Social Insecurity by James W. Russell

Author:James W. Russell [Russell, James W.]
Language: eng
Format: epub
ISBN: 978-0-8070-1257-4
Publisher: Beacon Press
Published: 2014-04-13T04:00:00+00:00

FANTASY OWNERSHIP

In sum, 401(k) and other defined contribution plans deliver inferior results for retirees compared to defined benefit traditional pensions for four general reasons:

• Low contributions.

• Drain-off during the accumulation and spend-down phases of considerable administrative fees, commissions, and profits by the financial services industry.

• Participants bearing all the risks of investing.

• Lack of the full social insurance advantage of risk pooling.

Not only are DC plans much less predictable and adequate in terms of benefit amounts than DB plans, contrary to widespread beliefs, they are more expensive to fund for comparable levels of benefits. They lack the full advantages of risk pooling and have significant drain-offs of management fees, commissions, and profits, making them less efficient in providing for income replacement during retirement. A dollar invested in a DB plan will inevitably produce far more in terms of retirement benefits than a dollar invested in a DC plan as numerous studies and our own experience in Connecticut have shown.30 For me, both the employer’ and employees’ contributions for the DC plan were more than double that of the DB one, which delivered much higher retirement income.

The financial services industry encourages the belief that participants can do it all with these accounts. They can finance their retirements, have rainy-day funds for unexpected expenses, and have money to leave to children or other heirs. But each use of the savings for nonretirement expenditures is at the expense of their ostensible purpose. If they do not produce enough accumulations to adequately support retirement alone, they certainly don’t produce enough to support retirement along with emergency expenditures and provision of inheritances to children as well.

With the rise of 401(k) and other defined contribution plans, the financial services industry has gained control of a substantial amount of worker retirement savings and turned them into vehicles for its own profit needs. Those in turn have limited the ability of workers to accumulate sufficient savings for retirement security. In return for the loss of their retirement security, workers have been left with a fantasy notion of ownership. It is their money in the private accounts, but workers have only abstract ownership. Robin Blackburn refers to these savings as gray capital.31 In theory, it is capital individually owned by participants. In reality, the financial services industry exercises most of the privileges of ownership. It holds the capital. It invests it. It draws profits off it. As a result, paying into the accounts is like paying for a house that someone else will be living in at minimal rent until you retire. You own what someone else—in this case, the financial services industry—gets to use. Then, after retirement, the financial services industry issues you a kind of reverse mortgage on your accumulation.

With private accounts, participants save for retirement—the ostensible purpose—and support the profit needs of the financial services industry at the same time. This is a contradictory set of goals. They can’t adequately save for retirement and simultaneously support the financial services industry. The financial services industry, on the

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