Grizzling baby boomers are showing signs of panic at their retirement life-style prospects, so New Age economics is in vogue. Fully-funded pensions are the crock of gold du jour.
But anyone who wants a really secure pension had better take to the hills, buy a bunker, stock up with 20 years of provisions, tins of spam, and bottles of Perrier. Or hope for a Russian style breakdown in health services, so that lifespans plummet below the pension age – at least for everyone else. Because our nest eggs are addled – unless the younger generations are prepared to shell out.As King Midas discovered so painfully, you can’t actually eat gold. And the same is true of money and other financial instruments – including fully-funded pensions.
Tell it not in Wall Street, nor in the City, but in the real world all pensions are pay-as-you-go. And lots of them are verging on being sophisticated inter-generational Ponzi schemes, dependent on a constant flow of new and naive punters.
When we say we’ve made provision for our future, what we mean is that when we click off our PC for the last time and shuffle our walking frames into that good evening, we hope those we leave toiling at the coal face of economic activity will forego a significant proportion of their income to keep us at the beach, on the golf course, or vegetating in front of daytime television. And that is true whether the necessary is exacted from them by taxation or by making them work harder and take lower salaries to pay off the profits and interest we think our investments entitle us to.
So if we want to go out with a bang instead of an impoverished and dependent whimper the key question must be: How we can sweeten the blow for them?
Of course, the government exactions on them will be more visible than the private ‘exploitation.’ This is especially true in the US where there is a fatal ambivalence about the Federal government. On the one hand, it is reviled as a sort of predatory neo-Ottoman state where the IRS almost burns huts and abducts children for the harems of Washington.
On the other hand, the people who resent the price of citizenship so comprehensively, also tend to be the ones who regard the government as a cornucopia to be uncomplainingly harvested by lawyers, arms manufacturers, farmers, senior citizens, and anyone else with a strong enough lobby on Capitol Hill.
In the face of such contradictory attitudes, Washington practises the most superficial prestidigitation. For Social Security, it operates a pay-as-you-go scheme based on an extremely regressive formula and persuades lots of anxious workers of a certain age that it is kept in a piggy-bank marked ‘not to be touched until I retire.’ Then it lends the proceeds to itself, and spends them, happily not including the ‘debt’ in its deficit calculations. With its ill-gotten gains it feels free to offer tax cuts at each election and keep gas tax at the lowest level in the industrialised world.
To exacerbate the scam, the system pays present voters far more than they have paid in, while postponing to future legislators the job of explaining to present contributors that there will not be enough in the kitty for them when they retire. And indeed that there is no real kitty at all beyond what generations Y and Z are prepared to spare.
Some people think that this scam should be ended, and the money put into equity investments. Well, fine. But then they’d better be prepared to pay double the income tax to meet the resulting shortfall in government revenue. Economies are dynamic systems and you can’t go on taking out more than someone else puts in.
Of course, if society as a whole invests in capital formation, or infrastructure development, then it enhances the prospects of a prosperous economy when you retire, growing fast enough for you to feel more sure that those future workers will buzz busily enough to spare us drones the occasional jar of honey.
The doomsday scenario assumes that the economy and productivity do not grow exponentially. But as we can see, a highly productive economy can just as well afford to pay pensioners as it can the military, lobbyists, journalists, investor relations officers and other occupations of dubious economic merit.
People speak as if social spending is in direct competition with employee earnings. In fact, of course, there are a lot of other things competing for resources, of much more arguable merit, such as B-1 bombers and the bloated remunerations of CEOs. Indeed, even as economists complain about the size of the deficit and the costs of Medicare and social security, this year legislators are offering the Pentagon a $14 bn top-up on the amount the military requested.
So there are hard choices to be made, but not necessarily the ones that are presented. We should all be taking measures, including savings, that enhance productivity. In the meantime, unless you have deep faith in what the future holds in store, storing spam derivatives in your bush is no substitute for tins of the stuff in your hand, or bunker.
A few prayers to any listening deity out there that Alan Greenspan doesn’t do anything catastrophically stupid with interest rates in his third (and fourth?) term would probably also not go to waste.
– The Speculator
