More Risk, Less Money

Editor’s note: This is part 2 of a 12-part collaborative series between Next Avenue and Marketplace Morning Report.

The economic and social transformation was breathtaking in scale and scope. The risk of living in poverty in old age was high for much of U.S. history. Social safety net innovations dramatically changed the economics of old age, especially after the Second World War. Among the most important changes were Social Security in 1935, Medicare in 1965, and large organizations increasingly offering their employees guaranteed pensions.

The move toward collective risk-sharing and social insurance policies by businesses, government and other major institutions greatly improved late life financial security. Perhaps most striking is the dramatic decline in the poverty rate among older people. Poverty in old age plunged from an estimated 78% in 1939 to 35% in the late 1950s to 15% by 1976. The mass of older Americans embraced a new stage of life: Retirement.

However, since the early 1980s, economic risks once absorbed by large institutions and universal government programs were increasingly shifted on to far more fragile household balance sheets. The transformation has been labeled the "Great Risk Shift" by the Yale University political scientist Jacob Hacker.

The transformation is a complex story, but at its core, increased international competition and technological innovation pushed companies to unload much of the cost of pensions, job security and health insurance onto their workers.

"There was a big push toward individual responsibility," says Deborah Thorne, professor of sociology at the University of Idaho. "What did that mean? That means shifting the risk for so many things onto individual households and the individual."

Collective responsibility and risk-sharing were out. Do-it-yourself finance and individualism were in.

The classic example of the risk shift is the change from defined benefit pension plans (also known as DB plans) to defined contribution plans like 401(k)s. The employer bears all the investment risk of a DB plan and commits to a fixed payout of money, typically based on a salary and years-of-service formula. Retired employees essentially get a monthly paycheck for the rest of their lives. With the 401(k), employees bear all the risk, deciding how much to invest (subject to regulatory limits) and where to invest it (depending on the menu of investment choices offered by the employer).

This shift to defined contribution plans placed the responsibility for saving and investing primarily on workers, "many of whom were unprepared or unable to save enough," says Mingli Zhong, an economist at the Urban Institute think tank in Washington, D.C.

Other examples of risk-shifting include requiring workers to pay more for their health care by expanding and increasing insurance copays and deductibles. Workers lived with growing job insecurity as employers embraced mass layoffs. Add in the high cost of living and growing income and wealth inequality and it's no surprise that older people with little to no retirement savings turned to debt.

"The high cost of living — and here I'm referring to big ticket items, housing, health care, the cost of college — inadequate income growth and income inequality, the lack of good career opportunities in too many parts of the country where the economies have been kind of hollowed out for a variety of reasons," says Mark Miller, author of "Retirement Reboot."

"The result of all that is accumulation of wealth at the high end and not below it," he adds. "If you apply this to the kind of the generation that is now retiring or getting close to it, economic volatility during their working years has just played an enormous role that gets people to a position where they arrive at retirement carrying a lot of debt."

Most household balance sheets are too brittle to absorb these risks during a lifetime of work without taking on debt. "I am convinced, based on my 30 years in academics and everything I've read, we have been sacrificed for this very interesting social experiment to see what happens when we say you are on your own," says Thorne. "Let's see how that works for you. It's not working."

The best-known risk-pooling or risk-sharing examples are Social Security and Medicare. These large programs spread the risk of setbacks in older ages.

"Risk-pooled solutions play a really important role as a buffer or a cushion to protect us from too much risk," says Miller. "We call these programs social because they bring us together or as a society, with the federal government serving as the plan sponsor. We call them insurance because these programs protect us from certain kinds of risks, so everyone who contributes is protected, and so together, we pool our risks and our responsibilities. That's the essence of this concept."

That said, there are few signs that the social insurance approach is regaining traction four decades after the move toward putting more economic and financial risks on individuals. Pamela Foohey, professor of law at the University of Georgia, is co-author of the forthcoming book, "Debt's Grip: Risk and Consumer Bankruptcy."

"There's another 10 years of people behind them who have been living through the same economic and social situations, who will soon be 60 and then 70, and will enter their retirement years with potentially even less, with the same health care costs and the same job problems," she says.

With employers, government and other major institutions sharing less of the downside hazards of old age, more older people of modest means find themselves carrying debts. Without major reforms, odds are the next generation of retirees will also find themselves at retirement still owing money — a drain on resources in the elder years.

"I don't know what's going to happen to them," says Foohey.

Editor’s note: This article is part of our “Debt Free” series, a Next Avenue initiative made possible by a grant from the RRF Foundation for Aging.

Chris Farrell is senior economics contributor for American Public Media's Marketplace. An award-winning journalist, he is author of the books "Purpose and a Paycheck:  Finding Meaning, Money and Happiness in the Second Half of Life" and "Unretirement: How Baby Boomers Are Changing the Way We Think About Work, Community and the Good Life." Read More