Today's Opinions, Tomorrow's Reality
By David G. Young
Washington, DC, February 11, 2013 --
A tradition of government meddling discourages Americans from changing jobs.
When a congressional report estimated big cuts American work hours because of the Obamacare law1, the partisan flames spread like wildfire. Disingenuous Republicans said the report proves the law kills jobs. Equally disingenuous Democrats started uttering strangely out-of-character words about “flexible labor markets” being good for the country.
However insincere, the Democratic argument is absolutely correct. The main (perhaps only) benefit of the law for financially stable Americans is that it eliminates the need to stick with an employer to keep health insurance. The report predicts that the law will inspire many to leave their full-time jobs because those with a health problem no longer need to stay put to retain heath insurance coverage.
Unfortunately, America’s pre-Obamacare health system isn’t the only conspiracy to keep Americans in dead-end jobs. On Saturday, AOL president Tim Armstrong abandoned a controversial plan to change the company’s retirement benefits after several days of employee and public outrage. Armstrong had decided to pay contributions to employees’ 401(k) plans to a lump sum at the end of the year rather than with each paycheck, thereby eliminating payments for any employee quitting during the year.2 In addition to punishing quitters, critics noted that by making a single end-of-year contribution, AOL had increased employees’ investment risk vs. making smaller contributions throughout the year.
The reversal of the AOL policy does nothing to eliminate the bigger ways that 401(k) plans lock American employees into their jobs. The system lets workers put their own earnings into investment accounts tax-free, largely replacing old-fashioned pension plans as America’s primary means of funding retirement. Some employers match worker contributions up to a small percentage of the employee’s salary.
But there are lots of problems with 401(k)s when it comes to the flexible labor markets. First, many smaller companies don’t offer 401(k) plans, almost no startup companies do, and they are completely unavailable to the self-employed. Americans without them supposedly eligible to contribute to similar Individual Retirement Accounts (IRAs). But by law they can’t save nearly as much ($5500 per year for IRAs vs $17,500 for 401(k)s). What’s worse, higher income professionals aren’t allowed to put money in IRAs at all, even though they would be eligible for a 401(k) with a sponsoring employer.
Now consider what happens to an employee who leaves his 401(k) job on January 2. Because he participated in the plan for a single day in the year, he isn’t allowed to contribute to an IRA at all. Unless he finds another employer who is a 401(k) sponsor, he isn’t allowed any tax-free retirement savings that year. This makes quitting a company offering a 401(k) tricky. As a worker in the notoriously volatile software industry, I always “front-load” all of my 401(k) contributions at the beginning of the year in case my job wouldn’t last until December 31st. By doing so, I hedge against the risk of ending up outside a plan and being blocked from further retirement savings. But I also incurred higher investment risk by putting my money in the market at uneven intervals.
These problems are worst for folks in volatile jobs with high turnover — exactly the kind of jobs that fans of “flexible labor markets” should theoretically encourage. Volatile jobs are more common in service industries and high tech that are growing parts of the economy. These jobs defy the myth of lifetime employment, a myth perpetuated by the common American term of “permanent employee” to describe a person who holds a full-time job.
How volatile are American jobs? Every month, 3.5 percent of American workers leave their jobs, a rate that has hovered around the same level for years.3 Adding this up, it only takes 2.4 years for all Americans to change jobs. Of course, it doesn’t work out exactly that way since some employees change jobs more often and some much less often. Numbers dating back to the early 1900s show this high turnover is not a new phenomenon.4 This means the cherished idea of lifetime employment existing in mid-20th century America is largely a myth -- it was enjoyed by a precious few for a very brief period of time.
For those who espouse flexible labor markets, this is not a bad thing. It is important to tear down all government penalties and disincentives to change jobs, be it through health insurance or retirement plans.
Obamacare is hardly perfect at eliminating health insurance lock-in. High private insurance costs for professionals (who are forced by Obamacare to subsidize poorer Americans) still make quitting a job with health insurance unattractive. Likewise, the 401(k) fiasco at AOL sheds light on the way that America’s retirement system is stacked against those working in the most volatile industries. For American politicians who claim to support labor flexibility, much work remains to be done.
1. Reuters, Obamacare to Cut Work Hours by Equivalent of 2 Million Jobs: CBO, February 4, 2014
2. Washington Post, AOL chief reverses changes to 401(k) policy after a week of bad publicity, February 9, 2014
4.Owen, Laura, History of Labor Turnover in the US, April 29, 2004