Edward A. Zelinsky

The Defined Contribution Paradigm

Pension cognoscenti have frequently remarked on the stagnation of defined benefit pensions and the concomitant rise of defined contribution plans. I suggest that, over the last generation, something even more fundamental has occurred, something that can justly be called a paradigm shift. Americans today primarily conceive of and implement retirement savings in the form of individual accounts. Such accounts have become primary instruments of public policy, not just for retirement savings, but increasingly for health care and education as well. Pension mavens have framed the choice between the defined benefit and the defined contribution formats as a matter of risk allocation in the design of retirement savings programs. However, the defined contribution society as it has emerged today entails more considerations than this and constitutes a fundamental transformation of the way Americans think about and implement tax and social policy. The initial Part of this Article describes the differences between defined benefit and defined contribution plans as retirement savings devices. Part II discusses these differences as a matter of retirement plan design: Defined benefit arrangements principally allocate risk and reward to the sponsoring employer, while defined contribution devices assign such risk and reward to the participant. In the third Part, I sketch the major features of the contemporary defined contribution paradigm and its development to date. This sketch highlights, inter alia, the extent to which the paradigm today determines how middleclass individuals and households undertake their medical and educational savings, making the defined contribution format the norm for such savings. The fourth Part places the defined contribution paradigm in the context of the possible futures of the Internal Revenue Code and emphasizes the extent to which the paradigm has effectively converted the Code into a consumption tax for middle-class taxpayers. Finally, I label the choices presented to us by the defined contribution paradigm and identify those that I think are best.

Reforming Health Care: The Paradoxes of Cost

Whatever happens in Washington in the weeks and months ahead, the United States is fated for the indefinite future to conduct a prolonged and difficult national debate on health care. The reason for this protracted and arduous argument can be summarized in a single word: cost. Yet, paradoxically, the rhetoric of unspecified cost reduction is used to avoid the painful choices needed to prune health care outlays, choices which inevitably involve agonizing denials of medical services in a world of finite resources. Medical costs cannot be controlled without denying something to somebody. Yet, paradoxically the term “cost” is used in contemporary political discourse to avoid the difficult choices involved in such denials. It is easier to favor unspecified cost reductions, than to identify particular service denials which would actually reduce medical care expenditures. Elected officials are reluctant to deny medical services to cut costs, but health care costs cannot be meaningfully controlled without such service denials. Our employer-based system of medical care is a major reason we confront this difficult situation. Yet, again paradoxically, the employer-based system, though flawed, is the best tool available to us to control medical care costs since employers must respond to competitive pressures in the marketplace and thus are better positioned than is government to implement the painful service denials necessary to curb health care outlays. However, even under the best of circumstances, medical care costs are not a problem which will be solved but rather are a reality to be permanently and painfully managed and controlled.