Law Firm Profits and Social Security: The Same Model?

In one of those about-to-fall-asleep, mind-is-wandering moments, it occurred to me that law firms are financially structured a lot like the US Social Security system. I wish I could give the genesis for this thought, but I was lucky to retain the overall analogy. However, it may have come from Ayelette’s post about my recent dark and forbidding predictions.
Social Security (SS) is structured such that workers (a.k.a. contributors) pay into a system that passes this money along to retired folk (a.k.a recipients). When you pay in to SS, you get the impression you are building an account that will pay you back, but the reality is you are merely building eligibility to receive benefits from future generations of contributors.
In law firms associates and other non-partners are the contributors who generate profits that are then passed on to the partner/recipients. Becoming a partner puts you in-line to reap the benefits from future associate/contributors. The differences between the systems are two-fold. First – unlike most retirees, partners are still contributing to the system via their own billable hours. Second – whereas workers contribute for decades into SS, associates only contribute for 7 to 10 years in to the profit pool before they become recipients.
The two systems share one weakness: The pool of contributors must be of sufficient size in order to maintain the payments to the recipients. Currently both systems appear to be facing a “contributor deficiency” situation.
I’m not sure which one will be the hardest to fix.

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Anonymous said...

There is also billable staff that will never withdrawal from the profit system. While I have no numbers, I question whether there is an increase in this number of staff to continue the pyramid system. Clerks, paralegals, lit support, contract attorneys, staff attorneys, counsel. (Perhaps others)

Toby Brown said...

In response to Anonymous: An obvious way of solving the "contributor deficiency" problem is bringing more non-partner track timekeepers into the system.

However, the legacy mind-set of most firms is that they need the best and brightest to remain competitive, so their hiring remains focused on partner-track associates. Another emotional barrier to adding more non-partner track lawyers is the stigma of appearing to be a commodity firm.

Some firms have de-equitized partners hoping to address the issue by mitigating the number and level of "recipients." But this appears to more of a band-aid than cure.


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