The False Promise of Private Pensions

One of the strangest claims made in the debates about social insurance now roiling the world’s richest countries is the that government-funded defined-benefit pension programs (such as America’s Social Security system) are outmoded. These programs were fine, the argument goes, for the industrial economy of the Great Depression and the post-World War II generation, but they have become obsolete in today’s high-tech, networked, post-industrial economy.

Advocates of this argument propose a different model. Just as corporations today are much happier supporting workers’ pensions by contributing to employees’ private accounts, so governments today should offer (or require) contributions to privately owned accounts. The value of these accounts would fluctuate with the market rather than resting on a defined-benefit scheme that guarantees a fixed real sum of resources available upon retirement.

This argument is strange because it gets the economics of the situation backward. When there are lots of companies offering workers long-term defined-benefit retirement pensions, there are fewer advantages to the government in setting up a parallel defined-benefit scheme and requiring workers to participate in it. After all, in such a world, workers who set great value on a defined-benefit pension can go to work for firms that offer such pensions.

https://prosyn.org/sOxE07A