Workers, Not Employers, Must Control Retirement Funds

COMMENTARY Social Security

Workers, Not Employers, Must Control Retirement Funds

Jun 16th, 2005 3 min read

Employees of United Airlines recently got a frightening lesson in the "ownership society." The lesson was: If you don't own and control your retirement assets, they can be slashed or taken away at any time. A federal bankruptcy judge approved United's request to dump its pension plan into the Pension Benefit Guarantee Corp., a federal agency that takes over insolvent retirement plans. More than 120,000 United employees and former employees - including many who are already retired - will see major cuts in their retirement benefits.

For decades, United has promised its workers generous payments in retirement. As other industries moved workers to 401(k) plans and other investment accounts, the airline industry kept a firm grip on the money in its pensions, assuring workers that they could trust their employers to fund their retirement.

While workers at firms across the country squirreled money into their own accounts and pored over their investment statements each month, United's pilots, flight attendants and mechanics rested secure in the belief that the company was handling all of that for them and would be there for them in retirement.

United's bankruptcy is a rude awakening. What once seemed a secure and risk-free retirement plan is now revealed to be neither. United's employees and retirees now face cuts of 60 percent or more in their monthly retirement checks.

As things stand today, few Americans are immune from winding up in a similar situation. Workers pay a whopping 12 percent of their wages as Social Security payroll taxes. And while Social Security's promises aren't as lavish as United's, many Americans expect to rely on it for a good part of their retirement income.

The problem is that Social Security's foundations are even flimsier than United's.

When United enticed its workers to sign contracts with a generous pension deal, the company assumed then that it would be able to make good on that agreement. Social Security, on the other hand, promises benefits that its actuaries know today it won't be able to pay.
According to the Social Security Administration, all retirees can expect a 25 percent cut in their benefits in 2041. Anyone born after 1974 will never get the full check he or she has been promised - not even for a single month.

And then there's the risk that something like what befell United - an unexpected cash crunch - could hit Social Security in the future. As the program's costs grow, Congress may face pressure to cut benefits further. If that's what voters want, that's what Congress will deliver. Like United's retirees today, seniors or future retirees facing benefit cuts will have no recourse.

The solution is simple: Allow ownership and control.

Every month, tens of millions of Americans deposit money in IRAs and 401(k) accounts. They own those accounts and control how their money is invested. To be sure, investing can be tedious, and not everyone comes out ahead every month. But no one who owns an IRA or 401(k) has to worry that an employer or the government won't be able to meet its promises. When you own and control your own account, you don't need to rely on promises.

When the president laid out his plan to give workers the option of creating personal accounts within Social Security, opponents were quick to carp that investments are difficult to manage and risky. In contrast, they say, today's Social Security is somehow "guaranteed."

The error in this argument is that investment risk can be managed, while political risk cannot. You could invest your personal account, for example, in a lifecycle fund that would adjust your holdings as you age to help lock in your earnings. In fact, workers choosing to open personal accounts would be enrolled in lifecycle funds automatically, unless they opted out to choose investments on their own.

But what about the risk that your employer may go bust or that Congress will scale back benefits? Sadly, there is no way to hold all to their promises. Our only guarantee is that, under today's Social Security, everyone will face benefit cuts when the trust fund runs dry.

When it comes to retirement security, Americans should know that promises can be broken but ownership cannot. If United's employees had owned and controlled their own accounts, instead of relying on the company's promises, they'd be in better shape today. The president's ownership society proposals - and especially Social Security reform - would help all Americans achieve that level of retirement security.

Andrew Grossman is a senior Web editor at The Heritage Foundation.

Distributed nationally on the Knight-Ridder Tribune wire