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Monday, February 22, 2010

Generation “Hexed”?

PLANSPONSOR.com

PLANSPONSOR staff editors@plansponsor.com

Michael Barry

In the spirit of a modest proposal.

Retirement “benefits” are, in real life, income paid to people who aren’t working. … There are only two ways that can, for lack of a better word, “work.”

Alternative 1, prefunding. Current workers can prefund their benefit. … That’s how 401(k) plans, for instance, work.

Alternative 2, PAYGO. Current workers can pay for the benefits of retired workers. … This is generally called a “pay as you go” (PAYGO) system. … Generation 1 invests time and income raising and educating Generation 2—during a time when, because of youth, Generation 2 cannot take care of itself. Then, Generation 2 invests income (if not time) taking care of Generation 1—during a time when, because of age, Generation 1 cannot take care of itself.

…[A] PAYGO system—such as Social Security—works fine as long as each generation reproduces itself. However, when you have the situation we do currently—a declining population (in some European countries and Japan) or, at least, a significant decrease in population growth—you have a problem financing a PAYGO system. Fewer workers are supporting more retirees—which is hard on Generation 2.

So, why don’t we make explicit the premise underlying PAYGO (that each retiring generation will depend on the productive ability of its progeny)? If you don’t reproduce (defined as raising and educating children), you don’t get a Social Security benefit. If you (“you” being defined here as a couple) don’t have (e.g., naturally or by adoption) and provide for any children, then you’ll have to pay for your own retirement. If you only have one child, you can collect half your benefit.

There are all sorts of quibbles that could be raised about this proposal: What about children who don’t survive to majority? What about foster children? What about single parents? And so on. All of these problems are solvable.

Bottom line: In a PAYGO system, people who, for whatever reason (choice, disability, or even legal impediments), do not have and raise children are free riders. When they retire, they will be living off the productive capacity of children someone else paid to raise and educate. However, … they should have more discretionary income than a comparable person who did have kids. … [They] should be required to use some of that spare cash to pay for their own retirement. …

I would extend this proposal to any social welfare system that is not means-tested and is funded on a PAYGO basis. I kind of think it would fix the (modest) problem we have with our Social Security system and the (significant) problem we have with Medicare.


Michael Barry is President of the Plan Advisory Services Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients. He has had 30 years’ experience in the benefits field, in law and consulting firms.