The Problem With Pensions

More than 3 million demonstrators – one in 20 of all French people – marched yesterday against the President’s plans to raise the standard retirement age from 60 to 62,” reported the UK Independent last week.

In reality, the protests are not really about France’s retirement age. The French are free to retire at any age. There is nothing that prevents them from retiring from their jobs at 55 or 50 or even earlier should they be so inclined.

What the protests are really about is the desire of the French to begin state-supported retirement at one of the lowest retirement ages in Europe. For comparison, the retirement age in Germany and Denmark is 67. Britain is planning to increase pension eligibility to 68.

But the French have a problem: The government does not have the money to indulge its citizenry. The French state is broke. France’s pension program is currently running a €32 billion deficit. With increasing life expectancy and fewer young people in the workforce, the figure is estimated to double within a couple of decades.

The French government cannot afford to provide the kind of pensions demanded by the population. The French people, however, are apparently unimpressed by such excuses. They demand that the state provide anyway. And to get their way, they are prepared to turn their country upside down. This is how bad things stood last week:

Rail and air services were disrupted… Many schools and government offices, and even the Eiffel Tower, closed. Eleven out of the nation’s 12 oil refineries were wholly or partially closed in what local union branches threaten could become an indefinite stoppage to topple the pension reform. The state railway company, the SNCF, warned last night that it expected widespread cancellations…

This is a truly desperate situation: The impossible is demanded and social disorder is threatened if the impossible is not delivered. The state cannot make good on its promises and the citizens refuse to acknowledge that fact.

The coming on of this impasse was not unpredictable, i.e. a black swan. It was, in fact, unavoidable. This is because no government can provide for the well-being of its citizens over the long run, be it through healthcare, employment or retirement. All such efforts inevitably culminate in fiscal calamity, which then morphs into social crisis.

Experience shows that all large-scale public retirement programs sooner or later turn into Ponzi schemes whereby pensions of current retirees are drawn from taxes paid in by the working population. Due to falling demographic trends that afflict welfare countries, there inevitably comes a point a point when the racket runs out of money. The citizens, however, do not easily relinquish the promised goodies. The politicians in charge have to give in if they want to stay in office. The enraged populace will accept nothing less. Kicking the can down the road is the pretty much the only option for politicians in modern western democracies where people have been conditioned to be taken care of by their government. But deficits and borrowing cannot go on forever. Things must eventually come crashing down, and in a bad kind of way.

This fatal dynamic is also playing itself out in the United States, where the government has promised to provide for citizens in their old age. This is a high-sounding notion, but one that can never be fulfilled. As in France, the US government is broke and in no position to deliver on its promises. Estimates of entitlement liabilities inherent in Social Security and Medicare range from $65 trillion to more than $200 trillion. Even the lower end estimate is completely out of the realm of fiscal possibility.

Nor will anything be done about it, since it is not for nothing that entitlements are called the third rail of American politics. Politicians just keep kicking the can down the road while contracting ever greater debts. Bad though they may be, it is wrong to blame the politicians for our woes, for they ultimately only do our bidding. The idea that Social Security needs to be scrapped would not go down well with the voting public.

We set out on the road to fiscal woe when we fell for that great lie: that the state will provide for our well-being and welfare. But this is an task that cannot be accomplished. Despite what we have been told, the state cannot provide education, retirement and job security over the long haul. The only way to have these things is to obtain them through our own efforts.

Self-reliance is not always easy, but it can be done. Our ancestors showed us how. They managed to live in functioning civil society with almost no federal involvement. There was no Social Security or government healthcare then. It bears to keep in mind that they lived in a technologically far less advanced age, when life was much harder than it is today. And yet they did not look to the state to take care of their needs. They did what they had to do themselves.

Why could we not do the same? Why do we instinctively turn to government the moment we encounter trouble or experience a need? It is this attitude that in the final analysis accounts for the fact that we are now broke as a country. In a mob democracy such as we have today, the state’s tendency is to promise all things to all people. Unfortunately, this can never work. It is a lie.

The choice we face is stark: Either we summon the strength to face the truth and choose to follow the path of self-reliance treaded by our forefathers, or we will continue on the road to doom with open eyes. The former would certainly seem the more courageous and sensible way. It would also be much less painful.

Signs of an Empire in Decline

Often one of the most reliable means of predicting the future is to look at the past. Historians such Edward Gibbons, who wrote The Decline and Fall of the Roman Empire, and Paul Kennedy, author of The Rise and Fall of the Great Powers have provided useful insights into the warning signs of imperial decline.

One of the most commonly cited warning signs is “imperial overstretch”, which is a mismatch between political and strategic goals and economic and fiscal reality. One has to look no further than US military spending. Current US military spending is equal to that of all other nations combined. The United States empire is also extraordinarily far flung. Defense Department data reveals that United States has 737 bases in 130 countries around the world. This does not include the 6,000 bases located in the United States and territories. In addition, the military owns or rents more than 28 million acres of land and $600 billion worth of real estate.

Another sign of impending imperial demise stems from a pattern of fiscal irresponsibility and increasing economic malaise. At the end of World War II the United States was producing about half of the world’s goods. Since then the country has lost significant ground economically, in part because of growth in in emerging economies, but also because of misguided policies that have encouraged the outsourcing of jobs and production to those same emerging economies, over-emphasis on financial “engineering” and a decaying work ethic. The United States has gone from being the world’s largest creditor to its biggest debtor. The US current account deficit stands at approximately 5.5 percent of GDP, more than $770 billion. This persistent and growing imbalance requires capital inflows of more than $2 billion per day, much of it borrowed from countries like the United Kingdom, Japan, China and Saudi Arabia.

Economic growth over the past 30 years has increasingly been fueled with borrowed money at all levels of the economy. The federal government has long run deficits in the multiple $100 billion range. Those deficits have been completely eclipsed by the current administration’s trillion dollar deficits. And there is no end in sight. At the end of 2009 total public and private debt reached and extraordinary 370 percent of GDP, based on data from the Federal Reserve. That far surpasses the previous record of 300 percent set at the height of the Great Depression. Stagnating inflation-adjusted wages, deteriorating household balance sheets, increasing inequality between the rich and everyone else, and the fallout from the devastating financial crisis only add to the decay.

US Debt to GDP

Also marking the twilight of past empires has been what can be described as an epidemic of cultural, moral and social decline. The United States has gotten soft. People prefer watching or pretending instead of doing. Our public education system is arguably a joke.

Social standards have slipped. Manners and respect for the elderly have fallen by the wayside, replaced by crude language, widespread disrespect for authority and YouTube exhibitionism. Sound argument is overrun by sound bites and facts are eclipsed by feelings and fantasy.

The conclusion is inescapable. The United States is an empire in decline – economically and socially. The repercussions of that decline is something that nearly every American is going to have to live with. But that is the subject of another post.

On the subject of America in decline – Gains, Pains & Capital recently published a worthwhile article.

http://www.gainspainscapital.com/index.php?option=com_content&view=frontpage&Itemid=28