Arnold Kling  

Your Defined Benefits = My Obligations?

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The Associated Press reports,


Under the law, companies facing shortfalls must bring their plans up to full funding over the next seven years. Those that fall short will be forced to take steps such as freezing the accrual of new benefits for current plan members.

The letter asks Congress for changes to the pension reform law, such as giving companies more time to reach full funding. It also seeks accounting changes that would allow companies to spread losses to their plans over longer periods of time, a process that would temper the effect of sudden drops in plan values.

This refers to companies with defined-benefit pension plans, which are plans that promise to pay specific benefits, even if the funds in the plans lose money. The companies think that it is onerous that they should be expected to actually have to take steps to keep their promises. Instead, they want to go on as if everything is fine, and leave somebody else to pick up the tab if it isn't.

And who are the tab-picker-uppers? Naturally, the taxpayers, under the Pension Benefit Guarantee system.

Everyone who promises defined benefits thinks that somebody else needs to help them keep their promises. That somebody else is you and me.

We will be picking up the tab for corporate defined-benefit plans (starting with General Motors), for state and local defined-benefit plans, and then for Social Security and Medicare. "We" means anyone who tried to earn money, live within their means, and invest prudently.

We are headed toward a huge conflict between the ants and the grasshoppers. The grasshoppers are going to take more and more away from the ants. At some point, the ants may start to fight back.

[Update: Alex J has a comment that deserves to be pulled up into the main body. He writes:]


To add my own spin here, our ants need the division of labor in order to be productive. This requires public cooperation. The "grasshoppers" don't need cooperation among themselves in order to do nothing. Cooperation is easy (for the government) to disrupt. The non-productive have more motivation to seek the reins of power; the productive are busy being productive. Therefore, we have reason to believe that this is not a fight the ants are in a position to win.

I think we have two ways to win. Communications technology might allow cooperation to be shielded from government interference. I doubt this will work all that well, since soiling ones own nest is cheap and easy. With luck, and some deft persuasion, people might attach personal meaning to being productive and supporting other productive people, rather than grasping for handouts and supporting handouts for others. Here, the problem is that voting people attach personal meaning to their political affiliation. Politicians get traction by being seen to redistribute, rather than sitting back and allowing production.

[UPDATE: A commenter points to a valuable piece from 2005 by Roger Lowenstein]


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The author at View From a Height in a related article titled PERA-lous Territory writes:
    Moral Hazards, everywhere you look. Arnold Kling has been all over that terrible idea, the proposed auto bailout. A big reason that the auto industry is in trouble financially is that many of its current and past workers have retirement... [Tracked on November 12, 2008 3:00 PM]
COMMENTS (21 to date)
RWard writes:

The problem being, of course, that the grasshoppers have the support of the praying mantises...

Matt C writes:

> At some point, the ants may start to fight back.

The ants are a general and dispersed interest, while the grasshoppers are divided into coherent and concentrated factions. Rotsa ruck.

Alex J. writes:

To add my own spin here, our ants need the division of labor in order to be productive. This requires public cooperation. The "grasshoppers" don't need cooperation among themselves in order to do nothing. Cooperation is easy (for the government) to disrupt. The non-productive have more motivation to seek the reins of power; the productive are busy being productive. Therefore, we have reason to believe that this is not a fight the ants are in a position to win.

I think we have two ways to win. Communications technology might allow cooperation to be shielded from government interference. I doubt this will work all that well, since soiling ones own nest is cheap and easy. With luck, and some deft persuasion, people might attach personal meaning to being productive and supporting other productive people, rather than grasping for handouts and supporting handouts for others. Here, the problem is that voting people attach personal meaning to their political affiliation. Politicians get traction by being seen to redistribute, rather than sitting back and allowing production.

Greg Ransom writes:

In Orange County, CA government workers are given retirement at age 50 at 100% salary.

Many of these folks earn 6 figures.

The same thing is happening all over California.

Cities are slashing the police and firefighting force in order to cover the 100% salary pensions of ... retiring policemen and firefighters, still in the prime of their careers.

Dan Weber writes:

Greg, those are the "headless nails" that Roger Lowenstein talked about in the NYTimes Magazine a few years ago:

http://www.nytimes.com/2005/10/30/magazine/30pensions.html?pagewanted=print The End Of Pensions

El Presidente writes:

So, going back to an earlier conversation, what is the proper the role of government? Spectator? If there is a libertarian in the audience who can answer that with any intellectual integrity, I am eager to observe.

I could do without the parabolic metaphors. They are a convenient mask for moralising. If we don't think that economics and morality have anything to do with one another, if we are averse to discussing distribution for this reason, how odd is it that we would abhor the plight of the honest, hard working, long suffering, morally upright ant? That's right; a creature lacking cognitive faculty. And at the same time, we decry the evil grasshopper that causes this devastation. That's right; a creature equally lacking cognitive faculty. Why is redistribution upward only evil when we are using metaphorical insects? Is this metaphorical empathy?

Alex J. writes:

Pres,

I'll answer a slightly different question. The best service that most governments provide is fending off worse governments. The "properness" of governments' actions drops off pretty steeply after that.

Randy writes:

Ants and grasshoppers seems to me like a practical classification (Productive and Political respectively). What doesn't quite figure is why so many ants support the grasshoppers?

I'm thinking the answer is that the ants also have a preference for order - regardless of cost. Their productivity makes them wealthy, they can afford to pay, and they don't put much effort into analyzing exactly what they are paying for. And one thing that grasshoppers are exceptionally good at is justifying their existance. Its annoying, but to be honest, I have to admit that the result is fairly stable - symbiotic, if you will. It will remain stable as long as the grasshoppers don't get overly greedy. Unfortunately, this seems to be the case...

Larry writes:

The parable of the ants and grasshoppers is ancient, as is the struggle between them. Somehow the ants still find a way to lift the world. Nothing has changed.

jb writes:

Larry sez:


Somehow the ants still find a way to lift the world. Nothing has changed.

Tell that to the people of Ancient Greece and Rome. And modern Zimbabwe. And North Korea.

Yes, the world will continue to turn. But there will be fewer people in it when the system collapses because the ants give up. And the government(s) that rise from the ashes may not be nearly as interested in freedom, self-expression and so forth.

The good news is that now that Obama is president, no one will have to work - the entire world can be powered from the vacuum energy supplied by all those promises.

Methinks writes:

Must the ants actively revolt? It seems a passive revolution would be even more effective. As more of their production is confiscated, the ants simply produce ever less and hide ever more of their production, starving the grasshoppers.

David Peterson writes:

Tthis highlights the difference between say an owned account and a general pool well, be it a private one or a public one.

Maximizer writes:

I think I'm ready to slash my wrists. Is there ANYTHING positive going on in the world that might be relevant to an econ blog?

Kidding about wrists, but your blog has been depressing. Are you ok? :)

Greg writes:

Could you please write more parables about ants and grasshoppers? Please disregard relatively low marginal income tax rates and trade levels at or near an all-time high. Predictions of total economic apocalypse coupled with Randian tales of virtuous business owners would be ideal. Also please avoid any mention of said virtuous business owners engaging in rent seeking. I don't want my bedtime reading muddled with ambiguity. Thank you.

Dr. T writes:

Greg, your mention about current tax rates and trade levels has nothing to do with the future. In the not-too-distant past, the grasshoppers raised the federal income tax rate to 70%. You don't think that could happen soon, with a semi-socialist president and a 'happy to grab the money of the well-off' Congress? And, most voters would love to see confiscatory taxes on those better off than themselves, especially if they can be enriched by a 'negative income tax' and a few government entitlements. There also has been talk of bringing back the wealth tax: a tax on your net worth, not on your current income. Those ants who saved the most will lose the most to the grasshoppers.

I expect that over the next few years, the grasshoppers will raise the top income tax rate to at least 50%. They will increase the death tax. They will increase Social Security and Medicare payroll taxes (which will also affect fellow grasshoppers, so they will increase the negative income taxes and the standard deductions). And, if the grasshoppers feel the need for more money, they will hit the ants with a wealth tax. (They will say it's a one-time emergency tax, but it will recur every few years.) I believe the ants cannot stop the grasshopper majority. The only hope for the ants is to get on some leaves and cross the river to a land with few grasshoppers.

RubberCity Rabble writes:

@Dan,

Thanks for the link to the NY Times article - a very good read! In the section "V. FROM MANAGEMENT TOOL TO EMPLOYEE BENEFIT," Lowenstein says that unions like the UAW pressed for pensions. He doesn't explain that whole story in as much detail as does Malcolm Gladwell at http://www.newyorker.com/archive/2006/08/28/060828fa_fact

Gladwell explains how the UAW under Reuther wanted a pension system different from the company-based plans the auto companies wanted. Had there been instead a pension system with a broader base than each individual company, the US auto industry might not have reached the same straits it's in today. Then again, as seen in The Reckoning, the company-based pension was hardly their only poor decision, and they've apparently not learned much since Halberstam's book came out 20 years ago.

El Presidente writes:

Alex J.,

"The best service that most governments provide is fending off worse governments."

That's a start. Maybe there's another good expression of that sentiment:

I will support and defend the Constitution of the United States against all enemies, foreign and domestic

Yeah, that works.

So, protecting the Constitution from domestic enemies could be pursued by jealously guarding the government's monopoly over the money supply from individuals, groups, and industries that might use enormous leverage for their own ends while portending damage to the general welfare. It might even entail using powers of taxation to promote the general welfare. I'm certain I read that somewhere. Let me see . . . oh yeah:

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

. . . and . . .

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

Or, would you object?

Greg writes:

Dr. T - Thanks for the response, but I disagree that the present has nothing to do with the future. It takes political capital to move away from the status quo. I don't think there's much interest out there in the semi-socialism you assert without evidence. Medical spending will probably continue to grow out of control, but I see that as a secular trend with lots of roots apart from the country's attitudes towards taxes and spending in general. Time will tell, of course, but I doubt your predictions will come to pass.

I also have the same problem with your comment that I do with Dr. Kling's post; they both strike me as a strange mixture of doom-saying and utopianism based on extrapolation of fears about an administration that hasn't even taken office yet. Perhaps history will show that Bush and his administration were the real grasshoppers. They didn't seem to have much problem spending $5 trillion on top of our taxes in just 8 years.

Oh yeah, and I assume you're short the market?

Alex J. writes:
El Presidente writes:

Alex J.

I would.

I suspected you might.

Your specific concern is met by the process for amendment or replacement by way of convention. There is no reason in the Constitution why subsequent generations should have to conform to the Constitution as originally written. They are free to make it what they choose, to engage in the process of creating their own social contract. Their only burden is to remain under some sort of social contract or to determine to do away with it altogether. That's quite a lot of breathing room. Enemies of the Constitution are not those who would change it, but those who would instead subvert both the Constitution and the process for arriving at a new contract. I thought you said that sovereignty was the best service governments provide. Is that not what you meant?

That's about as flexible a position as a standing government can have while maintaining the authority necessary to actually govern. What more could you want? The alternative, I suppose, would be to have no government; individual sovereignty at the expense of popular sovereignty?

Jeremy, Alabama writes:

From the NY Times article:

"..pensions mean unique security. The worker gets a guaranteed income.."

This is patently untrue. When you lodge your retirement security in a pension, you hope that
- the company remains solvent
- if not, that the Pension Guarantee Corp remains solvent
- if not, that taxpayers don't mind providing your pension.

The article casts all three in enormous doubt.

Unfortunately, death'n'taxes remain the only certain things. There is no "unique security" or "guaranteed income" anywhere, any time, for anyone.

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