Jewish World Review May 17, 1999 /2 Sivan 5759
(http://www.jewishworldreview.com) LOOKING BACK FROM THE YEAR 2030, what will be seen as the most important change in the American condition from 1970 to 2000? There are plenty of candidates: Computers, more foreign trade, bio-tech, the stock market boom, the end of the Cold War, the control of inflation.
Or consider something less sexy: the replacement of the "defined benefit plan" by the "defined contribution plan." It sounds nerdy and wordy. All it means is that a person's accumulation of retirement assets is owned, and directed, by the person and not by the company or institution he or she works for. Typically that money is directed into the stock market. When the value of invested pension funds goes up in the market -- as over the course of decades it always has -- the appreciation in value goes to the person not the company. This is important; Albert Einstein said that the most powerful force in the world is compound interest. The contribution revolution has been driven by a public saying: "Show me the money!"
Of course Americans could always invest their own money, for retirement or anything else. But now, through tax and employer policy, enabled by energetic and creative investment companies, Americans are being subsidized, seduced, encouraged and even enjoined to be participatory and contributory, in order to own a slice of the big American pizza.
According to the Employee Benefit Research Institute, in 1965 about 12 percent of Americans owned stocks and bonds, directly or indirectly. By 1990 -- over the course of 25 years -- the rate had doubled to 24 percent. By 1998 -- eight years later -- the rate had doubled again, to about 52 percent. It can only double one more time. The contribution revolution has been the major driver of this trend. Almost 50 million Americans are now in DC plans. Forty million have IRAs, also contributory in nature. (There is some overlap.)
Important? The contribution revolution is changing the nature of aging, changing our politics, our most important laws, our economics and the code by which we think. Thusly:
1. Only a few decades ago, a statistician seeking to find a high incidence of poverty in America would look under the heading "Over 65." Stories in newspapers, exaggerated in scope but not false, told of elderly people scavenging through garbage bins for scraps of food. Tragically, there are still plenty of elderly poor people in America. But now, thanks to increases in Social Security and the early results of the contribution revolution, Americans over age 65 have somewhat higher incomes than the American median.
(The bumper stickers on those big RVs tell a story: "We're spending our kids inheritance!")
As the years roll on, as compound interest compounds, retirement income and wealth will grow, enormously. An American aged 22, earning $30,000 per year, receiving a 1 percent per year real wage increase, putting 10 percent of earnings into retirement, ends up with $1.2 million at age 65.
Because of increased life expectancy, an American today aged 65 can expect to live to about age 83, up from age 79 in 1950. That lifespan will keep going up. While death and illness will continue (flash!), the economic dimension of growing old will be much eased.
2. The demand for equities for DCs has helped push up the stock market by about 1,300 percent since 1982. The rise in market values has made Americans wealthier, given American business the capital to expand, created a "wealth effect" which spurs consumer spending, all of which yields greater profits, which make stockholders still wealthier, creating a "virtuous circle."
3. The contribution revolution is leading to some sort of a major change in Social Security, the premier American safety net program. By offering tax credits (i.e., governmental cash), the new "U.S.A. Accounts," and similar plans, are the functional equivalent of the partial privatization of Social Security. Those are contribution plans, not benefit plans.
4. The contribution revolution is changing our politics. The typical American voter today is a stockholder. Much of our politics has been based on class distinctions. Franklin Roosevelt portrayed Democrats as the party of the "little guy" (workers) versus the Republicans, the party of the "fat cats" (owners). That fight will continue. But might not a stockholder society take some of the edge off of the politics of "us versus them?" Might the next political era, with most Americans owning shares of American businesses, be one where the party that can best envision a "we" society will have the electoral head start?
5. In 1848 Karl Marx wrote, "Workers of the world unite! You have nothing to lose but your chains." These words generated one of the great arguments of Western civilization: Who will own the means of production? Great philosophers and political leaders debated the issue. Wars were fought about it. It seems bizarre that something as arcane as the defined contribution plan could dramatically help change all that.
But isn't that happening
Ben Wattenberg is a senior fellow at the American Enterprise Institute and is the moderator of PBS's "Think Tank."
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