Good Luck With That 401(K)!
Unlike my colleague Robert Samuelson, I'm not too worried about the impending bankruptcy of Medicare and Social Security, the government-run programs designed to provide health care and pensions to Americans. The two programs, he notes, will start to run low on cash in 2017 and 2037, respectively.
But funding these programs adequately is more a matter of will than financial ability. We can choose to fund health care and a guaranteed retirement income for our older citizens, or we can choose not to. (Those answering "not to" should provide an acceptable poverty rate for the elderly. Thirty percent? Fifty percent?) More importantly, before we freak out about potential public-sector failures in the future, we should be seriously freaking out about the current failure of the private-sector systems designed to provide health care and retirement benefits to Americans.
People in the business community often argue against expanding public health care and pension benefits, arguing that this would raise taxes and that the private sector can do a better job providing those benefits than the government. But the evidence is mounting that the private sector can't.
Take health care. Before this recession started in late 2007, there were 45 million people without health insurance, of whom 21 million worked full time, according to this exhaustive Census report. In 2007, the percentage of people covered by employment-based health insurance fell to 59.3 percent, or 177.4 million people, down from 64.2 percent in 2000, while the number of people covered by government health insurance rose from 80.3 million to 83 million. (But the Census definition of "government health insurance" applies only to those covered by Medicare, Medicaid, the military, or S-CHIP programs. If you add in the millions of people who work for the government and in public-sector jobs (i.e., teachers), the private sector probably covered about 160 million people in 2007.) Since December 2007, however, the number of Americans receiving insurance from private sector companies has dropped sharply, since the private sector has shed 6 million jobs during that period.
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In this long and deep recession, those who still have private sector jobs are now increasingly less likely to find that they come with insurance. "Accelerating health-care premiums and sharp revenue shortfalls due to the recession are forcing some small companies to choose between dropping health insurance or laying off workers—or staying in business at all," Dana Mattioli reported in the Wall Street Journal (subscription required) on Tuesday. The National Small Business Association reports that last year the percentage of small businesses providing health coverage fell to 38 percent, down sharply from 67 percent in 1995. A new NSBA survey found that 9.8 percent are considering getting rid of it over the next year. A Hewitt Associates survey cited by the Journal said 19 percent of companies want to cease offering insurance over the next three to five years. Like Jonathan Weber, a small-business owner and blogger at The Big Money, more owners are wondering why they have to provide health care to employees. Business is clearly getting out of the business of providing health insurance to workers.
A similar trend can be seen in private-sector retirements savings. Over the last few decades, America has embarked on an experiment to replace defined-benefit plans, pensions that guarantee a certain level of income to retirees, with defined-contribution plans in which assets are based on a combination of individuals' and companies' contributions to 401(k) plans and the performance of the markets. This excellent report from the Boston College Center for Retirement Research found that in 2007, 63 percent of workers had only a 401(k)-type plan, compared with 12 percent in 1983. Before the recession began, there was good news and bad news. The good news: 91 percent of companies offered matching contributions to employees. The bad news: Employees simply weren't saving much. In 2007, according to the report, the typical worker aged 55-64 had a 401(k) balance of only $73,000.
Looking at the real entitlement crisis
And since 2007, 401(k) investors have been hit by a triple whammy. First, markets have slumped sharply. The Center for Retirement Research estimates that a typical 55- to 64-year-old 401(k) investor with two-thirds of his or her assets in stocks would now be down to $56,000. Second, big private-sector job losses means fewer people have paychecks from which to deduct 401(k) contributions. Third, those who still have jobs are finding that employer matches are dwindling. As U.S. News reports, "Some 22 percent of companies report they have recently reduced their contributions to employee 401(k) or 403(b) accounts, up from 12 percent in February and just 2 percent in October 2008, according to a Watson Wyatt survey of 141 employers conducted this month." The 401(k) has become a 201(k).
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Some of this misery could be cyclical. In theory, as the economy comes back and employment and the markets rise, 401(k) contributions and health care coverage will return. Alas, that ignores the trend line showing that the percentage of people receiving employment-based health care coverage fell every year since 2000, a period of low unemployment. It's just as likely that matters will worsen. We could be in for a couple of years of slow growth, cost-cutting, and a weak employment market, which would only accelerate the trends of companies shedding health care and slashing 401(k) benefits. And we haven't even discussed the crisis surrounding old-style defined-benefit pension plans.
So as the days of fiscal reckoning for Medicare and Social Security draw nearer, more people—not fewer—will be looking to the government for health and income insurance. That may turn out to be the real entitlement crisis.