There goes the rug

THE ANNOUNCEMENT by IBM that it would freeze its traditional pension plan, shifting all workers into 401(k) plans by 2008, passed through the news cycle with nary a ripple. It was, after all, the latest in a string of increasingly desperate attempts by companies as diverse as GM, United and Verizon to get out from under mounting pension and healthcare burdens.

The terms of discussion are mind-numbingly complex, a thicket of acronyms and arcane benefits jargon. Yet the basic story is simple -- and momentous. We are seeing the death throes of a corporate insurance system that, for decades, set the United States apart from other rich capitalist nations. And with this system’s slow but steady demise comes a massive shift of risk from employers onto workers and their families.

Contrary to conservative complaints about an unrestrained government, the United States has one of the smallest public welfare states in the advanced industrial world. Yet many times more is spent on private benefits than in any other nation -- almost a tenth of the nation’s economy. And benefits offered by employers are extensively subsidized and regulated by government. In 2005, the government gave more than $300 billion in tax breaks for benefits.

Indeed, if America’s tax code and private benefits are taken into account, U.S. social spending is slightly higher than average compared with other rich countries -- higher, in fact, than the spending of Denmark.

Yet this distinctive private system is in peril. In the last generation, corporations have trimmed and restructured benefits, shifting more and more risk and cost onto workers.

Employers once championed private benefits as an alternative to overbearing public programs. The editors of Life magazine described them in 1949 as “ransom devices to buy off the welfare state.� Today, however, the workplace welfare system that once stood as a shining beacon of America’s singular path looks more like a dimming light on a failed byway.

Take retirement pensions. In 1975, the vast majority of pensions looked like mini-Social Security systems. They promised a guaranteed benefit based on pay, years of service with the firm and other fixed factors. These were the kinds of pensions for which the federal government created a backstop insurance program in 1974, the Pension Benefit Guaranty Corp.

Twenty-five years later, almost all pensions are of the “defined-contribution� variety now touted by IBM: private investment plans, such as 401(k)s, that are voluntary, uninsured and have no guarantees. Much ink has been spilled comparing the investment returns of 401(k)s and old-style pensions (according to a study of returns from 1985 to 2001 by economist Alicia Munnell, the dinosaurs have actually won, outperforming their upstart competitors by about 1% a year). But the central issue for economic security isn’t the return but volatility. Some people do well with 401(k)s; others do poorly. The difference, in a word, is risk.

Employers also want to cut back health insurance coverage, which they say hurts their competitiveness. In 1979, nearly 70% of workers received health insurance coverage from their employer. Twenty years later, the proportion had dropped to just over 50%, and it continues to fall. Among workers earning roughly $8.50 an hour, the drop has been even steeper: from 46% coverage to 26% coverage.

Even companies that have retained coverage have made workers pay a larger share of the costs -- in essence shifting some of the risk from their own balance sheets to employees’ checkbooks. Not surprisingly, the ranks of the medically uninsured have expanded steadily -- to 45 million in 2004 -- and health costs and crises are now a factor in nearly half of America’s 1.5 million personal bankruptcies a year.

Still, faith in America’s unique system lives on, whether in calls for corporate responsibility by the left or paeans to spontaneous market solutions by the right. The harsh truth suggested by IBM’s pension freeze, however, is that no amount of hectoring or tax breaks will resurrect the old bargain that once provided tens of millions of American workers with a private umbrella of economic protection. The unanswered question, in an age of growing economic insecurity, is what, if any, bargain will take its place.