In response to:
Trapped in the New 'You're on Your Own' World from the November 20, 2008 issue
To the Editors:
Robert Solow’s review of Peter Gosselin’s book [ NYR, November 20] is a valuable primer on social insurance, a vital part of any civilized society. In it Professor Solow raises the suspicion that companies switched from defined benefit pension plans to 401(k)-type plans to save money; but, he wrote, he knew of no data on that point.
I spent ten years researching that point and the results are published in my book, When I’m Sixty-four: The Plot Against Pensions and the Plan to Save Them (Princeton University Press, 2008). I constructed a data set of over seven hundred firms and followed them for nineteen years. If a firm increased its spending on a 401(k)-type plan—a defined contribution plan—by 10 percent, it lowered its spending on pensions, overall, by a total of 3.5 percent. This means that firms decreased their pension spending by 53 percent (when all other factors are taken into account) because they adopted 401(k) plans.
401(k) plans have many flaws: two key ones are that they facilitate the shift away from guaranteed pensions and result in less employer spending on pensions. The effect is to erode retirement income security in the United States.
Bernard L. and Irene Schwartz Professor of Economics The New School for Social Research New York City
Robert M. Solow replies:
I thank Professor Ghilarducci for a valuable piece of information. An opportunity for a business to lower cost and reduce risk at the same time is too good to pass up. But as she and I both point out, the burden is just being shifted to the employee/retiree.