Forget houses as a source of secondary income – that’s so 2007. After the latest recession, Americans are increasingly dipping into their retirement savings to fund on-going consumer expenses. Many private 401(k) plans have rules that allow workers to withdraw some amount of saved funds before retirement and such early withdrawals are on the rise.
The individual irrationality of raiding a 401(k) plan fits nicely with the old stereotype of the stupid poor who don’t know how to save; as if this is what separates everyone else from the truly wealthy. We not only lack the human capital for high-skilled, professional or managerial labour – with its attendant high salaries, good benefits, possible stock options, and so on – but this lack of human capital also translates into unfortunate decisions about what to do with incomes and savings. Inequality of resources becomes a question of less capable faculties in more ways than one: worse economic outcomes are compounded by inadequate life-planning, whether you have a pension or not. In short, inequality naturalized.
On the other hand, even economics can interpret this kind of premature pension-raiding as, in fact, a rational strategy based in some change in preferences. The trade-off between current and future consumption may have simply shifted. Or the trade-off has stayed the same but falling levels of real consumption are causing people to shift money to pay for consumption today and possibly also prefer consumption today more. With the real estate crash leaving houses, especially those still mortgaged, harder to draw on, the next asset many look to is their private pension…if they have one.
What this story elides and what the previous moralizing story denies is that people understand very well what they are doing. The future is not just something to be calculated over but a hazy half-formed dream – a source of anxiety and hope whose indeterminacy competes for attention with the very determinate present. Today’s growing inequality produces an image of success that is further and further from the reality faced by those on the “wrong” side of the inequality ledger…in the 20, 50, or even 75 percent falling relatively further behind.
Here is a policy double bind: raise fees on early withdrawals from 401(k) plans to discourage this activity and you punish those who will be dipping in anyways – the very people who are in dire enough straights to do it despite the greater cost. And if economic conditions continue to stagnate or worsen, then the effect higher fees have on discouraging early withdrawals may be reduced in part or entirely, depending on the relationship between the number of additional people who would be discouraged by the higher fees and the number of additional people who would be encouraged by declining living standards.
This is a trade-off that sharpens the contrast between public and private pension systems. In Canada, the individualized trade-offs of the kind just outlined form a horizon of possibility in the direction of pension privatization and individualized risk-taking that stretches from shared-risk plans to PRPPs and beyond. In the other direction beckons a stronger public system.
Yet a public pension system presents its own significant trade-offs in the context of the decline of even a moderate social democracy – expanding democratic deficits and shifts in economic power. Take criticisms of recent plans to expand the CPP (via expanding both the replacement rate and maximum pensionable income) that argue these reforms would impose a savings burden on today’s low-wage workers that decreases their present incomes. These criticisms reflect not so much on the limits of particular pension reforms as on the general limits of our horizons. They suggest a double bind not completely dissimilar from the one above that squeezes workers today and in the future: increasing CPP contributions and benefits may result in lower present-day incomes and clawbacks to GIS and other distributional measures upon retirement that depress future incomes.
Impoverishment for the poor and paternalism for richer sections of the working class and the wealthy is not just a bogeyman but reflects very real crises of democracy and capitalism. The flip side of both of these is of course a greater democratization that seems so very far away. Democratization can impact on present outcomes through investment decisions – for example, funding an expansion of public investment – and future outcomes through greater attention to the distributive functions of pensions – not just as a form of not allowing relative incomes to diverge further in old age but a broader form of social insurance that ensures real standards of living and expresses collective care.
There are many much larger questions that flow out of these thoughts. What is the nature of the collective wisdom and care represented by a public pension system and how is it opposed to the conflicting rationalities of private pensions? What is the role of different kinds of debt for different strata of society today? What portion of consumption can be considered socialized? For now I’m willing to stake this claim: there is collective rationality and care in even our limited public pensions that stands against an individual “rational irrationality” and it is this collective voice that needs amplifying.