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More on United
Alex Tabbarok takes the opposite view and holds that the moral of the increasing unviability of defined-benefit pensions is that we should eliminate our defined-benefit public sector pensions as well. Frankly, I think this is a bit silly. If one aspect of your finances is becoming riskier, that's a terrible moment to transform a different aspect of your finances into a riskier system as well. It's particularly foolish if the risks entailed are essentially the same. Under privatization, your Social Security benefits will be down at the exact same time your 401 (k) account is down, i.e., just when you need it most.
Now what needs to be brought into the picture here is that the federal government is not like a big corporation. Governments don't go out of business. Governments don't experience unexpected new competition for their customers. Corporations can't just generate new revenues by taking a vote. And of course corporate managers are supposed to have a different attitude vis-à-vis their employees than elected representatives have vis-à-vis their constituents.
May 11, 2005 | Permalink
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» Mattombo at the United Center from The Ethical Werewolf
Tabarrok goes to the hoop: United Airlines shows how risky big pension programs like Social Security are!
(If he was aiming to support any of the Bush plans, he would've missed anyway, since United's pension program invests in the stock market ju... [Read More]
Tracked on May 11, 2005 11:32:16 PM
» Too silly, far too silly from Marginal Revolution
Matt Yglesias responds to my post The Canary is Dead as follows:Nononono, no, no! 'E's resting!Well, I paraphrase but you get the gist. [Read More]
Tracked on May 12, 2005 8:06:54 AM
» The "Equity Market Risk" Canard from Citizen Journal Blog
Alex Tabarrok notes that "the canary is dead," that is, that United Airlines' problems in fulfilling its pension promises foreshadow those of the federal government: A large organization counts on its younger workers and continuing high revenues to fun... [Read More]
Tracked on May 12, 2005 5:33:42 PM
» The Highest Cost Producer from Dull Geek
Starting with an article at Marginal Revolution, I read the earlier referenced article, and ended up reading this guy's article, which contained this comment: [Read More]
Tracked on Jul 20, 2005 10:43:13 PM
Comments
well, the WH agrees with AT:
WASHINGTON - House Democrats said Wednesday that United Airlines' success in winning court approval to terminate its employee pension plans underscores the need to preserve a traditional Social Security benefit.
"For those pilots, for those flight attendants, for those mechanics, for those ramp employees, Social Security this morning is much greater percentage of their total retirement package than they had ever anticipated when they started working for United Airlines," Rep. George Miller (news, bio, voting record) of California, top Democrat on the House Committee on Education and the Workforce, said after emerging from his party's weekly caucus meeting.
Rep. James Clyburn (news, bio, voting record), D-S.C., noted polls show less than a majority of Americans support a White House overhaul of Social Security that includes creating private investment accounts. "I think the headlines today will help them make up their mind and they will join that 60 percent who now oppose what the president is proposing," the congressman said.
The White House took the opposite view, arguing the United case underscores the need for Social Security reform.
"The UAL situation is Exhibit A in the debate about why we must shore up America's retirement security program now, so that workers can be assured that they will have a decent retirement," said spokesman Trent Duffy.
I really think they're going to lose this argument.
Posted by: praktike | May 11, 2005 2:59:36 PM
Governments don't experience unexpected new competition for their customers.
Sure they do, they're called tax shelters.
Posted by: Ugh | May 11, 2005 3:14:31 PM
"Governments don't experience unexpected new competition for their customers."
Um, have you missed the mass business exodus out of Old Europe for more tax friendly new europe? Or of rich Europeans out of Europe(ie the tax exiles).
This is just a silly argument, especially in light of today's world.
Posted by: Hederman | May 11, 2005 3:49:14 PM
>Now, let's review. A large organization counts on its younger workers and continuing high revenues to fund the pensions and medical care of its retired workers but finds that rising health care costs, longer life-expectancy, and its own inability to control spending force it to cut pension benefits and switch to personal accounts.
I seem to recall Clinton was pretty good at controlling spending. Bush's tax cuts to the rich might have something to with the problem as well. Even United wouldn't make the arguement that they couldn't aford the pension plan right after a massive give away to key investors and management. Alex Tabbarok is pretty hacktacular.
Posted by: joe o | May 11, 2005 3:52:37 PM
In addition, this is only a good deal for United Airlines because the transition costs are effectively payed for by the PBGC. But the government has to find a way to pay for those costs itself. So there's really no analogy here.
Posted by: RC | May 11, 2005 4:31:23 PM
I'm with Praktike, the United decision is going to hurt the Bushies and underscore the importance of leaving well-enough alone on Social Security. The tax shelter comments above are true, but not really on point.
There's a sweet irony in all this. Unless I'm mistaken, the airline industry was the first huge network industry to undergo deregulatory transformation back in the 70's and here they are, several decades later, begging for gov't handouts every legislative session and, now, passing through the costs of their pensions onto Uncle Sam. Tell me again how all this cuts in favor of privitization of the Social Security system?
Posted by: fnook | May 11, 2005 4:48:45 PM
Governments can, however, take from the poor and give to the rich. Maybe you and I would not want a government to do so, but then I suspect neither one of us voted for Bush-Cheney '04.
Posted by: pgl | May 11, 2005 4:59:00 PM
"Um, have you missed the mass business exodus out of Old Europe for more tax friendly new europe? Or of rich Europeans out of Europe(ie the tax exiles)."
The barriers for both companies and individuals for switching tax jurisdiction are much higher than the barriers for either companies or individuals switching commercial suppliers of products and services.
Posted by: otto | May 11, 2005 5:00:31 PM
bingo -- you don't want the performance of all three legs of the retirement stool (to use the old metaphor) to be correlated with each other. But if DB plans are invested in equities (or just underfunded), private savings/ 401k type plans are invested in equities, and privatized social security is invested in equities, well, you have a lot of equity market risk.
Posted by: brad setser | May 11, 2005 5:12:39 PM
"If one aspect of your finances is becoming riskier, that's a terrible moment to transform a different aspect of your finances into a riskier system as well."
It doesn't have to be riskier one could easily invest all the money in T-Bills. Furthermore, it only stands to reason that certain indexed-styled options for investors are going to be able to return a better result that the risk indicated on the Efficiency Frontier. In fact, I have money with a group that does that quarter after quarter with stunning frequency. The American public, by the sheer size of the SOcial Security program is going to get access to the type of funds managers that until now only a few can access. Every greoup like this is going to compete hard for the business and the commissions taht come with it. How is that not a good thing?
Posted by: Publius Rex | May 11, 2005 5:25:03 PM
The issues of private accounts losing value at the wrong time can and should be addressed by education on the proper use of asset allocation, preferably in high school classes on personal finance (which would also go a long way towards address our savings rate and thus the current account deficit).
The current SS system addresses this issue merely by papering it over with promises it will eventually not be able to keep. Tabarrok's moral of the story concerns the sustainability of a system where outflows are not limited at all by inflows. That's exactly the problem with the pension system, and that's exactly the problem with a Social Security system that directly transfers wealth from current workers to current retirees.
The magnitude and urgency of the problem have certainly been exaggerated by the Bush administration, and Bush's surplus-squandering tax shifts have certainly hampered our ability to deal with the issue right now. But it's still a real issue that needs to be solved eventually, especially as life expectancies increase and birth rates decrease.
While I do share DeLong's fear that this administration will fuck things up, I do have to wonder whether that Bush might be the only politician in a long, long time that has both the political will and the power to do anything about it. Certainly, it seems to me that the Dems would prefer to ignore it and downplay it as much as Bush ignores the deficit.
Posted by: fling93 | May 11, 2005 5:27:20 PM
fnook,
Airline deregulation had nothing to do with worker pensions. Your comment is a total non sequitur. Airline deregulation was fantastically successful at accomplishing its goal, which was making air travel affordable and responsive to market pressures. If you can afford to fly, and you're not rich, that's because of deregulation.
Posted by: Steve | May 11, 2005 5:47:56 PM
The fact that "Governments don't go out of business" is not a reason to assume that it's never a problem if a government program is financially unsustainable.
I know, I know: the solution is to keep jacking up taxes. But the more taxes you raise, the fewer and fewer people end up getting even a half-decent long-term return on the money they put in the system.
Under privatization, your Social Security benefits will be down at the exact same time your 401 (k) account is down, i.e., just when you need it most.
If you've been investing for 30-40 years and shifted the results into more conservative investments as you near retirement - one of the elementary principles of investing that anyone can understand - this won't be the case. The key point ignored here is the lower risks of investments that are made on a long-term time horizon.
Posted by: Crank | May 11, 2005 5:52:00 PM
Steve, I stand corrected.
Posted by: fnook | May 11, 2005 6:34:57 PM
Thanks, fnook. What a totally un-blog-like response!
When airline companies fail, it's proof that deregulation works. Companies that provide shitty, overpriced service should fail, and they should be replaced by companies like Southwest and JetBlue.
Posted by: Steve | May 11, 2005 7:58:03 PM
It would help to think of the united states as one big motherfucking corporation, since, that is exactly what it is. Or, for those who prefer, United is a little government. The early law texts make this point pretty clearly.
The big Federal government corporation has economies of scale and avoids the problems of insurance better than any smaller corporation.
For a secure pension the corporation of corporations is the best economic solution possible because it works off a percent of the national economy. The best, cheapest, mutual fund possible.
It is time to start looking at government from the other side of the orthodoxy, which teaches that government is unique because blah blah blah. A fundamental economic issue is being lost in the ideology of anti government. Government is just another corporation, and nothing prevents a government corporation from doing exactly what a non government corporation does - and better. It is like saying Green Bay can't be a competitive football team, or the USGS is a bunch of incompetent bureacrats. Meanwhile, my cable provider is just a sorry ass government monopoly that sets its own taxes while refusing to give me a la carte because they have bought off Congress.
Until the reality gets through that government is a corporation capable of being well or poorly run, with any mission a corporation is capable of, "conservatives" will continue to successfully claim that government is inherently incompetent because it is government, while socializing the risk and privatizing the profits.
Posted by: razor | May 11, 2005 8:49:18 PM
"The key point ignored here is the lower risks of investments that are made on a long-term time horizon."
As a general rule, long term investments have more risk than short term investments. The reason is that it is usually easier to predict the near future than the distant future. Saying that you can't reliably predict what an investment will be worth in the future is not exactly the same thing as saying that the investment is risky, but it is pretty close.
Of course, long term investments tend to produce greater rewards than short term investments. For example, if you invest $100 for one year, and your investment happens to return 5%, you will end up with $105, or a gain of $5. If, on the other hand, you invest $100 for 20 years, and again your investment happens to return 5% per year, you will end up with about $265, or a gain of $165. In fact, as a general rule, increasing the holding period of an investment, will increase the potential reward will increase more than the risk. In other words, the risk/reward ratio of long term investments tends to be better than the risk/reward ratio of short term investments.
Some people are confused by this, and assume that if long term investments have a better risk/reward ratio, it must be because long term investments have lower risk. That is false. The reason that the risk/reward ratio is better for long term investments is that the potential reward is larger.
Posted by: Kenneth Almquist | May 11, 2005 9:00:34 PM
Ugh! Is there some perverse pledge you have to take as a libertarian to attack social programs at the expense of everything else? You'd think a committed free-marketeer would be more up-in-arms about corporate welfare as a horrendous distortion of the markets rather than yet another half-baked excuse to pummel Social Security. Instead of some sensible analysis on why propping up United with taxpayer's dollars is batshit insane, AT weighs in with a convoluted jab on Social Security that is neither here nor there.
Yes, the government should honor United's pensions. But not before United is allowed to fail and its carcass liquidated to go towards the pension fund.
Posted by: Battlepanda | May 11, 2005 9:16:05 PM
So... you would rather he advocate getting rid of bankruptcy protections?
Posted by: fling93 | May 11, 2005 9:37:38 PM
I'm not sure what you mean Kenneth. Or maybe I do, but I don't think it's clear.
Take a game where you flip a coin and get $100 for heads, lose $90 for tails. Would you rather play this game 5 times or 50 times? On average you will get $10 per coin flip, so in some sense you want to play as much as possible, because every flip increases your expected gain. That's the argument about increasing your upside.
But when you look at it in terms of risk, there are a few perspectives you can take. You can look at your average gain per flip. The more times you flip, the closer it's going to get to $10. If you play once, you're quite likely to have an average gain per flip of -$90. If you play 1000 times, your average flip is going to be right around $10. This also corresponds to a lower probability of being down when you're all done. So in this sense, your risk is going down by playing longer.
Here's another way of looking at it though. Say you wanted to benchmark yourself against the "average" player, who gets 50% heads and 50% tails and plays as often as you do. Instead of worrying about coming out ahead of 0, you worry about not being too far behind Mr. Average. Well, now the more times you play, the more likely you are to be well behind Mr. Average. You can fall behind by $950 within 10 flips only if you flip tails 10 times in a row -- a 1 in a 1000 possibility. But you can fall behind by $950 or more within 1000 flips simply by getting 505 or more tails -- a much more likely occurrence. In this sense, playing longer is riskier.
I'm sure this was much clearer. Well anyway.
Posted by: Barbar | May 11, 2005 9:45:29 PM
Unless I'm mistaken, the airline industry was the first huge network industry to undergo deregulatory transformation back in the 70's and here they are, several decades later, begging for gov't handouts every legislative session and, now, passing through the costs of their pensions onto Uncle Sam. Tell me again how all this cuts in favor of privitization of the Social Security system?
It may not cut in favor of privatization of the Social Security System. It probably does cut in favor of structuring it a bit differently, to enhance the benefits of lower wage folks and reduce or eliminate those of the wealthy. Why? Because in the brave new world of the global economy, firms are likely to grow ever stingier with benefits. This trend only enhances the importance of maintaining a solid and effective (and certainly more robust than the one currently enjoyed by Americans) safety net, which in turn means using resources wisely. Giving Paris Hilton a significantly more generous public sector pension than one of her family's chambermaids isn't very wise in my book.
Posted by: P. B. Almeida | May 11, 2005 9:45:52 PM
Barbar: Take a game where you flip a coin and get $100 for heads, lose $90 for tails. Would you rather play this game 5 times or 50 times?
Typically, the choice is not how long to play, because that's usually determined by your situation. Your choice is usually between the above game (stocks) and a lower-risk game where you flip a coin and get $2 for heads, $1 for tails (bonds). If you have a long-term horizon, you're better off assuming more risk and playing the first game. Remember, in the investment world, risk means volatility.
Posted by: fling93 | May 11, 2005 10:12:52 PM
Great post. Free-marketeers are going to learn to love social security and other welfare state institutions, because it is easier for the business class to deal with them via their lobbyists, than deal with unions. Business secretly loves social security. All of this privatization ideology is going to bite them on the ass when they start re-fighting the labor battles of the early to mid-20th century.
Posted by: rakehell | May 11, 2005 10:24:22 PM
So... you would rather he advocate getting rid of bankruptcy protections?
(1) Why not? Individual bankruptcy protection has just recently been gutted, why not for corporations, too? What's sauce for the goose, etc.
(2) How is transferring United's obligations to my tax bill an example of bankruptcy protection, anyway?
It doesn't have to be riskier one could easily invest all the money in T-Bills.
Which would be a great way to beat the clawback of diverted FICA + inflation + 3%. If by "beat," one means "lose money to." This is without taking into account that apparently certain branches of the federal government consider its bonds to be worthless IOUs.
In fact, I have money with a group that does that quarter after quarter with stunning frequency.
Wow, "stunning frequency." So even you have to admit how stunningly unusual it would be for everyone to have above-average results. See, it's so condescending of liberals to suggest that on the bare outside chance that everyone doesn't achieve Publius Rex's stunning results, society should do more than say "Fuck you, loser."
It probably does cut in favor of structuring it a bit differently, to enhance the benefits of lower wage folks and reduce or eliminate those of the wealthy.
This I can I agree with. First, I would suggest a system that doesn't define "wealthy" as anything above $20,000 a year. Next, I would suggest a benefit that declines as a portion of one's total wage income as that income grows larger--let's say, wages above $90,000 don't count towards your final benefit. Oh, and stop stealing money from the Ronald Reagan Trust Fund to cover tax cuts for the very wealthy which more than offset any proposed decrease in their Social Security benefits. I could probably get behind that sort of reform.
Posted by: mds | May 11, 2005 10:47:57 PM
mds: Individual bankruptcy protection has just recently been gutted
Come now. Moving some people from Chapter 7 to Chapter 13 is hardly gutting it.
mds: (2) How is transferring United's obligations to my tax bill an example of bankruptcy protection, anyway?
Well, I for one don't like bailouts either. But what does that have to do with pension plans or Social Security? Are you saying that anybody who blogs about United has to talk about the bailout? Sheesh, that's about as controversial as saying agricultural subsidies are stupid.
mds: See, it's so condescending of liberals to suggest that on the bare outside chance that everyone doesn't achieve Publius Rex's stunning results, society should do more than say "Fuck you, loser."
I just don't see why my taxpayer dollars should bail out people who didn't manage their money well.
Posted by: fling93 | May 11, 2005 11:18:08 PM
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