Many Americans appear to be doing fine. They've got nice cars. They've got good jobs. They've got families. But they also have an abysmal savings profile and mountains of debt. The slightest disruption — a job loss or health incident — can and does destroy the perceived image of American middle class harmony.
In "The Great Risk Shift," author Jacob Hacker details how beneath the shiny hardwood flooring of America's middle class there is a rotted infrastructure that is ready to give out at any moment. He says that in order to prevent such a catastrophe workers need to spurn the ownership society, which heralded the loss of stable retirement benefits and comprehensive health care coverage, and reclaim the hallmarks of security and opportunity that have slowly decayed over the last 50 years.
"We're losing the language of security and it's time to reclaim it," Hacker recently told Employee Benefit Adviser during a telephone conversation with Editor Robert L. Whiddon. Hacker, a professor of political science at Yale University, argues that universal 401(k)s, an expanded Medicare program and individual stop-loss insurance — to protect middle class workers from severe disruptions in earnings or catastrophic health care expenses — are necessary to ensure a prosperous and secure American workforce.
Q:You seem very young to write this book. Unlike many Gen Xers (myself included) you refuse to simply give up on the notion of a traditional "retirement." The book ends by exhorting readers to get mad, get wise and get even.
A: What you describe, your attitude of resignation and acceptance is true of a lot of people in our generation. If you look at the polling, the people that are most up in arms about the loss of secure retirement benefits, the decline of comprehensive health benefits or rising college costs are people actually in the generation ahead of us who have seen both sides of the equation and who feel like something is being lost. Whereas you look at young Americans, particularly Gen Y if you will, people in the youngest age group in the labor market are resigned and indeed feel as if they just have to construct their own life independent of these promises.
What I'm trying to do in the book is say, look we're at a pretty critical turning point and we can either accept that we are going to lose any guarantee of security and we're all going to try and make it on our own, or we're going to try and reclaim some of the best elements of that tradition.
Q: The book is overflowing with interesting statistics. Many are from the University of Michigan's panel study on income dynamics, which has followed more than 8,000 families for nearly 40 years. What stats do you think standout for employers and their benefit advisers?
A: For employers the health care cost side of it is really the most dramatic. They often don't understand ... how much of a strain health care costs have placed, not just on them, but on their employees and Americans in general — how much income people are spending and how much health care costs have gone up ... And similarly, the statistics about the number of bankruptcy filings due to health care expenses and the increasing number of Americans that do not have health insurance at all.
The other side of it, for employers, is understanding the change in the labor market. They again experience that first hand, but a lot of them would find interesting the discussion of [displaced workers]; where I show there has actually been a pretty big rise in the last five years to 10 years in the number of workers who are displaced from their job every three years and the cost of displacement for those workers has gone up.
Q: The book carefully details how devastating even a temporary job loss or health condition can be on a working family. The book doesn't blame employers for the impact, however.
A: I want to be clear, I don't think of them as villains. I think they are basically stuck in a bad situation because there are so many responsibilities that the government has left on their shoulders. My view is we could have a win-win situation. Not only could we provide broader security but we could get costs under control in a way that would help employers' bottom lines.
It certainly doesn't make sense that a lot of these small- and medium-size firms are having to contract individually for all of these benefits. Why shouldn't these risks be more broadly pooled? Why shouldn't there be a clearinghouse for public insurance that allows them to reap a lot of the economies of scale that larger employers get? I'm surprised by how — I wouldn't say populist employers are — but when I talk to employer representatives and HR people they are really worried about these trends and they are sincerely worried about the health and welfare of their employees. They can either put themselves in competitive disadvantage by continuing to fund generous benefits or they can try to shift more of these costs and risks onto workers with the hope that will allow them to continue to provide these benefits.
There is a background belief among some employers that their employees will be able to more effectively manage their own health and retirement if they have more control. I wouldn't say that's a religiously held view among many employers in the way it is among some political conservatives. I think employers are generally pretty pragmatic and they recognize that there is no silver bullet here in terms of health savings accounts. I hope they do. I think we are at a fork in the road because I do think there is going to be more and more pressure on employers to either cut benefits or shift to the individual account style that puts the risk onto workers. I think that's the wrong way to go but I can understand the strain that employers are facing.
Q: Employers just seem to have a point where they don't want to spend more on benefits. You mention the cost of pensions versus 401(k)s in the book. Do we have to re-educate the next generation of business owners and leaders, reminding them that exec comp has to squeeze, shareholder value has to change in order for us to maintain a healthy workforce and a middle class? Do you see that linkage?
A: There are tradeoffs within companies and there are good and bad choices they can make. When I say they are facing severe and real pressures I'm not saying anything you do is a justified response to those pressures. At the largest companies the executive compensation story is a real serious one. It's not just how much is being paid. It's also that most company executives have a huge amount of deferred compensation and they have the kind of guarantees that their workers increasingly don't. That they'll get these generous pension benefits when they retire. To me that's not setting a kind of moral standard for the workplace. Executives — not that they should be foregoing compensation — should be emphasizing they are sharing in the risk and the reward of the company. It seems like increasingly they are sharing in the reward and they are not sharing in the risk.
The other side of it is that the companies that act to sort of slash their costs in the short term are often making counterproductive choices for the long term. They are losing some of the really valuable expertise of their older workers who are scared and try to bail out of the company. They are also hurting the morale of their companies. While there are cases where you really just have to retrench, corporate leaders often will act in short-sighted ways maybe because of the stock market pressure to do so and not think about how they can create a culture of higher performance that involves sharing in the risk as well as distributing the reward.
Q: The last chapter of the book outlines how Americans can solve the problems created by the great risk shift. Broadly, they are universal 401(k)s, Medicare-plus and universal insurance. How will each affect the employer community?
A: I don't think that a universal 401(k) proposal will much change how employers operate. It will offer a new incentive for employers to offer 401(k)s and provide generous matches for lower and middle-income workers.
It will probably reduce some of the burdens on employers because it will create an option for 401(k)s that exist independently of employers, if employers don't feel they can take on the administrative burden of providing a 401(k).
The Medicare-plus proposal, which I now call Health Care for America, would offer a new option to employers that would be very attractive to them. It would certainly — if it were fully implemented — also involve a requirement on employers.
The basic element of the proposal is if employers want to provide good coverage on their own they can and there would be no new requirements on them. They'll continue to receive tax breaks for doing so. If they choose not to provide any coverage their workers will be allowed in a new public insurance option modeled after Medicare. There will be a relatively small levy, 6% of payroll from their employer to fund that. It gives smaller employers the option of providing coverage at a bargain basement price and it also will help all employers who now provide coverage by reducing the cost of covering spouses and by reducing the cost of uncompensated care, which probably adds about $1,000 to the annual premiums they pay.
Finally, the universal insurance proposal is an idea that I developed for providing a kind of ultimate safety net for all Americans. Basically it would provide protection against very large drops in earning or income on the one hand and against catastrophic health costs on the other. It really is sort of a stop-loss program like employer stop-loss insurance. It would provide benefits to really prevent the most serious losses that families face. By providing this protection not only will you prevent a lot of hardship, but also you make it clear that there are a lot of people experiencing these events that are falling through the cracks of our current framework of insurance.
Q: Who would pay for that?
A: Ultimately we all pay for it. I have several different financing options in the proposal. It could be funded through a very, very, very modest payroll tax, well less than 1%. Or it could be funded through an income tax surcharge, or it could be funded through some kind of national sales tax or consumption tax. You wouldn't want to create a consumption tax just to fund a program like this because its total cost is relatively modest compared with what you could raise through a national sales tax.
One thing I don't talk about in the book that I probably should've is that to deal with the problems in the existing programs and to create the revenue base for filling in some of the gaps we need to change our tax code. As if we need one more big challenge. Major tax reform would really make it much easier to create stable sources of funding for these policies. We spend hundreds of billions of dollars to subsidize existing benefits through the tax code. We could certainly direct some of that funding towards more securing insurance or we could figure out ways to raise additional funds to provide such benefits. — E.B.A.
