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Wednesday, October 27, 2010


From the Mouths of Babes

When the study of economics first bit me, I wondered whether Social Security will have a check waiting for me upon retirement. Lately I've wondered whether our proud nation will remain financially solvent by the time I graduate. Such thoughts never crept into my mind as a child. During that blissful era, our country enjoyed decent growth rates, internal peace and freedom from foreign military invasion. Such were the ingredients for the perfect recipe to create a historically unique situation in which I engorged upon the fruits of millenia of hard work by millions of men and women and their accumulated sacrifices for future consumption. But those good times seem more distant now. Even the state governments with which we entrust our hard-earned tax dollars can't seem to avoid the decline that Mancur Olson predicted would come at the hands of distributional coalitions. The recipe for future generations seems soured with indebtedness to the rent-seekers of the present.

Eileen Norcross of the Mercatus Institute at George Mason University studies the funding of all the state employees' retirement accounts. An October 16th article in The Economist cites her finding that "21 states have failed to make their full contributions to their pension funds over the past five years." While this chronic underfunding may not cause alarm bells to ring in the popular media, its implications are deeply disturbing.

America owes much to its public sector - literally. At the municipal and state levels, millions of service employees are scheduled to receive defined-benefit pensions, which link retirement income to salary. While the private sector switches to defined-contribution plans in which employees bear the investment risk, civil workers' rent-seeking organizations and lobbies have successfully negotiated with elected, vote-seeking representatives to achieve unprecedented levels of retirement payments to be paid with an increasing share of tax revenues. During periods of strong economic growth, many governments have increased the promised pension payment to employees, partly as a means to attract new hires in a shrunken pool of available labor, as well as to keep the existing ones from leaving for the free market. These promises of future public wealth to a small percentage of the working force serve two functions: they lead to more votes from organized labor and the beneficiaries of public projects, and they spend the potential capital accumulation of the young and their offspring.

Predictions of fund growth by state pension advisors are criminally unrealistic. How could a rational person, especially one considered knowledgeable in finance and wealth management, expect pension funds to return 9% growth per year EVERY year? Yet this was the expected return presented to many state treasurers, who subsequently recommended lower taxes and lower payroll contributions, bragged of balanced budgets, and rode the wave to reelection by a deceived electorate. Across this country, the majority of state governments gave in to pressure from employees' groups and promised unsustainable benefits ($5.3 trillion). That means that We the People are legally bound to maintain payments and benefits to retirees who, in many cases, may live at least 25 years in retirement. Since our elected officials and their agents agreed to pay public service retirees an amount that requires unprecedented market returns, one can only conclude that those who signed away the wealth of future generations were either fools or unjust.

The laws of this country hold parties to a contract, like public employees' pension plans, bound by the terms and duties. What about our duty to those we burden who currently have no voice?

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