Pension Problems?
Jun 20, 2010
Posted by Jody Eisenman | Filed under Uncategorized
In a fascinating article in todays’ New York Times http://www.nytimes.com/2010/06/20/business/20pension.html?scp=1&sq=pension&st=cse
it seems that many states are finally coming to the realization that their budgets are not close to being balanced. Some states have promised pensions that they cannot afford, and as people retire, these states face a crisis in figuring out what to do. According to Eden Martin of the Commercial Club of Chicago, we are within a few years of several pension funds running out of money. According to federal law, a state is still obligated to make pension payments even if they run out of money. The problem is, where will they get the money? The most obvious choice is from general revenues, i.e. taxes. However, as most of these states are not only in debt but also run continuing yearly deficits, this is sort of like robbing Peter to pay Paul. On Wall Street, we sometimes call it “shuffling the deck chairs on the Titanic”. In other words, you are funding one deficit by adding to another. This is sort of like someone with several credit card bills that he can’t pay. Therefore, he pays off one by increasing the credit line of another. Of course, the interest charges just get bigger.
This is the same scenario the US government has with social security. Many people misunderstand this system. They think that the money deducted from their paychecks is being held in reserve for them till retirement. The reality is quite different. To understand this, think of when social security first became a law in 1935. Retirees received money immediately, without ever having to pay into the system. Where did this money come from? From the then current worker pool. Who paid those workers? The new workers, and so on and so forth. Now, this system only works if the social security tax rises at least as people retire. In 2009, over 50 million American received over $650 billion in benefits. Even though social security taxes are now over 15% (equally split between employers and employees), the system has not kept pace. This is especially due to the beginning of the “baby boomers” retirement age. Some people, like Thomas Sowell, refer to this as just a pyramid scheme. How this will play out over the next decade may prove to be a challenge.
