There are three classes of pension systems in the USA:
1) Pensions that are exclusively governmental. They apply only to government employees and are managed exclusively by government.
2) Pensions that are partly governmental and partly private. They serve employees of private employers but are managed by the government. Social Security is the prime example.
3) Pensions that, except for some government regulation, are completely private. They serve the employees of private companies and are largely managed by private entities.
Last week, in “Pension Panic,” I argued that financial problems facing the first class of pensions (cities like Detroit and Chicago and states like Illinois) were evidence of a growing problem confronting retired government employees: the purely governmental pension plans would be among the first to be “sacrificed” and looted by their former government employer, leaving the government retirees bankrupt.
This week, I’ll consider problems faced by the second class of pensions—those that are partly governmental and partly private—like Social Security.
The “Risk of Longevity”
Wikipedia defines “pension” as follows:
“A pension (a/k/a ‘retirement plan’ or ‘superannuation’) is a contract for a fixed sum to be paid regularly to a person, typically following retirement from service. . . . Retirement pensions are typically in the form of a guaranteed life annuity, thus insuring against the risk of longevity.
How odd. Pensions protect us against “the risk of longevity”. Apparently, it’s risky to live a long time. Does it follow that we may be safer in death than in old age?
Actually, that odd definition makes sense. The idea, of course, is that we might live longer than we’re able to independently provide our own food, shelter, and basic needs by means of our own savings and/or our own work. As a result of such “excessive” longevity, senior citizens might regularly find themselves living in poverty that they can’t escape or endure. In the midst of such poverty, seniors might be condemned to die a slow, painful death characterized by homelessness, neglect, fear and, ultimately, starvation. In order to make our last years more comfortable and safe, we have pensions.
But note that if the “risk of longevity” was originally and naturally assumed by each individual, each individual was responsible for saving funds for his own retirement. However, thanks to pension programs, the responsibility for each individual’s “risk of longevity” is now transferred to some other entity.
For example, my “risk of longevity” was formerly imposed on me alone and compelled me to be responsible for saving enough of my own earnings to survive whenever I became too old to work. Today, however, for most people, the “risk of longevity” has been assumed by the national government under the guise of Social Security (SS).
But, we can wonder if we’re truly safer when we transfer our personal “risk of longevity” to the government. This doubt is reasonable because, if we found ourselves in circumstances where the government could no longer afford to assume the “risk” of my “longevity,” would government be compelled to reduce, abandon or even terminate that “risk”?
Today, we’re in or near such “circumstances”. As a result, we have a “pension crisis” which Wikipedia defines as,
“. . . a predicted difficulty in paying for corporate, state, and federal pensions in the U.S. and Europe, due to a difference between pension obligations and the resources set aside to fund them.”
Note that pension crisis is based on two fundamental causes:
1) high and/or growing pension “obligations” (costs); and
2) insufficient “resources set aside” (savings, primarily) to pay current pension obligations.
As you’ll read, the government is much concerned with the first cause (growing pension costs) but reluctant to discuss the second (“insufficient resources set aside”).
Growing pension “obligations”
Wikipedia explains that pension “obligations” are growing because of “shifting demographics” caused by a lower ratio of workers to retirees.
In A.D. 1940, there were 160 workers contributing to SS for each retiree who collected a SS pension. In essence, each worker had to contribute enough money each year to support one retired person for only about three days. The cost to each worker of providing SS for reach retiree was almost trivial.
Today, however, due to the “demographic shift,” there are less than three workers contributing to SS for each retiree who’s collecting a SS pension. Thus, each of today’s workers is obligated to pay for at least four months of the annual living expenses of one retiree. The resultant burden on workers—and government—has become almost too large to bear.
This “demographic shift” (too many retirees; too few workers) has been caused by a several factors:
1) Retirees live longer. Back in A.D. 1940, most retirees died just two or three years after retiring and therefore imposed only a short-term burden on workers contributing to the plan. Today, retirees may live for two or three decades after retiring and thereby impose a much greater cost on the SS program.
80 years after assuming Americans’ “risk of longevity,” the costs of SS are exceeding government’s ability to pay.
Solutions: This substantial “risk” of retirees collecting SS for decades after they retire could be mitigated by: a) raising the retirement age from 65 to, say, 70 or even 75; b) reducing the retirement benefits paid to retirees from, say, $1200/month to $800/month; c) inflation which allows government to pay off on SS with “cheaper dollars”; and/or d) by instituting programs (ObamaCare) that deprive senior citizens of adequate medical care and thereby shorten the seniors’ life expectancy. (If I were to kill a senior citizen, it would be murder. If government uses ObamaCare “death panels” to causes seniors to die, that’s just sensible public policy.) By such means, government can reduce the “risk of longevity” and associated costs of Social Security.
2) Lower Birth Rates—the number of SS contributors is falling. Social Security is a pyramid—a Ponzi-scheme—that depends on the number of American workers to grow in direct proportion to the growing number of American retirees. Unfortunately, we’re not creating enough new workers needed to keep funding Social Security so the Ponzi-scheme is in jeopardy.
I’ve seen a recent estimate that it costs nearly $250,000 to raise a child from birth to age 18. Thanks to rising taxes, inflation and global free trade (lower American wages), many Americans can no longer afford to raise children. Result? We also can’t afford to raise the children who might otherwise become the new workers needed to support SS.
Solution: Increase immigration. By inviting millions of third world legal and illegal aliens into this country and persuading them to contribute to SS, the ratio of workers to retirees can be increased to a point where SS isn’t such a painful financial burden on current workers. Of course, by increasing immigration from 3rd world countries, we’re compromising or destroying the culture that helped make this country great. Thus, we may be destroying America in order to perpetuate a government’s SS program.
3) High unemployment. Thanks to the recession and global free trade, unemployment is rising. As unemployment rises, less people have jobs and those that do, are paid lower wages. With higher unemployment, there are fewer workers to contribute to SS and less funds to support retirees.
Solution: Stimulate an economic recovery. But that’s been tried for five years without success.
“Insufficient Resources Set Aside”
The second cause for the pension crisis is “insufficient resources set aside” (saved).
Just in case you suppose that there’s plenty of money saved in the SS bank accounts, you might note that we’re within a month or two of our next congressional “Debt Ceiling” debate. You might also recall that in our last Debt Ceiling debate in A.D. 2011, President Obama warned,
“If we default, we would not have enough money to pay all of our bills—bills that include monthly Social Security checks, veterans’ benefits and the government contracts we’ve signed with thousands of businesses.”
In other words, SS is broke; it has no funds in the bank and is completely dependent on funds flowing from the national government. SS only survives and is able to send out SS checks so long as the national government can go deeper into debt and give some of its newly-borrowed funds to SS.
As you’ve already read, when it comes to reducing the first cause (growing SS obligations) for the current “pension crisis,” government has a fairly broad spectrum of possible solutions.
However, when it comes to dealing with “insufficient resources set aside”—Wikipedia reported a fairly limited array of government responses: Gov-co could help fund future SS pensions by “increasing contribution rates and raising taxes”.
Ahh, yes—the holy grail of all government—to raise more taxes and drive more people deeper into poverty in order to justify even more government programs.
Gov-co implicitly declares that, gee whiz, due to some unforeseen increases in SS costs caused by “shifting demographics” and such, it’s now necessary to raise SS contribution rates and/or taxes on today’s workers.
On today’s a pay-as-you-go SS system, that might true. But what about the save-as-you-go system that Americans orignally supposed SS to be? What about the money that I’ve been “putting aside” (saving) in my personal SS Account for the past 40 years?
Abandoning the “save-as-you-go” SS system is no small problem.
My step-father was not an intellectual, but he was a hard-working owner of a small business and no dummy.
For reasons I can’t fathom, I still clearly remember him talking to me about SS back about A.D. 1959. He said that if a man invested as much in private savings in a bank account each week as he contributed into SS then (thanks to compound interest rates and having a currency that was still backed by silver) by the time he retired, he’d have a nest egg of over $1 million in the bank.
I don’t know if my step-dad’s mathematical conclusions were accurate, but I have no doubt that the principle was correct. If the wealth that you’ve contributed to SS over the years had been invested in an individually-discrete bank account in the form of a specie-backed currency, today your retirement principal would be at least hundreds of thousands of dollars and possibly over $1 million.
That $1 million would be a huge cushion in the event of an emergency or if you wanted to buy a retirement home in Florida. If you spent $30,000 per year on retirement ($2,500/month), your private savings could last you over 30 years—and it wouldn’t be a burden on current workers. If you died at a fairly young age, the remainder of your savings would be left to your heirs and assigns.
However, by making the same contribution to SS over the past 40 years, after you retire you might receive $1,200 a month (maybe less). You’ll be pretty much tied to your existing home or perhaps a small apartment and have little opportunity to travel or invest in a retirement home. If you died at a fairly young age, there’d be virtually nothing left for your heirs or assigns. Whatever excess funds you’ve “contributed” to SS will remain with the government. (Given that government might profit from your death, thanks to SS, government has an interest in seeing you die.)
With private savings (instead of SS), we might each have $1 million (maybe more) in the bank when we retired. We’d have assets for emergencies and a sizable estate to bequeath to our children. With SS, we have little for ourselves and nothing to leave to our kids.
That means that during our lives each of us may have earned enough to retire as a millionaire—but thanks to SS, we’ll instead retire near the poverty level. What happened to our earnings? Where’d they go?
A: the gov-co got ‘em.
The gov-co has been robbing you and me since the first day we contributed to SS (or at least since A.D. 1971 when government turned the dollar into a pure fiat currency). The government has understood all along that SS is a Ponzi-scheme that would inevitably collapse and leave an entire generation of the “little people” (that’s those of us who work as employees in the private sector) busted.
There’s never been a moment when people at the top of our gov-co doubted the ordinary SS contributor would eventually be robbed. There’s never been a moment when government doubted that the money you earned and you saved was better spent by gov-co than by you.
Given that SS was intended from the beginning to rob the American people, it makes sense to suppose that gov-co is still determined to steal whatever remains of SS funds. Gov-co intended to rob Americans SS “savings” back in the 1930s and will no doubt complete that robbery in the foreseeable future.
There’s no such thing as a personal SS account and whatever money I thought I was saving in SS has been long spent by the national gov-co. My “personal SS account” (if there were such thing) holds zero dollars.
In the end, any saving achieved by reducing SS costs or raising SS contributions will be consumed by increases in governmental size and spending rather than in increased benefits for retirees. The national government is the primary predator consuming SS retirements funds that have already been accumulated.
Evidence? There are rows of filing cabinets full of gov-co bonds at the Social Security Administration offices. These bonds memorialize the “loans” made from SS to the gov-co over the years and the gov-co’s correlative promises to repay those loans.
The fact that government has borrowed nearly $3 trillion from SS–even more than it’s borrowed from China. This borrowing is evidence that those funds weren’t originally intended to be the government’s property. Instead, those “contributions” were supposed to be ear-marked exclusively for SS use in a “save-as-you-go” SS system wherein each SS contributor saved a little out of every paycheck to fund his retirement account.
The average American supposes that the gov-co has collected SS contributions from him over the years and those contributions are being held in a discrete bank account with the contributor’s name on it. It’s commonly assumed that those contributions will remain untouched until that particular person retires and begins to collect “his” SS pension payments.
Nothing could be farther from the truth.
In fact, gov-co has been borrowing and spending SS contributions as fast as they came in the door for decades as if SS was always intended to be a “pay-as-you-go” system. Under this “pay-as-you-go” system, today’s workers and taxpayers are expected to pay however much is necessary to support today’s retirees—but no SS participant actually save any funds for their own retirement.
As a result, instead of bank accounts filled with trillions of dollars, the SS Administration has rows of filing cabinets filled with the national government’s promises to repay the money that’s already been “borrowed” from SS. The problem is that the national government is so deep in debt that most of its debts (including those to SS) will never be repaid. That means the time is coming when SS will have to renege on its promises to provide pension checks to all of the current retirees.
Therefore, when it comes to discussing the problem of “insufficient funds set aside” (saved), gov-co is fairly tight-lipped. Gov-co doesn’t want to admit or even discuss the fact that the “insufficient funds” (no savings) problem has been largely caused by government having “borrowed”/looted funds saved in the SS account. The SS problem is not that you and I didn’t save enough for our retirement. The problem is that government has already borrowed and squandered our savings and has little intention or capacity to repay those loans.
In fact, government has already spent most of SS contributions and is looking for a way to avoid having to make good on its promises to repay its debt.
I can see six possible solutions to the gov-co’s SS debt crisis:
1) Raise the retirement age to 70 or even 75;
2) Change the formula used to calculate SS benefits. I.e., promise to pay today’s worker, say, $1200 a month 30 years from now, but when 30 years rolls around, change the “formula” so as to reduce that debt to say, $900 a month.
3) Inflate or hyperinflate our fiat currency so as to pay off the SS debt with much cheaper dollars;
4) Allow illegal aliens enter the country; get ‘em to contribute to SS for the next 20 years, and then rob the illegals 20 to 40 years from rather than existing American nationals;
5) Openly repudiate the SS debt and say “to hell with the SS retiree’s”;
6) Kill the creditors (retirees) and thereby reduce the gov-co’s debt (ObamaCare may help achieve that objective).
But, no matter how you slice it, what can’t be paid, won’t be paid.
The fundamental challenge to SS is government debt. The government is too far in debt to ever repay all of its bonds. One of the biggest chunks of that debt is owed to current and future SS retirees. Thus, one way or another, the SS retirees will be robbed by the government.
It’ll take a few more years, but the time is coming when your Social Security pension fund will be clearly seen to be every bit as bankrupt as the government pension plans of Detroit, Chicago and state of Illinois.
No one’s pension that’s owned or operated by the government is safe. Those who are trusting their retirement to government pensions and/or Social Security are in peril. Many of you will collect at least part of those pensions. But, many, maybe most of you will be robbed—by your government—and left to reassume your own “risk of longevity”.
That means that if you want to have some money to support yourself after you retire, it’s up to you to earn that money, save that money in a form that’s not easily assaulted by inflation, and shield that money from government confiscation.
Gold and silver (of course) come to mind.