June 24, 2012

A generation lost

Colin Read, Everybody's Business

---- — The median American household’s wealth has fallen by 40 percent over the last four years, and is now at the same level as it was 20 years ago at the end of the last significant recession. Median workers aged 35 to 44 have lost almost 60 percent of their wealth. However, not all have suffered equally.

Our wealth takes a variety of forms. The largest component for many households is the value of their home. In this great recession, home prices have dropped by an unprecedented amount.

The second largest component is in our pensions or retirement savings plans. Most of those who save through defined contribution plans, like 401k or 403b accounts, have lost, first in the crash of 2008 and, more recently, in the Euro crisis-driven crash of 2012.

Most working Americans are also eligible for Social Security. Few young people believe it will be there for them. The global crisis and increased longevity have jeopardized this latent form of wealth. The Social Security system is expected to be broke in 23 years, well before the time 35 to 44 year olds retire.

Those who have employer-based defined-benefits packages, mostly employed by various levels of government, have been protected from recent declines. However, their plans are indemnified by taxpayers.

Congress has enabled a government agency to regulate private and public pensions. Sponsoring companies must be prepared to cover their private pensions for any shortfall in their pension fund return below about 4 percent. Using this figure, the top 100 private pensions are probably underfunded by about $200 billion. The sponsoring corporations are on the hook.

Public-pension managers are permitted to assume an unrealistically high 8 percent future investment return. The auditors of these pensions also make overly optimistic assumptions on our lifespan. If we die earlier, the public pensions are more sound. If medical advances allow us to live longer, or if gold-plated medical plans prolong life, public-pension managers underestimate their liabilities. Most public pensions are dramatically underfunded in reality, with 34 states underfunded by at least 20 percent.

If the benefits from these public pensions are higher than the pensions will likely earn, these local, state and federal obligations must be covered by future taxpayers through higher property taxes or state or federal income taxes. Purchasing power of the middle class will be reduced even more. One recent estimate is that public pensions remain underfunded by between $3.2 and $6 trillion. This represents a further reduction of about $20,000 to $40,000 of wealth from each working-age adult. If we remove from the population those exempt from paying taxes, the middle-class taxpayer is on the hook to an even greater degree.

Also, the working middle class absorbs a share of the liability for municipal pensions that would be owed by senior citizens were they not exempt from a share of local property taxes. In New York State, public-employee retiree pensions are exempted from state taxation, which creates an even greater burden on those middle class retirees without public pensions.

Our children will struggle under this burden. Of course, we could experience unprecedented economic growth, which can quickly make this problem go away. Or, we can experience a health crisis that sets back longevity. Either of these prospects seem unlikely.

We should rightly be concerned that so much wealth has recently concentrated in the top 1 percent. We must also address the generous promises made to future pensioners.

I know some claim public pensions are just rewards for low public-sector wages relative to their high level of education. That claim warrants further discussion on another day. Some also argue that every worker in America should be guaranteed the same generous pension public employees receive. This logic is problematic, even if it would be wonderful. If generous pensions are offered to everybody, it becomes a situation of borrowing from Peter to pay Peter. I’m afraid there can be no free lunch that will allow us all to become wealthier simultaneously.

I sympathize with young people who rally against the 1 percent. The 1 percent are doing better than ever. Defined-benefits pensioners are partly indemnified, too, at future taxpayers’ expense. The rest of the middle class has been set back more than a generation. And the young people occupying Wall Street are left holding the biggest bag.

Colin Read is the chair of the Department of Economics and Finance at SUNY Plattsburgh. Continue the discussion at