Is Virginia’s Social Safety Net in Tatters?

Please humor me as I make one last blog post on “A Growing Divide: The State of Working Virginia.” The ground-breaking study by the Commonwealth Institute presents two more sets of important data: the percentage of Virginia workers with health care insurance, and the percentage of workers with pensions.

It’s a classic good news/bad news situation. Here’s the good news: Virginians fare better than other Americans. We have a smaller percentage of the population without health care coverage, and a smaller percentage without pensions. Here’s the bad news: Like the United States overall, our numbers are heading the wrong way.

The health care insurance trends can be seen in Figure 10 (taken from the study), which depicts total private and public health care coverage. Summarizes the report: “In an environment where health care costs are rising rapidly, often substantially outpacing inflation, employers are finding it increasingly expensive and therefore financially difficult to continue to provide the same level of benefits. In particular, small businesses have found it difficult to afford to provide coverage for their employees.

“Consequently … this has contributed to substantially fewer workers receiving health insurance benefits through their employer compared to two decades ago. In fact, since 1979 the percentage of the working population that obtains health insurance coverage from their employer has decreased from a high of 70 percent to a near all-time low of 57 percent in 2006”

From 70 percent to 57 percent — that is significant erosion in the private sector. Indeed, if the trend does not reverse itself, as it did briefly a decade ago, we can fairly label it a crisis. To pay the cost of treating the medically indigent, hospitals and other health care providers shift costs to private-sector plans. If those plans shrink in the numbers of people they cover, the cost shifting becomes increasingly acute and onerous. Either private insurance becomes more unaffordable, prompting more businesses to drop their plans, or health care providers such up the losses. Neither path is financially sustainable.

While the medical-insurance piece of the privately funded safety net is fraying, “A Growing Divide” concludes, so is the pension piece. Says the study: “Following an eleven year surge in pension coverage through 2001, the state has seen steady decreases in the percentage of workers that are covered by these plans and was down to 46.5 percent in 2006, a decline of almost 10 percentage points in just five years.”

I’m not certain this is quite the crisis it seems. Does the decline in “pensions” signify only a decline in the number of traditional, fixed-benefit plans? If those plans are being replaced with 401(k) plans, that’s not necessarily a bad thing. Employers may be shifting some of the risk of financial performance to employees, which could be a mixed blessing, but 401(k)s are portable. As the workforce becomes increasingly mobile, switching jobs with ever greater frequency, employees don’t lose accumulated pension benefits when they’ve failed to “vest” in a plan. Instead, they they take their 401(k) retirement benefits with them wherever they go.

I would like some clarification on that final point before concluding that an increasing percentage of Virginians are heading to the poorhouse in their old age.

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  1. Michael Cassidy Avatar
    Michael Cassidy

    Thanks for your extensive commentary on our report. I appreciate the insights and feedback.

    I would like to answer a couple of the questions raised.

    On pensions, you are correct. The data relates to pension plans, not IRA’s/401(k) plans. The source of that data is the Census Bureau’s Current Population Survey. The CPS question asks: “Of private-sector wage and salary workers ages 18-64 who worked at least 26 weeks per year and 20 hours per week, the share who are included in their employer’s pension plan.” Since the question deals specifically with pension plans, not retirement plans, it would not include workers who have a 401K plan.

    Since we were working mostly with Census data, we had to work with what we had. This question of retirement savings through other means is an important one, and something we are trying to get our hands around and find good data sources on.

    I do think it is important to note that the decline in pensions represents an important shift of risk from the employer to the employee. Pensions provide a guaranteed level of retirement income to retirees. Laws governing these plans require such things as not having more than 10 percent of the fund invested in employer stock. Such funds are also insured, thereby protecting employee retirement security.

    The tax-advantaged employee savings programs like 401(k)s put the risk and responsibility for achieving a decent retirement income more on the shoulders of employees. Most require employee contributions to participate. Planning can be difficult and risks are much greater.

    All of this would be fine if this higher level of risk and the need to divert a portion of earned wages towards them had come with higher wages. But as the report notes, that is not the case. So I think there is cause for concern and inquiry here.

    On your point about the need for more regional analysis to dig into the trends within and across regions, I agree. It is something else we hope to tackle in the future. Again finding good data is a challenge. But I think it is a very critical avenue of research to pursue.

    Best regards,
    Michael Cassidy
    Executive Director
    The Commonwealth Institute

  2. Anonymous Avatar

    But keep in mind the 401K-like plan for federal employees. It’s an excellent plan, well-managed that delivers value to the employee. My wife’s federal account most generally out-earns many of our other investments.

    You are definitely correct in that 401Ks do shift risk and potential reward to employees. But we’ve also seen quite a few pension plans go under. And we are going to see quite a few public sector pension plans go under as well. A bankrupt pension plan or even one “rescued” by the PBGC may not be worth a heck of lot to the retirees.

    This is not to say that the rules around 401Ks are perfect. There could be improvements, especially in the area of earlier eligibility and vesting, along with rights not to invest in company stock. But, on the whole, defined contribution plans can be good — and should be good. I don’t think that we will see many new pension plans unless and until the economy becomes much less competitive.

    In terms of wage increases, I like to see more and not just for ten people at the top. But we, as a society, have sacrificed wage gains for big government, oversized state and local staffs, and program after program. Fair or not, the costs of government are generally passed along to those with lesser education and skills and, more recently, to more and more people in the middle. What is the ratio of state and local government employees and contractors per 100 residents today versus 20 years ago? I suspect it is much, much higher. That phenomenon is sucking a lot of income from many people.


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