Sunday, February 26, 2006

Pay as you go

Pensions piss me off.
Of course, they are great when they work.  My grandfather-in-law can attest to that.  (He's an actuary's nightmare, soon to begin his 4th decade as a pensioner.)
However, pensions often do more harm than good.  They put retirees (and future retirees) at risk, and they can cause tremendous tension in the worker/management relationship.  Plus they turn a basic fee-for-service arrangement into a crapshoot, gambling retirement benefits against a company's future viability.  I'll go into detail on these (and other) points another day.
What's a better alternative than pensions? 
"Pay as you go."
Companies should give workers every penny of what they earned each month.  Workers then choose how to allocate their earnings among different investment and benefit options.   With no pension vesting/funding obligations haning over their heads, employees and employers can part ways at any point without screwing each other over.
Here's what I want to see...  I want to see companies give each worker a complete accounting of his/her total compensation cost...  Salary plus employers' share of taxes, plus health benefits, plus pension contributions, plus workers' compensation and liability insurance, plus subsidies for commuting, gym memberships, day care, parking, etc.  Here's an example:
Nominal Salary: $50,000
Employer's FICA: $3,825
Unemployment / Disability: $500
Actuarial Pension Obligation: $10,000
Health Care Premiums: $4,800
WC / Liability Insurance: $4,000
Subsidies for parking, etc.: $1,200
Total Annual Employee Cost: $74,325
Employee's take-home pay after income tax withholding (30%): $35,000
Total taxes & benefits:$39,325
Showing these numbers would do a few things.  First, it would make apples-to-apples comparisons a lot easier for people looking to switch jobs.  More importantly, it should shock people to see how inefficient current compensation practices are (due largely to perversions in the tax code).  Hopefully that would spark an interest in some overdue tax reforms.
But the most basic reason to show these numbers: it would make clear once and for all what the deal is between a worker and employer.  For the work done in the past month, the fee is $74,325.  There are no IOU's, no future benefits...  Performance in exchange for consideration.  At the end of the month, both parties are even. 
If one believes the deal is unfair, there can be a renegotiation, or both parties can part ways.  There would be no pension overhang keeping them together in spite of growing dissatisfaction.
Ah, well.  The idea is well developed, but this posting is not my most coherent.  Give me some time to polish it up.