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Pension Ponzi

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http://daviddfriedman.blogspot.com/2010/12/promises-pensions-problems-proposal.html

You are a state governor dealing with a strike of state employees. To end it, you must offer them something. One possibility is to raises their wages. Another is to agree to a more generous pension plan.

Higher wages will come, at least for the next few years, out of your budget—and there are a lot of other things you would like to spend the money on. Higher pensions will be paid, almost entirely, from the budget of later governors. It looks like an easy choice. And, since you aren't the one paying, there is no good reason for you to be stingy in your offer, especially if being generous might end the strike sooner and buy you future political support from the currently striking union. Follow out the logic of the situation and one can see why many U.S. states currently face serious budget problems, in part due to very generous employee pension plans.

There is a fairly simple solution to the problem. Change the relevant laws so that a contract with the state government as a party is enforceable against that government only until the end of the term of the present governor. The governor still has the power to pay people with promises, but only promises that are binding for his current term in office.

Suppose, however, that pensions really are the right answer, that for one reason or another the state employees would rather get a thousand dollars worth of pension than a thousand dollars worth of salary, both figures calculated properly allowing for when and with what probability the money will be paid. The solution is for the state to provide pensions—and pay for them. That could be done by putting money into a fully funded pension plan. It could be done by buying pensions from a private firm. The one way it could not be done would be by making binding promises of future state payments.

My proposal does not, of course, solve all problems. The governor may have ways of binding his successors that do not depend on legally enforceable contracts—if he agrees to a pattern of wages in the future based on number of years of employment, it may be politically costly for his successor to reneg on that promise. And it solves the problem only for state governments. I will leave to readers the problem of how one constructs corresponding rules for the federal government.

Nor is the problem limited to governments. To take an obvious recent example, GM was able to buy peace with the UAW by promises of future pension payments. When it turned out that GM was unable to make those promises good, the federal government intervened to bail them out. Presumably the UAW's willingness to accept pensions instead of pay raises in part reflected their correct prediction that, if the situation arose, that would happen.

The same issue can arise, to some degree, even without government involvement. CEO's of private corporations are limited in their ability to make their performance look good at the cost of creating future obligations for their successors by the rules of accounting, which show, or at least are supposed to show, future obligations as present liabilities on the balance sheet. But the process is, given the limits of accounting methods, imperfect.

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I think he is stumbling in the right direction.

End all pooled pension schemes, be they private or taxpayer funded ones. Pay the pension money direct to individuals, who then have to decide how to save the money for themselves.

And never bail out pensioners who have blown all of their dough. You gotta have consequences for those who do not save, or else there isnt any incentive to save.

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They or you mean a 401K system like the USA then....

I see this as a cheat though, as what they mean is lets depool the pension pots and increase the fees on them! Thus allowing us to take even more so that every £100000000000 you put in you get £0.01 back.

Genius!

Edited by ken_ichikawa

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They or you mean a 401K system like the USA then....

I see this as a cheat though, as what they mean is lets depool the pension pots and increase the fees on them! Thus allowing us to take even more so that every £100000000000 you put in you get £0.01 back.

Genius!

If individuals were to manage their own pensions, total costs would fall, IMO.

You have to take into account that with lots of people managing their own pensions, companies will set up products to manage them, and they will have to be price competitive, as people care much more about their own money than a pension fund manager does when looking after the money of others.

Also, and this is a big plus, any shares owned individually can be voted on by the beneficial owners. That stops collusion between fund managers and executives to hoist executive pay to the stratosphere, increasing returns on shares.

And the point of the MBS housing scam was to relieve pension funds of their assets.

People will on average take a lot more care of their own money, less for Wall Street.

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  • 284 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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