Thursday, July 28, 2011

Rethinking Pension and Benefit Schemes

My July 4th post concerning America's Porkiest Generation was my first organized plunge into the mess that is the modern global entitlement society in any so-called developed nation.

Among the passages I feel most represent the core ideas of that post are these,

"What astounds and confounds me is that, for forty years, from 1935-75, apparently no economist of standing bothered to note that it was a mistake promise defined benefits, over time, from the proceeds of a national economy subject to the vagaries of recessions, depressions, monetary crises, global competition and occasional wars. After 1945, the same economists should have warned Congress not to use a temporary period of US economic hegemony as the baseline from which to forecast the availability of lavish wealth for decades hence, from which to pay ever-growing defined benefits of health insurance, care, and retirement pensions.

My point for today's patriotic post is to highlight how the generation that deserved credit for fighting and dying to win WWII promptly rewarded itself, through unionism and Democratic control of Congress, by promising itself defined levels of health care and old-age pensions which were never going to be affordable. The mistaken belief that a brief period of unrivaled American economic supremacy would endure and fund such lavish promises should have been challenged and crushed before it could become cemented into the American workers' expectations.

Can it really be that nobody was smart and courageous enough throughout the 1930s-1970s to point out this folly? That no society in history had ever managed the trick of working for about 30-40 years, then being paid near-working wages in retirement for another 20-30 years? That the mechanics of actuarial math and compounding wouldn't sustain those promises without economic assumptions never before seen in global economics?

What a Ponzi scheme, eh? You get control of unions and Congress, you pass laws to promise wildly unrealistic and unaffordable benefits to be paid by subsequent generations, then retire and complain when the next generation realizes what the Porkiest had done.

In my opinion, enacting foolish and economically impossible legislation and promises is no defense to simply stripping them away- now- totally- and reverting to defined contribution schemes."

As I understand it, the original social pension concept originated in Bismarck's Germany before 1900. FDR gave the concept a gigantic push with America's own Social Security program.

To be blunt, Michael Spence's recent Wall Street Journal article observing how Germany engaged in "wage and salary restructuring" for the period 2000-05 in order to attempt to regain some measure of global competitiveness, caused me to wonder whether Germany's social pension scheme has ever really worked? And whether America was profoundly misguided to look at Germany and attempt to replicate its program?

Let's admit that the fundamental reason for such so-called social safety nets is that people living in the most economically-advanced societies, with the highest GDPs/capita, are embarrassed to see people in their 60s, 70s and older going hungry, homeless, or suffering debilitating illness due to a lack of medical care. They instinctively think,

'Gee, our society is so wealthy in the aggregate. Surely we can allocate some money to provide for indigent old people, can't we?'

It sounds good in theory. But, as I wrote in that earlier linked post, consider these aspects of that "solution,"

"When you think about it, most of the intent of dedicated health care and old-age pension benefits have more to do with societally-enforced saving for these needs, and necessarily less to do with societal funding of them.

If all Social Security had ever been was a law to mandate workers and employers to dedicate defined percentages of the formers' wages to individual, single-use accounts, it's not clear that federal assistance would have ever been necessary.

After all, using federal funds to augment such accounts is simply a wealth-transfer from those making higher incomes to those making lower incomes. But if actuarially-determined amounts were deducted from compensation, federal funding never would have been required. Besides, society pays, either way. It's just that when the government is involved, it is taking from some to give to others, rather than have those others behave responsibly and live within their means."

You see, what we're really discussing here is a part of the social compact that nobody wants to, or has, to my knowledge, express simply like this,

'To be part of our society, along with obeying our laws, you must agree to save a socially-mandated amount while you are younger and working, so that the rest of us won't have to support you when you are old and no longer working.'

Instead, that got turned on its head, and became Social Security, Medicare and Medicaid. And now ObamaCare. Rather than force individuals to save from their earnings, in designated individual accounts to fund their post-retirement life, we somehow decided to just promise certain levels of payments to everyone from one big pot, or, really, four big pots now. This had the perverse effect of making people feel wealthy, because the government was going to magically give them defined sums of money when they got old.

How did these people consequently behave from the 1930s onward? Why, they saved less and adopted unhealthier lifestyles, of course, because some disembodied 'government' was going to pay for their older, sicker years. Meanwhile, they bought boats, more cars, second homes, and spent lavishly on themselves while younger.

Now multiply this by several times, to reflect the various economically richer, developed countries in Europe, South and North America and Asia which have followed this model.

See the problem? Actuarially, on a global basis, this concept of government funding defined cash or in-kind benefits for older people, was never going to be sustainable.

By failing to mandate individuals saving sufficiently from their own earnings to fund actuarially-determined amounts, and making clear that no government funds were going to be available to augment these, governments invited hyper-consumption by their populations while working, often including lifestyles leading to higher healthcare costs when retired.

The result is slow-growth, sclerotic European economies overloaded with debt, and America finally reaching its own fiscal tipping point.

Just because Bismarck's concept may have worked for whatever period of time it did, or that it took about 80 years, with periodic fixes along the way, for America's Social Security system to become bankrupt, does not mean those programs "worked."

It simply means that those of us around now to bear the cost of the long term unsustainability of these ill-conceived and -designed programs are the victims of a multi-generational Ponzi scheme.

That's why I see no reason whatsoever why any living American not already on Social Security, Medicare or Medicaid, should be shy about terminating those programs and putting their recipients on defined contribution replacements, funded annually out of tax receipts. With absolutely no time-shifting of funding of any sort.

The whole notion of lavish pensions and benefits appearing magically out of government coffers decades or centuries into the future is just foolish and impossible.

Monday's Wall Street Journal contained an editorial by Arthur Brooks, currently head of the American Enterprise Institute, entitled The Debt Ceiling and The Pursuit of Happiness. In it, Brooks argued that America's current deficit, debt and entitlement woes aren't simply economic in nature- they have have a moral component which involves the erosion and corruption of the Framers' original notions of liberty and freedom in America. Too much guaranteed this and entitlement that have caused people to look to the federal government as the source of their retirement and medical care.

It didn't have to be that way, and never should have been that way. Considering the fraudulent manner in which Social Security, Medicare, Medicaid and ObamaCare have been perpetrated on American voters, there is every reason to simply strip these programs out and move to defined contributions from the federal government's annually fluctuating tax receipts.

Despite various pundits' and politicians' constant claims that Americans currently on these programs "earned" those benefits, they did not. They never paid sufficient amounts of their incomes to fund the lavish benefits they now receive.

We have to redress that fraud now. That's really what the debt limit debate is about. I'll discuss that in tomorrow's post.

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