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Penzions and Politicians

Aren’t you glad you’ve got a state pension! I know I am. It’s just great to know the government cares about us and will look after us in our old age. Kind of like having parents, only better because it’s even bigger and even stronger, and not selfish like parents are. (Also, more likely to be around at that point.) And it works so well too. You just pay money in and later you get more out. I know this because I can see pensioners getting their money out now. Obviously the money is properly invested and gives an excellent return. So I simply cannot understand why the party poopers are maundering on about dangerous pension liabilities leading to unsustainable government deficits and debts. Don’t they believe what the prime ministers and presidents tell us?

Look, here is what President Obama is saying, and if he doesn’t know what he’s talking about then I just don’t know who does:

To put us on solid ground, we should also find a bipartisan solution to strengthen Social Security for future generations. And we must do it without putting at risk current retirees, the most vulnerable, or people with disabilities; without slashing benefits for future generations; and without subjecting Americans’ guaranteed retirement income to the whims of the stock market. (State of the Union Address, January 2011)

I wonder what he means about ‘put us on solid ground’…. hmmm. Anyway. See. No problem. Pensioners can have all their pensions now, and it doesn’t matter how the economy goes because pensions are guaranteed by the government to be just as good in the future. You see, unlike that guy in Enron, you know, the one who was protecting Enron against losses by capitalising ‘independent’ companies with Enron shares, which ‘independent’ companies promised to pay Enron whatever amount Enron shares went down in value (yeah, seriously, what an idiot, eh! but that’s capitalism for you), the government knows how to make these things work.  And that’s what I want from a government. Promises of what we want at very cheap prices (like Walmart, only moral instead).

I expect you have seen that cruel parody of the President’s wisdom, you know, the one that goes

To keep me from going bust we should also find a solution, agreeable to both our investors and me, to strengthen Bernard L. Madoff Investment Securities for future investors. And we must do it without putting at risk current investors, who deserve special privileges and are the most vulnerable (apart from me); without slashing returns for future investors; and without subjecting investors’ guaranteed investment income to the whims of the stock market.

I mean, obviously that’s complete nonsense. Bernie Madoff never invested the money at all. He simply took money in from new investors and paid some of it out to old investors and spent the rest on himself and his cronies.

What? Well, yes, OK, I suppose technically that means that he didn’t subject the investors’ guaranteed investment income to the whims of the stock market. Ha Ha. Very clever.

Sorry? The government hasn’t got the money invested either? So what’s it been doing all this time? Taking in money from workers, paying some of it out to pensioners and spending the rest on the government and its cronies? You’ve got to be kidding me. You’ve just been taken in by propaganda. What are you, some kind of an anarchist?

Well, alright, I suppose it doesn’t matter what kind of an nut case you are. What matters is whether what you say is true. But it can’t be true because if it was there’d be no difference between a Ponzi scheme and a pension scheme….

Yes, they’d be Ponzions. Very droll. Keep the day job if I were you.  As I was saying, obviously there is a difference. Ponzi schemes are immoral whereas state pension schemes are very moral, so you’re just wrong.

You can prove it? How? Look where? There? Yes, I see

Pension arrangements provided by the state in most countries in the world are unfunded, with benefits paid directly from current workers’ contributions and taxes.

Hmm….No, but look, it says that in the US the ‘Social Security is funded by investment in special US Treasury Bonds’, so that’s alright then.

How does that work? Well, the workers give their money to the government and the government spends the money and signs pieces of paper promising to pay that money and gives the pieces of paper to the social security fund. Now, and here is where you need to pay close attention and martial what you can of your inconsiderable intellect to attempt to grasp some basic economic ideas… so I’ll go slowly:   those       pieces      of      paper     are     bonds, don’t you see, which makes them investments.  So you’re wrong again.

What? Yes, of course the social security fund is part of the government. That’s the whole point. You can rely on the government for this kind of thing because, unlike businesses, the politicians in charge are there for us, so obviously they are the best people to have our pensions in their hands.

So the investment is just a promise that the government gives to itself to give itself some money? Yes, I suppose so. Nothing wrong with that!

You say it’s like writing a promise to your left pocket to give it some money from your right pocket and thinking your trousers have got an investment? Please try and keep up. We’re not talking about hosiery!.

Huh? No, of course it’s not like Enron giving itself its own shares so it can sell them to give itself some money if it goes bust. If it goes bust no one will want to buy its shares (that’s the bit the guy at Enron got wrong!). Whereas the government! Completely different.The government doesn’t just write itself promises. If no one else want to buy the special social security bonds it gives to the social security fund it can print its own  money to buy them, whereas obviously Enron couldn’t do anything like that.

Nooooo! Of course I’m not saying that the only thing Enron got wrong was it forgot to buy a printing press. For God’s sake! Look. Don’t you understand? Politicians are good people who care about us whereas Enron was just a bunch of greedy businessmen out for themselves.

What about the other countries? Well, yes, I suppose that makes you right about them.  OK, smarty pants, so you’re very good at this being technically right about all the wrong things. Aristotle had a word for people like you. What we need, though, is phronesis, practical wisdom. Unlike you, I’m not obsessed with with meritricious factuality. I care about people’s welfare and you’re ignoring what matters. It’s not what is done with the money but what is promised. What Madoff did was wrong because he promised but couldn’t deliver, whereas what the government does is right because what it promises it can deliver. After all, if necessary it can make people carry on giving it money so it can pay out and Madoff couldn’t do that.

What? No, I’m not saying the only thing the Madoff got wrong was that he lacked an army.  Good God! What is the matter with you? Don’t you trust politicians? Look, I just don’t think there’s any point in carrying this further. Maybe after you’ve learnt a bit of respect for your elders and betters who undertake the burdens of office, and a bit of real economics wouldn’t go amiss either, but until then, Goodbye!

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2 Comment on this post

  1. So Ok, let’s really get into phronesis, if that’s what it’s called :
    Why, Dr Shackel, do you stop at Penzions ?
    You just pay in money to pay for schools and armies and roads and policemen. You just pay money in and later you get something in return, if you have kids, drive a car, want to walk the streets safely, or simply want to kill the bad guys.
    I know this because I see schmucks and other immoral nutcases doing these things, right now. But they all ignore real economics and forget that it’s mainly thanks to taxes and government bonds, just like penzions.
    Let’s call the whole thing off.

  2. The organising principle of a state pension scheme is exactly the same as a Ponzi scheme – I am surprised you seem to have just worked that out. Effectively governments borrow money from future taxpayers to pay current beneficiaries. The difference is that the government does this because it has not charged enough in taxes or NI contributions to fund the benefits (if you want to know why, have a look at the change in life expectancy since 1945), while Madoff, Ponzi and others did it because they were stealing the funds. Your argument that governments, like Madoff, spent the money on other things rather than investing it, was true in the early days of state pensions in the 1940s and 1950s, but has long since vanished into history, as the cost of pension payment is already running above the sums being collected, at least in the UK.
    How would you propose this is fixed? Triple the rate of contributions to the state pension for a decade or two? Cut the already meagre pension in half? Raise the pension age to 75? All these would be actuarially sound but not very popular with voters of all political stripes.
    By the way Obama's point about "not subjecting Americans’ guaranteed retirement income to the whims of the stock market" opposes the STOCK market (equity shares) to the BOND market (fixed income securities). He is not saying that they are not investments. While over most periods (but not recently) equities outperform bonds, their returns are much more volatile and it is not unreasonable to argue in favour of pension assets being kept in bonds. Most pension funds have a mix.

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