Tuesday, August 22, 2006

Gladwell and the Link Between Productivity and Pensions

GladwellDennis Nolan (South Carolina) wrote this morning to send me a link to this fascinating article by Malcolm Gladwell in the New Yorker Magazine discussing the connection between increase productivity in the American workforce and the turmoil surrounding employer-provided pensions.

Here's a taste of this lengthy, but highly interesting, article:

America’s private pension system is now in crisis. Over the past few years, American taxpayers have been put at risk of assuming tens of billions of dollars of pension liabilities from once profitable companies. Hundreds of thousands of retired steelworkers and airline employees have seen health-care benefits that were promised to them by their employers vanish.

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The logic of dependency ratios, of course, works equally powerfully in reverse. If your economy benefits by having a big bulge of working-age people, then your economy will have a harder time of it when that bulge generation retires, and there are relatively few workers to take their place.

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This demographic logic also applies to companies, since any employer that offers pensions and benefits to its employees has to deal with the consequences of its nonworker-to-worker ratio, just as a country does. An employer that promised, back in the nineteen-fifties, to pay for its employees’ health care when they were retired didn’t set aside the money for that while they were working. It just paid the bills as they came in: money generated by current workers was used to pay for the costs of taking care of past workers. Pensions worked roughly the same way.

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Technology led to great advances in productivity, so that when the bulge of workers hired in the middle of the century retired and began drawing pensions, there was no one replacing them in the workforce.  General Motors today makes more cars and trucks than it did in the early nineteen-sixties, but it does so with about a third of the employees. In 1962, G.M. had four hundred and sixty-four thousand U.S. employees and was paying benefits to forty thousand retirees and their spouses, for a dependency ratio of one pensioner to 11.6 employees. Last year, it had a hundred and forty-one thousand workers and paid benefits to four hundred and fifty-three thousand retirees, for a dependency ratio of 3.2 to 1.

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But, with respect to the staggering burden of benefit obligations, what got them in trouble isn’t what they did wrong; it is what they did right. They got in trouble in the nineteen-nineties because they were around in the nineteen-fifties—and survived to pay for the retirement of the workers they hired forty years ago. They got in trouble because they innovated, and became more efficient in their use of labor.

The take home line from this remarkably perceptive article: "Here, surely, is the absurdity of a system in which individual employers are responsible for providing their own employee benefits. It penalizes companies for doing what they ought to do."  In other words, by becoming more productive and more innovative and thereby having less employees, it makes it harder for companies to fund their existing pension obligations.

Gladwell's solution:

[I]f you pooled the obligations of every employer in the country, no company would go bankrupt just because it happened to employ older people, or it happened to have been around for a while, or it happened to have made the transformation from open-hearth furnaces and ingot-making to basic oxygen furnaces and continuous casting. This is what Walter Reuther and the other union heads understood more than fifty years ago: that in the free-market system it makes little sense for the burdens of insurance to be borne by one company. If the risks of providing for health care and old-age pensions are shared by all of us, then companies can succeed or fail based on what they do and not on the number of their retirees.

PS

https://lawprofessors.typepad.com/laborprof_blog/2006/08/gladwell_and_th.html

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