As the baby boomers begin to reach retirement age, the chronic under funding of pension plans will become a major public policy crisis.  This has already manifested in many ways in the recent past, but unfortunately, prior examples might just represent the tip of the iceberg.  Roger Lowenstein’s latest book, While America Aged, takes a case study approach to the problem.  He examines the pension debacles at General Motors, the New York City Metropolitan Transit Administration (MTA), and the City of San Diego.  Those who are familiar with Lowenstein’s prior books, including Buffett: The Making of an American Capitalist, will not be disappointed with his latest book.

The common thread behind each of the case studies is the tendency of business, labor, and government to take short sighted approaches to problems that have time horizons extending decades into the future.  Traditional defined benefit pensions promise benefits to workers for life in contrast to 401ks and similar plans where employers and employees contribute defined amounts but no guarantees are made regarding how long the funds will last in retirement.  In each of the case studies, labor demanded ever escalating benefits and employers were often willing to go along because the costs would not appear for years (and often decades) to come.

Those who are interested in the long run solvency of Social Security may want to take note.  While each of the case study examples demonstrated under funding of commitments, at least there was some attempt to provide for future promises.  In contrast, the Social Security system is purely as “pay as you go” plan in which future taxpayers will fund the benefits of retirees.  In the conclusion, Lowenstein proposes changes to Social Security to move away from “pay as you go” toward a funded system.  However, as the author notes, the transition costs will be huge since taxpayers will need to continue funding retiree benefits while starting the painful process of funding the system for their own retirements.

Lowenstein does not hesitate to be critical of all parties involved in his case studies: labor, employers, and the government.  However, it is clear that in the case of Social Security, he is advocating a plan that will involve massive tax hikes and he seems to dismiss privatization plans prematurely.  As long as the system is being reformed and taxpayers are taking a double hit (paying for existing retirees and funding their own retirement), perhaps more consideration should be made regarding why taxpayers should not own their own accounts rather than leaving it up to future governments to raid the system as politicians have routinely done in the past. 

If politicians were irresponsible in the past, such as the case of San Diego, why would anyone believe that they can be trusted in the future?  The reality is that retirees can only rely on themselves for financial security.