Why Governments Love Pensions

While growing up, my parents, like most parents, tried to give me as much information about different career paths as they could to help guide me in my life choices. I remember my mother telling me about how the benefits, particularly retirement, were often better for most government jobs though the pay usually lacked. She would say: “If you want to go into the military, go in as an officer. Stay in for 20 years and you will secure a great retirement in your early 40’s.”

At the time, I wasn’t all that concerned about retirement, but I listened and remembered those words. Now I remember those words, not in choosing a career path but when seeing stories of how various government pension funds are underfunded and likely doomed.

I have now realized why government jobs offer great pensions. Politicians want talented skilled workers to run various government services; from fire and police departments to the military, garbage collection, road construction, and everything in between. Makes sense right, better workers equals better services, and better services results in happy constituents and in turn getting re-elected. Unfortunately good workers want fair compensation and that means raising revenue through unpopular taxes. Of course, they could borrow but to make it easier they could just borrow the labor from those same workers. Sovereigns take this to a whole new level and require government pension funds and social security funds to loan their money back to the government, conveniently reasoning that government bonds are the safest of investments. Could you imagine a private retirement fund loaning contributions back to themselves?

With the taxes raised, local, state, and federal governments could not afford the skilled civil servants they want. Then again, if they offer to pay them in 30 or 40 years, with a great pension, they might be able to sucker some great workers into doing the job for a far lower wage than they would be able to command in the private sector. This is perfect for a politician, they hire great people to supply good services to constituents, and get to take the credit while in office. They don’t have to worry about making good on those promises since they will be long since retired. Making good on those promises will be someone else’s problem.

Everyone is happy for a while, until the retirees want their money, and the underfunded pension funds can’t meet those obligations. This goes back to debt taken on by fools analogies covered here. It would be nice if the government pensioners could collect from those that they provided services for, but those people are also retired and not paying the taxes that would cover the shortfall. It is their children and grandchildren who were not alive when the services were provided, or at very least not aware of the arrangement that are now on the hook.

Different government officials will do their best to pit the children and grandchildren against the retirees, painting the retirees as greedy, and taxpayers as cheap when in front of the relevant audience. This is only to keep the focus from the real issue; governments have a natural tendency to commit this type of Ponzi fraud if not controlled through proper laws. Anyone who thinks we have those types of laws should now realize that they are only superficial as evidenced by the various failing pension systems.

Potential Employee-In my last job I was making $62,000 a year.

Mayor: Oh no we can only afford $48,000.

Potential Employee: Well what about benefits?

Mayor: Well the health insurance isn’t very good.

Potential Employee: And retirement?

Mayor: Retirement? Yeah…well in 20 years at 55 you can retire with 85% of your salary for the rest of your life...yeah that’s the ticket.

Suckered Employee: Wow my current employer doesn’t even have a pension and only matches 3% on my 401k...when can I start?

The simple solution is an overhaul of the pension system. It is not possible to give a guaranteed nominal benefit amounts based on ASSUMED returns. Currently, the precedent set has dictated that the employer is responsible for shortfalls in that assumed return, but this does not take into consideration the ability of the employer to pay. The employer could be bankrupt, such as in Detroit. Instead, pension benefits should be based on a formula giving beneficiaries a percentage of the pension trust fund. The formula to find that percentage would be quite simple, it would be the amount paid in, multiplied by the fund return during the time that money was invested, minus benefits paid, all divided by the current total fund assets. This way if the fund was invested in mortgage-backed securities, stocks, gold, or government bonds that lose half their value, benefits simply get cut in half. There is no litigation to get blood from a stone. Your benefit is what it is, is self-correcting, and would not affect future beneficiaries. Unfortunately for a Mayor, Governer, or President, this type of pension would not allow politicians to promise more than they could deliver. This overhaul has actually aready taken place, has been embraced by the private sector, with far less luck in the public sector. It is the 401k/403b.

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