Archive for December 31, 2009

Modern Ponzi Schemes: Underfunded Pensions

December 31, 2009 4 comments

Anybody with the ability to perform grade school-level arithmetic can see the major problems with public or private pension plans in western countries.

1. The generation after baby boomers is smaller than them, and even the echo is, well, not quite as big. Given that the earning peak of people in western countries is in the 5th decade of their life, what is going to happen to the tax base? The fallback position for paying pensions involves using tax revenues.

2. Which stable and well-paying jobs are awaiting the generations after baby boomers? Selling each other houses, used cars, uncollectable insurance, innovation stifling regulation, writing worthless and harmful guidelines, arresting and guarding each other? Seriously…

and what will people work for? Maintaining marriages? Educating kids? Looked at the marriage and divorce rates recently? Ever considered the percentage of educated and never married men? What motivation or opportunities do they have to work hard? We overtly reward sociopaths and believe that others will just keep working hard and live honest, “law-abiding” lives.

3. Which idiot came up with the idea that a (per annum) 8% plus return, with simultaneous sub 2% inflation, on investment was possible over an extended period of time. Who is going to keep on propping up this asset/ equity/ debt bubble? Asian countries are busy devaluing their currency to increase exports. How can you extract money out of investments when everyone wants to sell them at around the same time (for paying pensions)? Who is going to buy them? And with what income or currency?

4. With the partial exception of the US, legal immigrants have poor earning abilities for reasons that are related to racial discrimination. The one group that could have stopped the tax base from collapsing have poor income, job stability and are generally not eager to help those who are perceived as mistreating them. Are older whites expecting a gift of unlimited money from extraterrestrial aliens to pay for their retirements?

Do older westerners believe that their system can stay solvent? Can even government pensions be paid with a shrinking tax base? Who will lend unlimited amounts of money, forever, to countries with shrinking tax bases? What about poor resource prices after a prolonged global slowdown? What about domestic deflationary spirals?

In my opinion, the economic effects of magical thinking over a prolonged period of time are greatly over rated.