A Lousy Deal

Will Collier makes an excellent point while blogging about United Air Lines dumping its pension liability onto the Pension Benefit Guaranty Corporation (PBGC)...

I don’t mean to tread on Martini Boy's turf here, but the pensions crisis among all of these old-line companies illustrates a great no-no of long-term investing: lack of diversification. In the end, even though they presumably didn't have much choice in the matter, all those UAL employees who've been promised a defined-benefit pension are in the same boat as the Enron and WorldCom employees who voluntarily put all of their 401(k) money in their own company's stock. They bet the house on one horse, and by they time old age caught up with the grizzled nag, there was barely enough left of it to cart off to the glue factory.

...All of which begs the question, why does one of our political parties still insist that everybody in the country ought to be putting 12% of their income into a single rapidly-becoming-insolvent "company" that they have no control over, no ownership of, and no ability to diversify out of?

What is Social Security, if not a giant defined-benefit plan that's outrageously underfunded going forward? And to the lefties who'll yell, "Yeah, but United and Enron had greedy executives who took all the money," my response is, "Sure did--and how is that any different from greedy politicians who spend all the tax money?"

It's a brilliant point, and one that people often miss in the Social Security debate. In his primetime news conference last week, President Bush explained in no uncertain terms that future generations are going to receive cuts in benefits from Social Security unless we raise the tax burden to provide more support going forward. This is in effect little different than what United is doing with its pension liability -- the PBGC will only pay about $5 billion of the $9.8 billion by which United's pension plans are underfunded. For the folks in public high school in Tampa, that's approximately half.

I'd like to think the federal government isn't going broke. And it won't. But I'd like to think that in order to support future generations, American taxpayers won't be forking over half their paycheck to the federal government every two weeks or so.

Some liberals will probably claim that United's default is proof positive of the need for Social Security. They're effectively missing the point -- having a system of insured benefits is great, but only if the person who expects to receive the benefits will indeed be able to receive them.

Megan McArdle makes an important point:

At least when companies have insufficient accrued assets to meet their accrued liabilities, the government forces them to trim benefits or raise contributions. Government programmes, on the other hand, have a tendency not to self correct until the crisis is upon us--by which time the nature of the fix has gone from painful to catastrophic. And taxation to support government insurance programmes has a high deadweight loss.

What's the best solution, then? I'd say we're converging on it: a system of minimal government insurance for those who have been unlucky, in life or investments, combined with a regulated forced savings plan to make sure that those who aren't unlucky aren't tempted to free-ride on society, and incentives to employers to encourage additional savings among employees. This won't make anyone ideologically happy. But it seems like the least intrusive, most fair, most economically sound possibility.

(hat tip: Instapundit) The media and the Democrats can try to kill private accounts, but they're not going to succeed. They make too much sense. Eventually, people will realize that Social Security as currently structured doesn't work. We don't rely on cars built in the 1930's to get around. We shouldn't rely on a pension system designed back then, either.