In his latest book, While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego and Loom as the Next Financial Crisis, journalist Roger Lowenstein explores America's deeply flawed retirement system. He talked with U.S. News about solving this major economic conundrum. Excerpts:
How bad is America's retirement situation?
It's dire from two perspectives. One is the people who'll be funding the burden. General Motors doesn't want it. The states have a cumulative deficit close to $1 trillion. The other side is these institutions telling retirees to take on the burden. Guess what? Individuals haven't saved. In 2004, the median 401(k) holding was $31,000. This is happening at a time when we'll have more retirees than ever. We have 38 million senior citizens now. By 2030, we'll have 72 million. It's like adding another New York and another Texas of just seniors.
Why did the traditional pension system fail?
Pensions were a feature of a world where there wasn't much global trade, where unions and companies were both protected against outside competition, and where workers stayed at one company for much or all of their working lives. Unions were able to press for too much or, alternatively, managements gave too much. Suddenly, when American firms were competing against foreign firms that hadn't given the same sorts of benefits, there were gross cost disadvantages.
Why are other retirement plans—401(k)'s, private savings—poor replacements for pensions?
Pensions replicate the insurance feature of collective security. Some people retire when the market is high and some retire when it's low, and it doesn't matter to the individual because the money will be there. With 401(k)'s, that security is lost. If I retired in 2000 when the Nasdaq was at 5,000, I'm in good shape. If I retired in 2002 when the Nasdaq was at 1,200, I've totally lost. Then, you can outlive your savings. Since pensions are structured like annuities, you don't have that risk.
Why is government better suited to shoulder some of these issues, like saving and healthcare?
People are [already] switching jobs because of healthcare. I don't think that improves the function of the labor market. What if someone said your employer had to pay for your kids' college education? There's no reason why that's any less silly than having your employer pay for healthcare. There are other options. I think the Hillary Clinton plan of a retirement 401(k) the government would match is a good one. [Barack] Obama has a very good twist on that. He would say to employers that everyone has to have a 401(k) plan, and the default option would be workers enrolled automatically who would have to opt out later. Any solution that gets society saving more is a good one.