July 5, 2010
My Shaky Government Pensions
On July 1, 2010, I retired from a major East Coast State University after more than forty years on the Mathematics faculty. When I was hired in the late 1960s, I enrolled in the state's Teacher Pension Plan, a defined benefit plan. Over the years, I worked very hard in my disparate roles as teacher, researcher, and administrator. I climbed the academic ladder, and I retired with a reasonably good salary. Ergo, I earned an ample annual stipend to be paid to me during all the years of my retirement.
When I enrolled originally, the state agency that administers the plan sent me glossy brochures assuring me that my contributions -- as well as those of the state -- would be invested wisely, and that these investments would easily generate sufficient revenue in the future to fund my stipend. The accompanying charts and schedules that they sent seemed quite convincing, and so I did not doubt the accuracy of the projection. In fact, the plan was typical of others offered by many state governments, as well as by the federal government at the time.
But then the severe inflation of the 1970s struck. The state plan called for annual cost-of-living adjustments pegged to national indicators without constraint. State legislators decided that the Pension System would not be able to sustain its commitments in that environment, and so they made two fundamental changes. First, participants were forced to make a one-time irrevocable choice between substantially increasing contributions in order to keep the same benefit (i.e., no cap on COLAs in retirement) or leaving one's contribution unchanged in return for a 5% cap on COLAs. I figured that the country would make whatever adjustment was required to rein in inflation (it did: Reagan for Carter), and so I chose the cap. For thirty years, I've looked like a genius. I used the extra money that I would have paid in increased contributions to fund a 401(k) that did quite nicely over the years -- at least until the decade just concluded. Of course, if Obama's insane fiscal policies cause the severe inflation that most expect, then my genius status will be open to doubt.
The other adjustment the state made (thirty years ago) was that it discontinued the plan for all new employees from that point forth. It replaced my plan with one that required smaller contributions by participants but also paid drastically curtailed benefits upon retirement. However, as the years passed, the state became one of the most profligate spenders in the nation -- to the point that it now has a multi-billion-dollar structural deficit. That puts the state in virtually the same shape as the federal government. Its entitlement programs -- of which the Pension System is a prime component -- have made financial commitments for the future for which there is no reasonable chance that the state will obtain the requisite revenue to pay the expenses.
The State cannot print money like Uncle Sam can. Therefore, it has only two choices: Raise taxes and/or cut spending. It has already done the former, with the predictable ill effect on the local economy. There are many ways it can do the latter, but one option not really available to it is to cut my retirement benefit. That would be a clear and blatant violation of the sanctity of the legal agreement that the state made with me more than four decades ago. I don't think it is going to happen, but I would be lying if I said that I wasn't worried about the prospect.
Now, I have argued in this and similarly oriented journals that the role of the government in our society has grown far beyond what was intended by our Founders. I believe that the federal government's intervention in and control of the economy and culture of our nation is a grave threat to our freedom and the traditional American way of life. State governments are not nearly as threatening, but they too have gone, in many ways, substantially beyond their assigned role, and like the federal government, they interfere with individual liberties more than they protect them. A prime example of both types of governments overstepping their bounds is entitlement programs. Through these programs, governments, both national and local, control our health care and our retirement. But they also increasingly control the education of children, our energy, financial institutions, automobile manufacturers, housing, and much more. It was not supposed to be this way. Moreover, I believe it should stop.
And yet, here I am, getting a monthly check from both the state and the feds (my pension and also Social Security). My very sustenance during my retirement arrives via the government, acting in a role that I believe is improper. Ugh!
Am I going to refuse either check? Not on your life! First of all, I earned every penny of the check from the state. I entered into a binding financial deal with the state forty years ago. I kept my end of the bargain. Now it is time for the state to do likewise. Besides, supposedly, the state has been using my contributed funds properly all these years in order to enable it to live up to its obligation to me. I view Social Security somewhat differently. The Feds have been spending every nickel I sent to them these forty years. There was never any pretext otherwise. My financial contributions to the state were an investment. My Social Security contributions were purely taxes paid. Nevertheless, I am not returning my Social Security check, either. The Feds would just send it to someone else. Instead, I'll use it to fund needy people of my own choosing.
It is ironic that I, a staunch opponent of unlimited government, should be "dependent" on two governments to fulfill the legal obligations they took on to bankroll my retirement. Of course, I am not alone. But the situation is more than ironic; it is, as we all know, unsustainable. We need to get the government out of the retirement business. How are we going to do that? Well, since I am part of the problem, it is reasonable that I propose a solution.
In the future, an individual's relation to Social Security will be as follows. (The choice of the ages is negotiable; the underlying principle is not.)
- If you are 55 or older, you continue in the current Social Security system.
- If you are between 40 and 55, you have a choice of remaining or bailing out.
- If you are under 40, your only choice is to bail.
- If you bail (either mandatory or optional), you receive from the Feds all the contributions you have made previously to Social Security, augmented by a modest but compounded interest rate. It is now incumbent upon you to provide for your own retirement.
- If you remain in Social Security, the rules stay as they are (except that the retirement age might increase). Social Security will cease to exist in fifty years. Those few 40-year-olds who opt to stay in and survive until 90 will have to be dealt with on an individual basis.
This scheme will still be expensive for the Feds to implement. But it will not be open-ended, and just that fact alone will cause a great change in the long-term fiscal health of the nation, as well as provide a start down the road of returning the government to its proper role.
Similar principles can be employed to phase out Medicare, Medicaid, and many other government programs. The hard part will be summoning the political will over an extended period to prevent future lawmakers from reneging on the deal.