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Please do not dispute for now the importance or lack thereof of “inequality.” There are all kinds of inequality, some would seem to matter more than others, and some seem to be changing. But just for a moment, accept the raw data (and possibly what your eyes tell you) that measured income inequality is worsening.

If you are a reporter, these are great topics to write about. People like to read about how the world is ending and how it used to be oh so much better. And here is the latest from the bloggers at WonkBlog:

401(k)s are replacing pensions. That’s making inequality worse.

If a student in my Eco 108 class wrote a headline like that they would not pass the course. It’s a pretty confident claim, and certainly there are some uncontrolled raw data in the post that the author seems to use as “proof” of this conjecture. But real good explanations go beyond that. They first demonstrate the change in inequality and they try to make sure such inequality is measured correctly – i.e. saying what the author thinks it is saying. Then they try to control for other factors that might contribute to that change. And then they ask how much of that change may be accounted for by the change in retirement structures in the workplace. But we don’t see that here, or references to the professional literature that do this. We just say it, because it sounds good. It’s little more than myths. When we do not understand we make up myths, and there’s a reason why so many cool stories came out of the ancient Greeks and Romans – we didn’t understand much, so we invented wizards and gods and spirits and the like to “explain” things. That is not how civilization advances.

Now, just a brief comment on the particulars of the piece.

  1. Is it not at all possible that the old defined pension plans were “unsustainable” to coin a term used on that site and other similar ones? Many of the corporations and governments that offered them no longer exist and those that do are having trouble making those promised payments. So, if that has even a grain of possibility to it, maybe (according to the author’s way of doing “science”) the previous lower measures of inequality were artificially low. Those measures were propped up by unsustainable retirement plans, masking the true inequality that existed in society. Isn’t that at least plausible?
  2. Just because we have moved to 401(k) plans controlled not by the retirement board but by the workers themselves does not at all imply that retirement savings must fall (in fact it has increased as the piece shows) or that for all classes of workers it must be harder to save. Are the risk adjusted returns on a typical 401k plan different than the risk adusted returns on managed plans? Does the author care to show us this? Do 401k savers have more options about how to “guarantee” an income in retirement than relying on a pension? If firms were fully funding pensions, then a portion of a worker’s pay was funneled into a retirement plan, to be paid out in installments after retirement. If that was the case, then what is different than the firms taking those same funds and handing them to the workers to be managed in their own 401(k) plans? After all, if my firm puts $100 per month in the pension fund on my behalf, or gives me $100 per month to put in my 401(k), what is the difference aside from the plan costs and performance? None. The tax treatment is the same. So, are firms simply paying people less today in total compensation? If so, that’s not a story about 401ks, as the author wants it to be, but something else. Are 401ks notorious for performing worse? Are 401k plan fees higher?
  3. There’s nothing preventing firms from making 401(k) contributions just like they made contributions to pension plans. Nothing. There is no difference. Indeed, I am sure many readers work at firms that contribute a portion of their compensation into the retirement plan of their choosing. U of R certainly does this.

Inquiring minds would like to know. But nothing from this piece actually gets to the core of the potentially interesting question. And say what you wish, the piece simply wishes to lionize the defined pension plans. Plain and simple. Someone reasonably convince me otherwise. This is perhaps why I’m “through” blogging and reading the popular economics and news reporting out there. 

2 Responses to “Yes, Yes, Yet Another “Reason” Why Inequality is Getting “Worse””

  1. Andrew says:

    My thinking on why we observed the switch away from defined benefit to defined contribution might be rationalized by increasingly complete asset markets. If you look at personal finance data from the 60s, basically nobody owned investment instruments and there were huge transaction costs in doing so. The firm had an advantage in access to markets, and could therefore invest on behalf of the worker. When you can make complicated trades for less than $10 now at home online, the logic of the arrangement vanishes.

    • Harry says:

      Andrew, the reason why everyone who could abolished their pension plans in favor of SEPs and 401-K plans was to avoid sure legal liability. There may have been other reasons, too, including the rational fear of bankruptcy. I was there, right in the middle of it.

      Also, in the 1960’s and 1970’s it was not uncommon for savers to accumulate a portfolio of stocks and bonds, and, assuming no gross foolishness, become modestly wealthy and not have to rely on Social Security, which we all knew would not do it for us, let alone for our children when they retired. My daughter wisely shares this belief that she will have to provide for her.

      It is still possible to do this. Maybe. The rule of seven makes it tough if economic growth, which hinges on the creation of wealth, is slow.

      What I would put in the U of R toilets is a biodegradable sticker with links to Cafe Hayek, Bastiat, and the collected works of Milton Friedman. They let you do your business without interference.

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