start to experiment with portable retirement systems. Red states should think about how they can build on these ideas, perhaps by giving people more leeway to control their retirement accounts, or encouraging employers, rather than the government, to take a lead role in creating and sustaining the new system. At a time when economic anxiety among working class voters is creating a class war within the Republican party, it would behoove Right-of-Center policymakers to show that they are serious about making retirement secure for low- and moderate-income voters.