Friday, December 31, 2004

More on risk

As I commented in an earlier post (The engine of the innovation: making it possible for people to take risks), how risks are allocated seems to be as significant a differentiator between liberals and conservatives as other political issues. Yet this issue has not received the attention it deserves.

Both businesses and individuals want to minimize the risks that they face. We all want a certain degree of stability, and we all want some form of safety net (i.e., insurance policy) to protect us from volatile conditions.

The current administration is now attempting to reduce the insurance aspect of Social Security and turn it into a program in which people put their future retirement security at risk in return for possible increased returns. That clearly is not the point of social security. It is an insurance plan for retirement, not an investment plan.

The LA Times has a nice story on the generally increased degree of financial risk we are all bearing.
The Times has sought to make sense of an American paradox: why so many people report being less financially secure even as the nation, by many measures, has grown far more prosperous.

The answer, the newspaper has found, lies in the shifting of economic risks from the broad shoulders of business and government to the backs of working families. [emphasis added]

Over the last quarter of a century, many safeguards that people once counted on to shield them from financial harm have been weakened or completely lost. These include formal protections such as guaranteed corporate pensions and state and federal unemployment benefits. And they include informal ones, like the loyalty that employers once showed their workers by offering secure jobs with relatively little prospect of long-term layoff. Other cushions that families … have relied on, such as the financial stability that comes with a college education, also have eroded.

The result is that families, even well-off ones, operate with little margin for economic error. And they can pay a steep price if anything goes wrong. The price grows exponentially if … several things go wrong at once.

The Times has tried to gauge the effect of this risk shift over the last 25 years by tracing the rising volatility of family income.

During the early '70s, the inflation-adjusted income of most of those in the middle of the economic spectrum — making about $50,000 a year in today's terms — bounced up and down by no more than $6,500 annually. By the beginning of this decade, those fluctuations had climbed to as much as $13,500, the newspaper's figures show. At the same time, the increase in volatility has been far greater for the working poor, while even top earners haven't been immune from ever-larger income swings.

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