Personal Retirement Accounts Could Help Businessmen and Bureaucrats Trade Places

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My friend Tim, who hates seeing his surname in print, learned an important lesson while installing an access road on his California farm not long ago. He hired a civil engineer to draw up the plans and a soil engineer to assure that his smooth, nicely paved path didn’t wash away with the first rains.

When the engineers submitted their designs to their opposite numbers at City Hall, they were stopped cold with questions, proposed modifications and other impediments.

“They certainly have distinct motivations,” Tim says. “The civil engineer’s point of view is to get something done — cost‐​effectively and within the guidelines. But when the plans are submitted to the bureaucrats, their view is ‘How can we hold this up? How can we delay it? How can we get more from the developer than what is required in the code, such as affordable housing or perhaps a widened 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, government often hinders, confiscates or destroys.

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

The biggest brick is the defined benefit plan or old‐​fashioned pension. They provide strong disincentives for entrepreneurs and bureaucrats to trade places, even briefly. Thus, those who serve the state gain little knowledge or empathy for commercial interests while those in industry often misunderstand public oversight prerogatives and miss the chance to apply modern management techniques to moribund agencies.

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

A 401‐​k‐​type defined contribution plan, in contrast, is like a cash‐​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, then the rate at which the benefits accrue accelerates in the last five to 10 years,” explains Dr. William Even, professor of economics at Miami University of Ohio. “You want to stick around to get that pension accrual at the end.”

Economist Richard A. Ippolito observed in the spring 1987 Journal of Human Resources that this is “Why Federal Workers Don’t Quit,” as his article is entitled. Most federal defined‐​benefit pensions penalize those who depart early. Rather than risk or reduce their pension benefits by, say, leaving the IRS to work for three years at H & R Block, IRS employees are likely to stick with Uncle Sam’s collection agency for their entire careers. Federal tax officials and H & R Block’s accountants certainly could learn a thing or two if they were to walk a while in each other’s shoes.

Closer to home, some 90 percent of America’s 13 million full‐​time, state and local government employees participated in defined benefit plans in 1994, according to the latest figures from the Bureau of Labor Statistics.

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

“The good news is that traditional defined benefit plans are being phased out in corporations while cash‐​balance pension plans and 401‐​k‐​style defined contribution plans are replacing them,” says Richard Thau, president of Third Millennium, a New‐​York based research and advocacy group on whose national board I serve. “These plans give workers the portability they need to move from one sector of the economy to the other without losing their accrued benefits.” This is especially valuable since Americans rarely marry their jobs for life anymore and now travel like gypsies from one employment or entrepreneurial opportunity to the next.

What America needs is a universal system of Personal Retirement Accounts in which all workers — public and private — may place and control their own pension deposits, their employers’ matching funds and, of course, at least a portion of their Social Security taxes. If invested in the stock market, this money would grow, as it did between 1926 and 1996, at an average, real rate of return of 7.56 percent per year. Compare that to the 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 intellectual cross‐​pollination between businessmen and bureaucrats would be among the Personal Retirement Account’s more promising unintended consequences. Is anyone 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.