Personal Retirement Accounts Could Help Businessmen and Bureaucrats Trade Places


My friend Tim, who hates seeing his surname in print, learnedan important lesson while installing an access road on his Californiafarm not long ago. He hired a civil engineer to draw up the plans and asoil engineer to assure that his smooth, nicely paved path didn't washaway with the first rains.

When the engineers submitted their designs to their opposite numbers atCity Hall, they were stopped cold with questions, proposed modificationsand other impediments.

"They certainly have distinct motivations," Tim says. "Thecivil engineer's point of view is to get something done -cost-effectively and within the guidelines. But when the plans aresubmitted to the bureaucrats, their view is 'How can we hold thisup? How can we delay it? How can we get more from the developer thanwhat is required in the code, such as affordable housing or perhaps awidened street?' Their perspectives are entirely different."

These conflicting outlooks permeate the private and public sectors and,usually, epitomize them. What civil society tries to build, governmentoften hinders, confiscates or destroys.

One partial explanation for this is that the private and public sectorsremain divided as if by a wall, though one built with cash rather thanconcrete.

The biggest brick is the defined benefit plan or old-fashioned pension.They provide strong disincentives for entrepreneurs and bureaucrats totrade places, even briefly. Thus, those who serve the state gain littleknowledge or empathy for commercial interests while those in industryoften misunderstand public oversight prerogatives and miss the chance toapply modern management techniques to moribund agencies.

This is so, in part, because a defined benefit plan is like a vault inthe company basement. If a worker sticks around long enough, hisemployer eventually will give him the combination so he may gain accessto his accumulated savings.

A 401-k-type defined contribution plan, in contrast, is like acash-loving attache case that an individual carries from job to job.

"With a defined benefit plan, it's real flat for 10 to 15 years, thenthe rate at which the benefits accrue accelerates in the last five to 10years," explains Dr. William Even, professor of economics at MiamiUniversity of Ohio. "You want to stick around to get that pensionaccrual at the end."

Economist Richard A. Ippolito observed in the spring 1987 Journalof Human Resources that this is "Why Federal Workers Don'tQuit," as his article is entitled. Most federal defined-benefitpensions penalize those who depart early. Rather than risk or reducetheir pension benefits by, say, leaving the IRS to work for three yearsat H & R Block, IRS employees are likely to stick with Uncle Sam'scollection agency for their entire careers. Federal tax officials and H& R Block's accountants certainly could learn a thing or two if theywere to walk a while in each other's shoes.

Closer to home, some 90 percent of America's 13 million full-time, stateand local government employees participated in defined benefit plans in1994, according to the latest figures from the Bureau of LaborStatistics.

This also has been true in the private sector, though less so lately.

"The good news is that traditional defined benefit plans are beingphased out in corporations while cash-balance pension plans and401-k-style defined contribution plans are replacing them," saysRichard Thau, president of Third Millennium, a New-York based researchand advocacy group on whose national board I serve. "These plans giveworkers the portability they need to move from one sector of the economyto the other without losing their accrued benefits." This isespecially valuable since Americans rarely marry their jobs for lifeanymore and now travel like gypsies from one employment orentrepreneurial opportunity to the next.

What America needs is a universal system of Personal Retirement Accountsin which all workers - public and private - may place and control theirown pension deposits, their employers' matching funds and, of course, atleast a portion of their Social Security taxes. If invested in the stockmarket, this money would grow, as it did between 1926 and 1996, at anaverage, real rate of return of 7.56 percent per year. Compare that tothe paltry 0.78 percent in equivalent returns that a full-time,average-income couple now can expect from Social Security.

Beyond this vital financial advantage, the intellectualcross-pollination between businessmen and bureaucrats would be among thePersonal Retirement Account's more promising unintended consequences. Isanyone in Washington listening?

Deroy Murdock

Deroy Murdock is a senior fellow with the Atlas Economic Research Foundation in Fairfax, Virginia and a member of the Cato Institute's Advisory Board on Social Security Privatization.