Sunday, November 23, 2008

Pension Pensives

Went outside to get the paper today and saw the local headlines--Bracing for a Major Pension Fund Hit. Reading through the article you find out that the pension fund makes future estimates based on an 8.5% annual return. Not an unreasonable estimate, even though returns in 2003-2007 averaged 16% annually . You then read that the annual return for the pension fund is lower this year. Again, not surprising, considering the financial crisis. Then there is the prediction that the financial crisis will not truly impact the pension plan until next year. Well, of course. Many people believe that 2009 will be rougher than 2008. But then comes the kicker. They are considering raising taxes to make up for the losses of the pension plan because the pensions "are guaranteed by law and will not be affected by the downturn in the financial markets."

Excuse me?

Let me see if I have this straight. Teachers have to contribute about 5-7% of their salary to he pension fund. I contribute about 8-10% of my salary to my 401k. Their pension fund guarantees replacement of a very good percentage of their preretirement income when they retire, typically at an age earlier than most working Americans. My 401k will offer me only an income based on its growth over time and is limited by inflation. I have no guaranteed income amount each year. Their pension will run for a defined period of time, usually to death. My 401k will run out when it runs out. By today's financial calculators, I have less than an 80% chance of having enough money in retirement before I die. Living longer hurts me more. If their pension fund takes a huge loss from the financial crisis, taxes are raised to make up for the loss. If my 401k takes a huge loss from the financial crisis, I am up the proverbial creek without a paddle. Not only that, but I also now have to spend more of my earned money in taxes to make up for someone's else poorly performing pension fund. Money that I otherwise would have used to make up for my own market losses. And on top of that, they will not increase the salary contribution of teachers to the fund because of a ridiculous rule restricting the percent balance the fund can hold. So while people are getting laid off and taking salary reductions, teachers keep making the same amount.

How does this make any sense?

The answer, or course, is that it does not. It is a smaller model of the $700 billion socialist lobbying scandal that Congress approved because of the heightened fear they created. That is not to say there should be no fear of the financial crisis, just not the little-girl-in-the-woods-alone-at-night-with-coyotes degree of fear that was manufactured. You are paying to fix other people's troubles, who in turn will do little if anything to fix your troubles. So I will pay more taxes to pay for the retirements of teachers that save less than half of what I try to save for my tenuous retirement. All the while, they will strike every year because they want more money and more benefits. As the United States falls increasingly behind in education to the rest of the world, teachers are demanding more money because...because why exactly?

In order to solve this problem, the socialism and privatization must be separated. If teachers want to strike and get ridiculous salaries just because they have taught for fifteen years, then they should lose the public support of their retirement. If they want to make $130,000/yr after teaching the same grade and similar curriculum for a decade, then they can save for their own retirement, take the ups and downs of the market, and fund their own benefits. But if they want a public tax supported pension plan, then they need to take fixed salaries with absolute salary caps, and the state should be able to shunt surplus money from the fund for other state projects.

These days pensions are slowly becoming extinct. Only large scale defined pensions exist, and those will either implode or bite the hand that feeds them. With each market downturn, the pension funds available diminish, but the pensions paid out remain constant or increase (as people retiring and receiving pensions outnumber people receiving pension dying). Get another financial crisis like this in the future, when the population of define pension recipients grows faster than the funds, and the system will crash. Unless you can show that high school freshmen know how to multiply and divide two digit numbers or at least spell two syllable words correctly, you cannot justify a tax increase to pay teachers more for the same poor results. And believe me, simple math and spelling are benchmarks that you can easily use to show educational progress because creativity and imagination is worth squat if you cannot construct and write a coherent sentence or calculate the change you should receive from a ten dollar bill for a $2.16 cup of coffee.

Then there is the hypocrisy of tenure. But that is another article.

Friday, November 14, 2008

Socialization and Privatization

We've already discussed the current economic crisis before. Everyone's discussed the economic crisis before and they are still discussing the economic crisis. The government is desperately trying to restore the public's faith in the financial system, which has resisted rate cuts and cash infusions. And now we have the 700B bailout plan that has people up in arms because intuitively they know that much of it will be misspent and that skepticism and anger erodes what little faith the well spent money will build. If only 1% of the bailout is misappropriated to CEOs, that is $7 billion dollars. And we know the government has a poor track record in keeping accounting errors to less than 1%, or even 0.1%, which would, or course, still be $700 million. This explains only some of the outrage over the bailout plan. While in pure economic sense the bailout plan can help to restore the financial system by allowing more lending and spending, in a societal sense it does not help everyone equally. In fact, it helps those who are in default much more than those who are not in default--bailing out the people who are largely responsible for this mess with respect to the majority of the public, who were more careful with their money. If this financial crisis had not occurred, and had the housing bubble continued to grow, the risk takers would have turned a very tidy profit. And would they have shared that profit with the rest of us? Of course not. It is not public profit. The profits are privatized. That is how free markets work and why businesses exist. But the housing bubble burst along with the credit bubble. And now these risk takers (we will refer to homebuyers to simplify thing) lost a lot of money. And with this bailout we are paying off that loss. The loss becomes a public loss. The loss is socialized. With the bailout we have positively reinforced high risk financial deals--homebuying when you cannot afford it, credit swaps, CDOs, and SIVs, all by removing any accountability for possible losses. What a fantastic system for the gambler! Imagine going to Vegas and being able to keep all your winnings, but splitting the losses with all of Nevada!

What if we flipped the scenario? What if losses were privatized and profits were socialized? What if you went to Vegas and had to split all your winnings with the state of Nevada and eat all your own losses? Well, for starters, you would not be gambling in Vegas. But what if instead of eating your own losses, you lost only a proportion equal to your earned income? That might not sound so bad to about 80% to 90% of you, especially considering that only 10% of Americans earn over $200,000 a year. For most of us, we might actually make money in this scenario. And what if instead of gambling with cards and dice we gambled with heart disease, diabetes, cancer, and other ailments? Why, we would have the American healthcare system! The popular view on how the American healthcare system should work is that everyone should be covered, but not everyone should have to pay for it. Medical care should be socialized, but the cost should be privatized. This system works well for the sick poor and the sick wealthy. It may also work for the healthy poor. It does not work for the healthy wealthy. Apparently the reward for doing well in life is some sort of Harrison Bergeronian penalty. The state of healthcare in America today tells you how well a socialization of care with privatization of cost model works for healthcare. This system has managed to stay afloat for so long because when it began the majority of the wealth was held by 1% of Americans. Over time that percentage has grown, and now we have wealthier people. But because the population as a whole has also grown and healthcare spending has multiplied, the cost has outstripped the contribution of the wealthy. Does this mean that reducing healthcare spending we can make this reverse bailout system viable again? Perhaps it can, but I doubt that spending can be curbed quickly enough before the system becomes bankrupt and costs become socialized as well.

Is there a solution to healthcare and the financial crisis? I do not have such an answer, but I would suggest that we keep socialism and privatization separate in a broad sense. If we want privatized profits from risky financial deals, we need to accept privatized losses from those same deals. I should not have to pay for Joe the Idiot's mortgage default because he was too ignorant about his own finances. Likewise, if we want socialized medicine then we should socialize the costs. I should not have to pay for Joe the Idiot's triple coronary bypass with my higher premiums because he refuses to stop smoking and eating at Applebee's every other night. Socializing the financial world will never work--it will lead to stagnation because no one will invest since there would no incentive to do so. Privatizing healthcare could work, but would lead to massive numbers of uninsured and likely an increase in prevalence of chronic illnesses. One possibility is to privatize medical care but socialize preventative medicine. That is, medical care of existing illnesses is available to those who can afford the insurance, but preventative care is available to everyone and is subsidized proportionally by everyone. Or for the financial world privatize investment profits and losses but socialize counseling and oversight for transparency.

Or we can revert to a bartering system and scrap the financials.