America’s Pension Problem

pension

So, there are these two ants…

One works in the private sector as a secretary for the company that builds anthills. The other works for the state, the Council of Ants, that oversees the anthills. These two ants are friends. They earn similar salaries and live next door to one another. Their kids play together and go to the same school. Their families gather for barbecues (grasshoppers, of course) on the weekend.

The only significant difference is one neither see, but which promises to tear their friendship apart one day — and to destroy the anthill in the process.

You see, the private-sector ant contributes 10% of her pay to the company retirement plan for which her company has no contractual obligation to assure a decent standard-of-living in her golden years. She must invest her savings herself, though she has no skill in this area and, thus, has no guarantee her money will even exist when she retires. She’s also required to donate (under force of law) a quarter of her salary to the Council of Ants to help it pay all the costs of running (though not very well) the anthill.

Meanwhile, the bureaucratic ant contributes a minimal amount of salary to her retirement plan. But she’s part of an organized group of bureaucratic-worker ants who banded together and negotiated (often through blackmail tactics) fabulous, contractually-obligated retirement packages that the Council must pay — with money it collects largely from private-sector ants.

Better yet for this bureaucratic ant: She has professionals managing her savings; she knows she can retire from work well before her neighbor (with full benefits), and she can load her last three years of work with an abundance of overtime, goosing higher the average annual salary on which her retirement payments are based (the private-sector ant has no ability to do anything similar).

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No doubt, you see the problem: The two ants will live two entirely different retirements — the one who saved will struggle; the one who didn’t save will live comfortably — and it’s the private-sector ant who essentially funds both. That unfair, bizzaro world is enough to cause a rift in the friendship when the private-sector ant realizes it’s her donations that allow her neighbor to live so richly.

But there’s a lurking and massive problem that goes far beyond the friendship of two ants.

The Pension System Is Crumbling

Because of the legally binding promises the bureaucratic ants achieved through immoral means — threatening work stoppages unless their demands are met, thereby allowing the anthill to disintegrate to the detriment of all ants — the Council of Ants is required to pay retirement benefits that grow ever-larger over time.

Thus, more and more of the donations taken from the private-sector ants go to pay for the retirement promises made to bureaucratic ants — so much, in fact, that other services in the anthill begin to disintegrate anyway, and the Council of Ants has no other option but to demand higher donations from the private-sector ants and, ultimately, renege on the promises made to bureaucratic ants by cutting their retirement income.

All the ants are unhappy.

Private-sector ants are overtaxed to pay for promises made to bureaucratic ants who used iniquitous tactics to press for superior retirement plans, and they rightly rail against a system that forces them to bail out the retirement plans that have promised bureaucratic ants a better retirement than the private-sector ants will live.

Bureaucratic ants, meanwhile, take to protesting and suing the Council of Ants to claim what contracts say they are due. They don’t care so much about the unfairness of a system that allows them to live more fulfilling retirements on the backs of their neighbors. Rightly, too, they only care that promises were made by a (largely ignorant and financially incompetent) Council.

The anthill is in a constant state of turmoil. Anger swirls. Neighbors take sides against one another. Almost all express rage against the Council, though for different reasons.

Insurance Against Collapse

The moral of our story today: America’s state, local and federal governments are underfunded by roughly $1 trillion — a gargantuan sum equal to 16% of all the money collected in tax revenue in 2015 at the local, state and federal level. In some places — Illinois is one of the most egregious examples — taxpayers are now paying 80% of the contributions to the retirement system.

The great disaster in waiting: Governments have based the growth of their pension plans — necessary to meet all the future promises they’ve made — on expectations of investment returns in the range of 7% to 8% annually. Yet, the investments those pension plans prefer — bonds — yield in the 1% to 3% range. The dire math is obvious. A variety of research organizations have found that pensions can expect annualized returns of about 2.5% over the next quarter century.

In short, they haven’t a prayer of ever attaining their goals.

Which, of course, means that higher taxes are the future for those of us who are working … while benefit cuts (and the resulting protests and lawsuits) are the future for government workers.

And so it goes that the American anthill just lurches from one crisis to another because the Council we’ve got running this joint isn’t nearly smart enough to keep our anthill functioning properly. A collapse, I assure you, is coming. Aside from moving to a better-run anthill, real assets — namely gold — are the only insurance policy that exists.

Until next time, good trading…

Minimum Wage Dooming the American Worker

Jeff D. Opdyke
Editor, Total Wealth Insider