One of life’s comforts is reading the Economist. The magazine is generally optimistic about the world’s prospects for growth and improvement. An article typically takes the following form:
- problem is identified
- straightforward solution is offered
- discussion of why some countries don’t have the political will to implement the solution
- example of one country that behaves rationally
This is comforting because it is then clear that there is a lot of low-hanging fruit. If our politicians could wean themselves from the diet of special interest money, our problems could be quickly and painlessly solved.
One example is automobile pollution. The U.S. government regulates the amount of pollution that new cars can emit, but actually encourages people to keep old cars on the road (through sales tax and property tax, in addition to the inevitable higher insurance rates of a new and more valuable car). So we get into a situation where 95 percent of the pollution comes from 5 percent of the cars. The rationalists at the Economist would point out that cars are being inspected annually. Why not hook up a meter to the tailpipe, measure the amount of pollution, and charge a tax that is proportional? This would give owners of old cars a financial incentive to buy a new Honda Accord.
Another example is automobile congestion. Two of society’s most valuable resources are the road network and everyone’s time. We let drivers waste both of these by crowding onto roads at peak times and make no effort to discourage them. The Economist would explain that a congestion fee would encouraging car-pooling and time-shifting of non-essential errands as well as boosting revenue for cash-hungry governments (enough to lift California out of bankruptcy?). Examples of the smart and successful folks in Singapore and London then close out the article.
I therefore couldn’t resist buying the April 9-15th issue of the Economist at the supermarket. The cover story promises “a special report on pensions”. I figured that I would be comforted by learning that this alarming problem has a simple solution.
The magazine gives a comprehensive overview of the problem. The most important number is the support ratio, between the number of working people and the number of retired people. In the U.S. it was 4.6 in 2010, trending to 2.6 in 2050; Australia is very similar. Japan is already living our future, with 2.6 today and trending to 1.2. Turkey’s prospects are bright today, with a 9.8 ratio, but trending towards only 3.2 in 2050; Mexico has similar numbers. The numbers give some insight into the bankruptcy of Greece: a 3.4 ratio today, trending to 1.6 in 2050 (i.e., worse than the U.S.), a young average retirement age of 61.9, and pensions that are, on average, larger than a worker’s salary. Spain doesn’t look great by the numbers either, 3.7 today and 1.5 in 2050 (paying unionized public workers, such as air traffic controllers, more than $1 million/year probably hasn’t helped them either).
Perhaps the problem will correct itself as people work until they are older? In the world’s rich countries, the official retirement age is set to rise by about 2 years by the year 2050. Life expectancy, however, is predicted to rise by 3-3.5 years. So the challenge will be getting tougher, not easier. And with public workers retiring at 41 (Boston bus driver), 50 (fire/police/prison/sheriff workers nationwide), or slightly older, plus disabled workers dropping out young, healthy private workers will have to stay on the job to age 80+ in order to bring the average up above 70, which is where it will need to be, according to the Economist.
The U.S. Social Security system has been running at a cash deficit since 2010. What’s the true cost of Social Security? The first recipient was Ida May Fuller, who paid in $24.75. She received $22,889 in benefits until her death at age 100. A couple retiring at age 66 can get a benefit of $4,692 per month for life, indexed to inflation. MetLife would charge them $1.2 million for an annuity with the same characteristics. What do folks save if left to their own devices? The average in Britain is about $44,000 (though these people know that they can count on a Social Security-like program as well and that number includes workers of all ages; the comparable U.S. figure is $58,350; the figure for workers in their 60s was less than $200,000).
Who can escape the coming pain? State and local government workers in the U.S.! Courts have held that they’re entitled to continue accruing pensions under whatever scheme prevailed at the time they were hired. Since government workers almost never quit, that means that a 22-year-old hired in New York City in the boom year of 2007, when Mayor Bloomberg and union cronies in Albany were handing out lavish pensions, will accrue those benefits until retirement at age 50 or 60. Britain is not in any better shape. Their current funding shortfall for government workers is roughly 81 percent of GDP (about $11.4 trillion if measured against the U.S. economy; whereas we have a $3 trillion shortfall at the state/local level).
Municipal bondholders will not escape the pain. When Vallejo, California went bankrupt, bondholders got 5-10 cents on the dollar. Public employee pension benefits were unchanged.
How about the example of the one successful country full of smart people? Among rich nations, the only example the magazine could find is the Netherlands. They have “a higher ratio of pension assets to GDP than any other country”, with 100% funding, basically, for the actuarially predicted costs. They retire younger than Americans (age 62.1 versus 65.5). Part of the magic is that they don’t promise unlimited inflation indexing. If their country gets poorer, the pain will be shared by the working and non-working alike. The same is true in Sweden, Germany, and Japan. But mostly the Dutch have deferred consumption. Overall, the countries that have at least some plan and hope for paying what they’ve promised are the Netherlands, Switzerland, Sweden, Australia, and Canada (this doesn’t include developing countries such as China, which has $3 trillion in cash and hasn’t made any long-term promises).
What’s missing from the issue is any hope of an easy, quick, painless, or cheap fix. The article assumes that public workers will be protected by the politicians that they paid to elect, which means private workers must shoulder a previously unimaginable burden of taxes and an extra decade chained to a desk (my article on early retirement will be read by ever-fewer people in developed nations).
[One option that the article did not mention is that U.S. state and local governments could simply fire all of their existing workers. They may not have the constitutional power to reduce benefits being accrued by workers going forward if the worker was hired in, say, 1998 or 2005, but states have the power to eliminate agencies or fire everyone. The states could then hire people as needed under new terms and conditions. (I sat next to a senior administrator from a Colorado school system. She said that the salaries they offered were so much higher than a market-clearing wage that she could replace all of her teachers within a week or two, except for some math and science positions.) Politicians who receive donations from public employee unions aren’t likely to do this, of course, but it does seem to be the way out of the fiscal trap.]
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