To many economic commentators, insecurity first reared its ugly head in the wake of the financial crisis of the late-2000s. Yet the roots of the current situation run much deeper. For at least 40 years, economic risk has been shifting from the broad shoulders of government and corporations onto the backs of American workers and their families.
This sea change has occurred in nearly every area of Americans’ finances: their jobs, their health care, their retirement pensions, their homes and savings, their investments in education and training, their strategies for balancing work and family. And it has affected Americans from all demographic groups and across the income spectrum, from the bottom of the economic ladder almost to its highest rungs.
I call this transformation “The Great Risk Shift” — the title of a book I wrote in the mid-2000s, which I’ve recently updated for a second edition. My goal in writing the book was to highlight a long-term trend toward greater insecurity, one that began well before the 2008 financial crisis but has been greatly intensified by it.
I also wanted to make clear that the Great Risk Shift wasn’t a natural occurrence — a financial hurricane beyond human control. It was the result of deliberate policy choices by political and corporate leaders, beginning in the late 1970s and accelerating in the 1980s and 1990s. These choices shredded America’s unique social contract, with its unparalleled reliance on private workplace benefits. They also left existing programs of economic protection more and more threadbare, penurious and outdated — and hence increasingly incapable of filling the resulting void.
To understand the change, we must first understand what is changing. Unique among rich democracies, the United States fostered a social contract based on stable long-term employment and widespread provision of private workplace benefits. As the figure below shows, our government framework of social protection is indeed smaller than those found in other rich countries. Yet when we take into account private health and retirement benefits — mostly voluntary, but highly subsidized through the tax code — we have an overall system that is actually larger in size than that of most other rich countries. The difference is that our system is distinctively private.
Guaranteed pensions have not been the only casualty of the Great Risk Shift. At the same time as employers have raced away from safeguarding retirement security, health insurance has become much less common in the workplace, even for college-educated workers. Indeed, coverage has risen in recent years only because more people have become eligible for Medicare and Medicaid and for subsidized plans outside the workplace under the Affordable Care Act. As late as the early 1980s, 80 percent of recent college graduates had health insurance through their job; by the late 2000s, the share had fallen to around 60 percent. And, of course, the drop has been far greater for less educated workers.
In sum, corporate retrenchment has come together with government inaction — and sometimes government retrenchment — to produce a massive transfer of economic risk from broad structures of insurance onto the fragile balance sheets of American households. Rather than enjoying the protections of insurance that pools risk broadly, Americans are increasingly facing economic risks on their own, and often at their peril.
The erosion of America’s distinctive framework of economic protection might be less worrisome if work and family were stable sources of security themselves. Unfortunately, they are not. The job market has grown more uncertain and risky, especially for those who were once best protected from its vagaries. Workers and their families now invest more in education to earn a middle-class living. Yet in today’s postindustrial economy, these costly investments are no guarantee of a high, stable, or upward-sloping path. [ed. See also:
A Follow-Up on the Reasons for Prime Age Labor Force Non-Participation]
Meanwhile, the family, a sphere that was once seen as solely a refuge from economic risk, has increasingly become a source of risk of its own. Although median wages have essentially remained flat over the last generation, middle-income families have seen stronger income growth, with their real median incomes rising around 13 percent between 1979 and 2013. Yet this seemingly hopeful statistic masks the reality that the whole of this rise is because women are working many more hours outside the home than they once did. Indeed, without the increased work hours and pay of women, middle-class incomes would have fallen between 1979 and 2013.
This sea change has occurred in nearly every area of Americans’ finances: their jobs, their health care, their retirement pensions, their homes and savings, their investments in education and training, their strategies for balancing work and family. And it has affected Americans from all demographic groups and across the income spectrum, from the bottom of the economic ladder almost to its highest rungs.
I call this transformation “The Great Risk Shift” — the title of a book I wrote in the mid-2000s, which I’ve recently updated for a second edition. My goal in writing the book was to highlight a long-term trend toward greater insecurity, one that began well before the 2008 financial crisis but has been greatly intensified by it.
I also wanted to make clear that the Great Risk Shift wasn’t a natural occurrence — a financial hurricane beyond human control. It was the result of deliberate policy choices by political and corporate leaders, beginning in the late 1970s and accelerating in the 1980s and 1990s. These choices shredded America’s unique social contract, with its unparalleled reliance on private workplace benefits. They also left existing programs of economic protection more and more threadbare, penurious and outdated — and hence increasingly incapable of filling the resulting void.
To understand the change, we must first understand what is changing. Unique among rich democracies, the United States fostered a social contract based on stable long-term employment and widespread provision of private workplace benefits. As the figure below shows, our government framework of social protection is indeed smaller than those found in other rich countries. Yet when we take into account private health and retirement benefits — mostly voluntary, but highly subsidized through the tax code — we have an overall system that is actually larger in size than that of most other rich countries. The difference is that our system is distinctively private.
This framework, however, is coming undone. The unions that once negotiated and defended private benefits have lost tremendous ground. Partly for this reason, employers no longer wish to shoulder the burdens they took on during more stable economic times. In an age of shorter job tenure and contingent work, as Monica Potts will describe in her forthcoming contribution to this series, employers also no longer highly value the long-term commitments to workers that these arrangements reflected and fostered.
Of course, policymakers could have responded to these changes by shoring up existing programs of economic security. Yet at the same time as the corporate world was turning away from an older model of employment, the political world was turning away from a longstanding approach to insecurity known as “social insurance.” The premise of social insurance is that widespread economic risks can be dealt with effectively only through institutions that spread their costs across rich and poor, healthy and sick, able-bodied and disabled, young and old.
Social insurance works like any other insurance program: We pay in — in this case, through taxes — and, in return, are offered a greater degree of protection against life’s risks. The idea is most associated with FDR, but, from the 1930s well into the 1970s, it was promoted by private insurance companies and unionized corporations, too. During this era of rising economic security, both public and private policymakers assumed that a dynamic capitalist economy required a basic foundation of protection against economic risks.
That changed during the economic and political turmoil of the late 1970s. With the economy becoming markedly more unequal and conservatives gaining political ground, many policy elites began to emphasize a different credo — one premised on the belief that social insurance was too costly and inefficient and that individuals should be given “more skin in the game” so they could manage and minimize risks on their own. Politicians began to call for greater “personal responsibility,” a dog whistle that would continue to sound for decades.
Instead of guaranteed pensions, these policymakers argued, workers should have tax-favored retirement accounts. Instead of generous health coverage, they should have high-deductible health plans. Instead of subsidized child care or paid family leave, they should receive tax breaks to arrange for family needs on their own. Instead of pooling risks, in short, companies and government should offload them.
The transformation of America’s retirement system tells the story in miniature. Thirty years ago, most workers at larger firms received a guaranteed pension that was protected from market risk. These plans built on Social Security, then at its peak. Today, such “defined-benefit” pensions are largely a thing of the past. Instead, private workers lucky enough to get a pension receive “defined-contribution” plans such as 401(k)s — tax-favored retirement accounts, first authorized in the early 1980s, that don’t require contributions and don’t provide guaranteed benefits. Meanwhile, Social Security has gradually declined as a source of secure retirement income for workers even as private guaranteed retirement income has been in retreat.
The results have not been pretty. We will not be able to assess the full extent of the change until today’s youngest workers retire. But according to researchers at Boston College, the share of working-age households at risk of being financially unprepared for retirement at age 65 has jumped from 31 percent in 1983 to more than 53 percent in 2010. In other words, more than half of younger workers are slated to retire without saving enough to maintain their standard of living in old age.
Of course, policymakers could have responded to these changes by shoring up existing programs of economic security. Yet at the same time as the corporate world was turning away from an older model of employment, the political world was turning away from a longstanding approach to insecurity known as “social insurance.” The premise of social insurance is that widespread economic risks can be dealt with effectively only through institutions that spread their costs across rich and poor, healthy and sick, able-bodied and disabled, young and old.
Social insurance works like any other insurance program: We pay in — in this case, through taxes — and, in return, are offered a greater degree of protection against life’s risks. The idea is most associated with FDR, but, from the 1930s well into the 1970s, it was promoted by private insurance companies and unionized corporations, too. During this era of rising economic security, both public and private policymakers assumed that a dynamic capitalist economy required a basic foundation of protection against economic risks.
That changed during the economic and political turmoil of the late 1970s. With the economy becoming markedly more unequal and conservatives gaining political ground, many policy elites began to emphasize a different credo — one premised on the belief that social insurance was too costly and inefficient and that individuals should be given “more skin in the game” so they could manage and minimize risks on their own. Politicians began to call for greater “personal responsibility,” a dog whistle that would continue to sound for decades.
Instead of guaranteed pensions, these policymakers argued, workers should have tax-favored retirement accounts. Instead of generous health coverage, they should have high-deductible health plans. Instead of subsidized child care or paid family leave, they should receive tax breaks to arrange for family needs on their own. Instead of pooling risks, in short, companies and government should offload them.
The transformation of America’s retirement system tells the story in miniature. Thirty years ago, most workers at larger firms received a guaranteed pension that was protected from market risk. These plans built on Social Security, then at its peak. Today, such “defined-benefit” pensions are largely a thing of the past. Instead, private workers lucky enough to get a pension receive “defined-contribution” plans such as 401(k)s — tax-favored retirement accounts, first authorized in the early 1980s, that don’t require contributions and don’t provide guaranteed benefits. Meanwhile, Social Security has gradually declined as a source of secure retirement income for workers even as private guaranteed retirement income has been in retreat.
The results have not been pretty. We will not be able to assess the full extent of the change until today’s youngest workers retire. But according to researchers at Boston College, the share of working-age households at risk of being financially unprepared for retirement at age 65 has jumped from 31 percent in 1983 to more than 53 percent in 2010. In other words, more than half of younger workers are slated to retire without saving enough to maintain their standard of living in old age.
Guaranteed pensions have not been the only casualty of the Great Risk Shift. At the same time as employers have raced away from safeguarding retirement security, health insurance has become much less common in the workplace, even for college-educated workers. Indeed, coverage has risen in recent years only because more people have become eligible for Medicare and Medicaid and for subsidized plans outside the workplace under the Affordable Care Act. As late as the early 1980s, 80 percent of recent college graduates had health insurance through their job; by the late 2000s, the share had fallen to around 60 percent. And, of course, the drop has been far greater for less educated workers.
In sum, corporate retrenchment has come together with government inaction — and sometimes government retrenchment — to produce a massive transfer of economic risk from broad structures of insurance onto the fragile balance sheets of American households. Rather than enjoying the protections of insurance that pools risk broadly, Americans are increasingly facing economic risks on their own, and often at their peril.
The erosion of America’s distinctive framework of economic protection might be less worrisome if work and family were stable sources of security themselves. Unfortunately, they are not. The job market has grown more uncertain and risky, especially for those who were once best protected from its vagaries. Workers and their families now invest more in education to earn a middle-class living. Yet in today’s postindustrial economy, these costly investments are no guarantee of a high, stable, or upward-sloping path. [ed. See also:
A Follow-Up on the Reasons for Prime Age Labor Force Non-Participation]
Meanwhile, the family, a sphere that was once seen as solely a refuge from economic risk, has increasingly become a source of risk of its own. Although median wages have essentially remained flat over the last generation, middle-income families have seen stronger income growth, with their real median incomes rising around 13 percent between 1979 and 2013. Yet this seemingly hopeful statistic masks the reality that the whole of this rise is because women are working many more hours outside the home than they once did. Indeed, without the increased work hours and pay of women, middle-class incomes would have fallen between 1979 and 2013.
by Jacob S. Hacker, TPM | Read more:
Image: Christine Frapech/TPM
