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What Gas-Guzzling Dinosaur? The Travails of Labor and Education

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It's Not The Dependency Ratio, Stupid

by Christopher Chantrill
August 27, 2006 at 5:53 pm

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BACK IN THE late 1940s, The New Yorker wants us to know, Richard Gosser, president of a United Auto Workers local in Toledo, Ohio, wanted to set up a union pension plan for the workers. Ten cents an hour was all it would cost to give the workers a decent retirement, writes Malcolm Gladwell in (http://www.newyorker.com/fact/content/articles/060828fa_fact) “The Risk Pool.”

The auto companies would have none of it. Instead they offered their own defined-benefit plans, each funded by the company.

Management guru Peter Drucker saw through the whole scheme immediately. In a 1950 article in Harper’s he exposed the company pension plan idea as a mirage.

Drucker simply couldn’t see how the pension plans on the table at companies like G.M. could ever work. “For such a plan to give real security, the financial strength of the company and its economic success must be reasonably secure for the next forty years.”

And he was right. Of course, the union pension plan hasn’t been much better. But we don’t mention such things at The New Yorker.

The lesson to take from the defined-benefit-plan debacle, according to Gladwell, is the importance of the “dependency ratio,” the ratio of workers to non-workers. A healthy pension plan depends on a favorable ration of workers to beneficiaries.

It is the job of wise policy experts, he implies, to devise how to spread the risks across society to solve the imbalances caused by the overweening pride of corporate management in the late 1940s and the inevitable swings of the dependency ratio.

Just a minute! Before we sign up for another generation of expert-driven national pension policy, let us step back a moment. Let us look at the whole picture, not the tendentious detail that Malcolm Gladwell wants us to see.

In 1950 the three bigs, Big Business, Big Labor, and Big Government were all offering the American people defined-benefit Ponzi schemes, whether corporate pensions, union pensions, or Social Security.

But all these top-down plans for social welfare have now failed, and failed because of the dependency ratio. Social Security started with a dependency ration of 22-to-1. Now it’s three-to-one, and soon it will be two-to-one. The unfunded liability amounts to trillions of dollars.

Nobody wants to deny New Yorker readers a breathless tale of proud Big Businessmen and the mysterious dependency ratio. They pay their money and they deserve a rattling good yarn.

You might not realize it from reading The New Yorker, but there is another way. But first, let us take a look at the dependency ratio. Malcolm Gladwell presents it as a fixed, immutable law of society. But of course it isn’t.

The dependency ratio is not really fixed. It is only fixed because liberals jammed it. Let us look at how liberals jammed up the works: first of all, children.

Back in the bad old days we had this institution called child labor. Poor parents sent their children out to work. The artisan class sent their children to school to get a basic education for three or four years in literacy and numeracy. Then, at twelve or thirteen, they went out to work as apprentices. The middle class, of course, sent their children to school much longer. They could afford it.

Today, the average western nation keeps its children in government schools by law. Everyone agrees that education is a Very Good Thing for everyone, and child labor a Very Bad Thing. It must be true. One thing is for sure: universal compulsory primary and secondary education certainly messes up the dependency ratio.

In real life, of course, young people start work at different ages, for a host of different reasons.

The other thing that fixes the dependency ratio is the idea of a fixed retirement age. Bureaucrats, whether corporate, labor, or governmental, like one-size-fits-all programs. It makes life so much easier. Big Business wants to shift the bed-blockers out of the way with fixed retirement ages. Big Labor wants to reward their members with 30-years-and-out of their dead-end jobs. And Big Government wants to buy votes with taxpayers’ money.

In real life, of course, older people retire from work at different ages, for a host of different reasons.

The dependency ratio is meaningful only when you treat people like bumps on a log, as corporate “headcount,” as union “rank-and-file,” or as government beneficiaries.

A truly compassionate and sensitive political elite would have used its power back in 1950 to help ordinary people to provide for themselves without a helpless dependence on Big Anything.

Because in real life, it’s dependency ratio be damned. You retire when you can afford to.

Of course, some-people-through-no-fault-of-their-own-cannot- provide-for-themselves. But that is no excuse for the rest of us.

Christopher Chantrill blogs at www.roadtothemiddleclass.com.

Buy his Road to the Middle Class.

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