Sunday, August 27, 2006


The New Yorker Weighs In On Pensions

Malcolm Gladwell, the author of such books as Blink and The Tipping Point, specializes in stories about subtle, initially almost imperceptible effects that somehow achieve a decisive influence over human affairs. In Blink, he reported on the way snap judgments can prove more accurate than considered analyses, and in The Tipping Point, he traced how ideas can start out small, then achieve momentum and explode into compelling new trends. There is an element of wishful thinking in these stories - a belief in the eventual victory of small things - and also an element of irony.

In an article in The New Yorker entitled "The Risk Pool", the element of irony predominates. Using the recent debacle at General Motors as his starting point, he describes how the private pension and benefits programs of large corporations are in big trouble in the United States, and acknowledges that most of these programs were doomed to failure to begin with.

He invokes a concept called the "dependency ratio", which is the ratio of the number of people in a population who are not working to the number who are. Populations with large numbers of children, such as Africa - or Ireland before the legalization of contraception and the subsequent boom that begat "The Celtic Tiger" - have high dependency ratios that impede economic development. The same is true of populations with large numbers of elderly - which will be the case for most of the industrialized world sooner than we think. The ideal scenario is a small number of dependents and a large number of workers, but this scenario represents merely a stage in a cycle and almost by definition never lasts - e.g., vast numbers of workers with few children eventually become the elderly, outnumbering their own children once they themselves become workers. Gladwell applies this concept to show that increasing numbers of retirees depending on corporate pensions gradually overburden the corporation and its current employees, causing high overhead, layoffs and eventual bankruptcy.

But the burden differs from one corporation to the next, depending on such factors as the size of the company, its age, the age and composition of its work force, its financial condition and the market for what it produces. The best way to offer pensions and benefits, Gladwell argues, is for all employers to pool their resources into one giant fund, thereby spreading the risk. Nationalized health insurance, supported by both corporations and individual tax payers, would be one example of such a fund.

Here is where the irony is introduced to our story. Walter Reuther, along with other officers of the UAW in the 1940's, initially wanted to establish an industry-wide fund to which all employers in the automobile business would contribute. This fund would spread the risk of providing pensions and benefits to employees of the industry. The big automobile manufacturers, however, reacted with the typical paranoid short-sightedness that still pervades the corporate world. Believing that the collectivization of pension funds would yield too much power to the unions, they shot the plan down at once, offering their workers instead private pension plans run by the corporations themselves. One of the first of these companies to offer a pension and health benefits to its workers was General Motors. GM was so afraid of its workers that it preferred to hobble its own financial future rather than agree to a plan that would be more cost-effective for all concerned.

"The Risk Pool" from The New Yorker

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