Candidates battle over risk, responsibility

Analysis

By Ron Brownstein

updated 4:30 p.m. ET Sept. 19, 2008

Ron Brownstein • E-mail

WASHINGTON - This week's tumultuous events on Wall Street have immediately commanded center stage in the presidential race. But the debate is being framed too narrowly.

It's understandable that the first reactions from Barack Obama and John McCain centered on whether Washington is effectively regulating the financial markets. That's a natural focus for Obama, who delivered a detailed speech at Cooper Union in March urging a comprehensive modernizing of financial regulation. Coming from McCain, a demand for tougher oversight is more jarring. Although he has occasionally banged heads with individual industries over specific policies, he has generally presented himself as a "small government ... less regulation" conservative.

Yet neither presidential nominee has yet connected the gales on Wall Street to the generation-long changes in the American social contract that have exposed average families much more directly to the effects of such upheavals. Over the past quarter-century, America has engaged in a fundamental transfer of the responsibility for managing everyday financial risk from employers and government to individuals and families. In his 2006 book, University of California (Berkeley) political scientist Jacob Hacker memorably terms this The Great Risk Shift.

Since the 1970s, the share of employers providing defined-benefit pension plans that guarantee workers a set income upon retirement has shriveled. Instead, most workers now rely on defined-contribution plans--primarily 401(k) accounts--in which employers commit only to providing funds that workers can invest, and the amount of money available upon retirement depends entirely on the workers' skill (and luck) in navigating the financial markets. Defined-contribution plans undeniably provide workers with more control over their retirement investments, but they also expose employees to far more risk, as those hoping to retire soon were painfully reminded when their 401(k) plans plummeted this week. A similar transfer of risk is evident in health care, because fewer employers offer insurance to their workers, and even those that do shift more of the cost onto employees.

Video   McCain: We need 'regulatory clarity' Sept. 19: Presidential candidate John McCain lays out his plan to reform the U.S. financial sector and its regulation, and also proposes tax cuts for workers. MSNBC

Although neither McCain nor Obama has framed the situation this way, their reactions to this transfer of risk and responsibility represent a fundamental dividing line between them. Like President Bush, who touted an "ownership society," McCain has welcomed these shifts of responsibility as giving individuals more control over their financial future. On several fronts, McCain in fact wants to accelerate these trends.

Today, most Americans still receive their health insurance through group coverage (either from government or employers) that shares risk and cost between the healthy and the sick. Relatively few obtain insurance in the individual market, which exposes consumers to much wider variations in cost and coverage depending on their health. McCain's proposal would push more people toward the individual market (perhaps 20 million more, according to an independent study released this week) by replacing the tax break that promotes employer-based coverage with an individual tax credit.

Likewise, McCain wants to allow workers to divert part of their Social Security payroll taxes into private investment accounts, as Bush unsuccessfully proposed in 2005. Any system of private accounts would require future reductions in guaranteed Social Security benefits (because it would consume payroll taxes that are otherwise used to pay the benefits for retirees) and would make workers even more dependent on financial markets for retirement. "I think your money is probably better invested in America's economy than ... by a federal bureaucrat," McCain said last year. That might not seem so obvious after this week's eruptions.

Obama, by contrast, wants to strengthen the institutions that promote the sharing of risk. His health care plan aims to buttress group-based coverage, either through employers or new government-sponsored purchasing networks. He adamantly opposes private accounts under Social Security and would instead offer tax incentives for workers to invest for retirement in accounts intended to supplement Social Security's guaranteed benefits.

In all these respects, the McCain-Obama contest represents a fork in the road that will likely determine whether the nation continues to shift more financial responsibility to individuals, or seeks opportunities to restore more sharing of risk. This week's chaos on Wall Street, which rattled millions of workers relying on the markets to fund a decent retirement, shows how much average Americans have at stake in that choice. "This is a critical watershed moment," Hacker correctly notes, "because it really captures in sharp relief both the stakes and what the core of this debate is."

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