Mulling over retirement

The social safety net in the United States has gradually frayed. People have less protection against financial shocks, such as job loss or huge medical bills.

The resulting insecurity has been getting more political attention. It needs it. The volatility of family incomes has grown decidedly. In any given two-year period since the early 1970s, about half of all US families experienced a drop in real income. In the 1970s, that drop was typically about 25 per cent. But since the late 1990s, families in that category experienced a median drop in income of about 40 per cent, finds Jacob Hacker, an economist at Yale University in New Haven, Connecticut.

In recent years, economic risks have been shrugged off by employers and society onto individuals.

For example, far fewer firms offer traditional defined-benefit pensions, where the employer assumes the investment risks and the employee receives a steady pension upon retirement. Instead, many firms provide less generous 401(k) plans in which employees absorb the risk of managing their own pension money. Similarly, many employers are pushing the cost and risks of health insurance onto employees. And employees are less likely to be covered by unemployment insurance if they are laid off.

Economist Peter Orszag would like to bridge this policy gap between conservatives and liberals.

He's director of the Hamilton Project, an initiative of the Brookings Institution in Washington, aimed at rebuilding the safety net in a way that doesn't harm free-market incentives that stimulate output and efficiency. His thesis is that "long-term prosperity is best achieved by making economic growth broad-based, by enhancing individual economic security, and by embracing a role for effective government in making needed public investments."

In other words, Orszag holds that if Americans are less fearful for their econ-omic safety, they are more likely to make investments in education or business that may involve considerable personal risk but can also enhance their own and the economy's prosperity.

Recently Hamilton Project economists proposed education and unemployment insurance reforms intended to make economic security and growth mutually reinforcing.

As it is, the increased flexibility of the American labour market, with its relative ease of hiring and firing workers, has had costs for employees. The average spell of unemployment now is 16 weeks, up from about 12 weeks in the 1960s. When displaced workers do find a full-time job, roughly half of them (according to 2003-05 statistics) had a drop in earnings.