Pension Reform Offers Lessons in Social Security Debate

Question: What’s the first lesson we learn from the recently passed Pension Protection Act?

Answer: That most of the critics of allowing workers to deposit their Social Security contributions in a personal account either don’t have a clue about the retirement system or they simply wanted to undermine President Bush’s attempt to reform Social Security for political reasons—or both.

How can we make that assertion? Look at what the Pension Protection Act does:

  • It allows employers to automatically enroll employees in a 401(k) plan.
  • It allows employers to provide employees with advice about their investments.

Why is that important? Because the large majority of workers don’t understand the market and investment options very well and so many tend to shy away from taking the plunge. And when they do, they tend to be very conservative with their investment choices. So conservative, in fact, that their 401(k) portfolio tends to under-perform the market. But wait, that can’t be! The critics of personal accounts told us that, given access to a 401(k)-type Social Security account, the public would be “day-trading” with that money, losing it in poor investments, and leaving them financially stranded in retirement.

Remember then-Vice President Al Gore’s attack on President Bush’s campaign proposal for reforming Social Security? He called it a “risky scheme,” and most Democrats echoed the message.

But the real threat has never been workers who invested too aggressively, but too conservatively. So the Pension Protection Act, recognizing that fact, is trying to help more workers get into a 401(k), while providing some guidance on those investments.

Second lesson from the legislation: Most defined benefit pension plans are in the same bad financial shape as Social Security.

The legislation requires employers with defined benefit plans to be more transparent and realistic in accounting for their unfunded liabilities. That’s good, but it’s going to shock some people.

But that leads to the third lesson we should learn, but probably won’t: That what is good for corporate America’s financial accounting is good for Social Security—increase transparency and provide an honest assessment of the unfunded liability.

Oh, and get workers moving into personal Social Security accounts.