Megan McArdle quotes Jonathan Cohn:
To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous? And to what extent is the problem that retirement benefits for everybody else have become too stingy?
…it seems like we should be looking for ways make sure that all workers have a decent living and a stable retirement, rather than taking away the security that some, albeit too few, have already.
It seems like we should be looking for ways to make sure that everyone has a pony, rather than taking away the ponies that some, albeit too few, have already.
Actually, my point is not to pick on Cohn, tempting although that might be. My point is to commend McArdle’s response. Read her whole piece.
Her main point is that if you live about 90 years and spend the last 30 of them not working, it is hard to maintain your standard of living no matter who pays for it. There is a lot of optimism about stock market returns built into state pension funds, individual retirement plans, and–I would say–even Social Security and Medicare. My argument is that without strong stock market returns, general tax revenues are not going to be robust, and Social Security and Medicare will go broke really soon without robust general tax revenues.
As McArdle puts it,
Whether you collect a dividend check, get a corporate pension, or live off your social security, your retirement is funded by real claims on the output of people in the workforce.
For any given level of output, more consumption by one group (say, people over 65) is going to reduce what can be consumed by everyone else. As the ratio of people over 65 to everyone else goes up, this increases the ratio of state-confiscated income to total income required to keep Social Security and Medicare going. Perhaps to Cohn, this higher confiscation rate represents a kinder and gentler society. But it may not feel kind and gentle to those who earn incomes and have them confiscated.
READER COMMENTS
Lord
Aug 11 2010 at 7:28pm
For any given level of output … what a laugh. To a first approximation output is determined by level of technology and the only difference between fewer and more retired is whether the transfer is in lower wages due to more of them working or in higher taxes due to fewer of them. You can pay in taxes or pay wages, but pay you will.
Yancey Ward
Aug 11 2010 at 7:36pm
Lord,
Do you really believe what you wrote?
Thomas Sewell
Aug 11 2010 at 7:40pm
A major difference is that future retirement benefits paid out of future taxes have a negative affect on the economy because of the additional taxes, while future retirement benefits paid out of stock market returns on current investments have a positive affect on the economy because the capital is invested.
In short, money “invested” in government spending vastly under-performs money invested in marketplace companies in terms of it’s affect on the economy.
Would you rather give a Billionaire an additional billion and say, “Go create a new company” or a bureaucrat that same Billion and say “Go spend this on something you think we need”.
One helps provide for the wealth that pays the future retirement returns much better than the other does.
Matthew Gunn
Aug 11 2010 at 8:26pm
The biggest problem with public employee pensions is that they are defined benefit, not defined contribution. Let me explain.
(1) Empirically, public employees have higher average compensation than the private sector, even after correcting for the different job mix of public employees. The opaque nature of DB gives many opportunities to secure high compensation in collective bargaining and the legislature.
(2) Not only are public employees better off than the average American, but through DB plans, the rich and the poor insure public employees against losses in the stock market. When the economy takes a lower growth path, pension contributions go up. The rich pay through higher taxes and the poor pay through service cuts. This is at least what has played out in California.
Problem (2) might be somewhat helped by requiring pension plans to go back to only holding long dated, highly rated bonds, (transferring risk elsewhere) but I’m doubtful this would ever happen.
On a practical level, DB pensions give public employee unions a tool to raise compensation that is poorly understood by the general public. This makes problem (1) worse. For example, CA has granted numerous retroactive pension benefit increases! Is there any possible justification for that as part of a rational compensation strategy?
Basic math says that everyone can’t be in a DB plan! Someone has to hold the risk.
Lord
Aug 11 2010 at 8:32pm
Absolutely. The labor supply is relatively inelastic, but the main result of increased supply is lower wages, not increased output. Increased supply also reduces the investment incentives in labor saving technologies that increase productivity leading to lower wage growth. There is a slight increase in efficiency due to higher specialization but not more than that provided through trade.
kebko
Aug 11 2010 at 10:28pm
Now that Lord has explained it, I think everyone should stop working immediately.
Lord
Aug 11 2010 at 10:42pm
With more advanced technology, we could.
Yancey Ward
Aug 11 2010 at 11:43pm
Lord,
In your opinion, was this always true?
Foobarista
Aug 12 2010 at 1:52am
The problem is actually worse for public-sector employees, especially senior ones and government officials. They often start collecting when they’re in their late 40’s or early 50’s, while they’re working in other – highly compensated – jobs. And since their pensions often have full survivor benefits, their 25 year younger trophy wives stand to get a full pension for the rest of _her_ life. So, you could easily end up paying out the pension for over half a century.
The notion that unionized bureaucrat compensation packages are some sort of prototype for “how things should be” is the current talking point of government unions. Since they’ve never had to meet payroll with cash generated from operations, you can see how they feel that packages are some sort of entitlement, paid for with funny money.
Hyena
Aug 12 2010 at 2:38am
But Megan’s main point is that it doesn’t matter where we source the higher net consumption of one group, it will always reduce the consumption available for other people. The problem is not public pensions, per se, but that we can’t sustain a leisure class which represents half the population regardless of where we source the money.
That is, to get to McArdle’s thesis, that the “golden age of retirement” may be over, period.
Tracy W
Aug 12 2010 at 4:22am
Lord: To a first approximation output is determined by level of technology
I think this depends on how you look at it. Other things determining output is government policy (eg Zimbabwae managed to ruin its economy) and the amount of labour and capitali supplied (affecting that was part of how Zimbabwae managed to wreck its economy).
The labor supply is relatively inelastic, but the main result of increased supply is lower wages
How come the USA got so rich then?
Increased supply also reduces the investment incentives in labor saving technologies that increase productivity leading to lower wage growth.
On the other hand, it increases the investment incentives in labour-complimentary technologies that increase productivity, leading to higher wage growth. Eg if you have lots of people around you might invest more in ways of coordinating their behaviour, eg the internet, or production-line techniques. The overall effect is indeterminate.
I am assuming here that the increase in labour supply comes from people shifting to be employed rather than retired.
There is a slight increase in efficiency due to higher specialization but not more than that provided through trade.
Obviously. Higher specialisation and trade are not separable, so of course the gains are going to be equal. (Eg take Robinson Crusoe on his desert island. Before Man Friday showed up, there was no one to trade with and he had to do all the work himself. After Man Friday showed up, the two of them could specialise in different jobs and trade their results).
I disagree with you though that these gains are “slight”.
Lord
Aug 12 2010 at 9:32am
No, it wasn’t true in the pre-industrial era, but it has become increasing true as technology advances. As I said though, this is a first approximation, but the surprise is it is first. The US has prospered because of its lower density; fewer workers create higher incomes. This is why the movement towards two income households was so ineffective in boosting real household incomes. It has improved the status of women but it did not make us better off, only lowered the wage of one income households.
Lori
Aug 12 2010 at 9:33am
For any given level of output, more consumption by one group (say, people over 65) is going to reduce what can be consumed by everyone else.
Sometimes life really is a zero-sum game. So much for the win-win.
Tracy W
Aug 12 2010 at 11:51am
The US has prospered because of its lower density; fewer workers create higher incomes.
By this logic, as more people immigrated to the USA, the US should have gotten poorer. Instead it got richer.
Also, Britain should be poorer than NZ, in terms of capita per head, instead it’s richer. (see Japan should be poorer than NZ, instead it’s richer.
Economic logic supports the idea that more workers create higher incomes, not lower incomes, as more workers means more division of labour, boosting productivity.
It is very noticeable that in the one rich country with a very low population density, Australia, nearly everyone lives around the coasts.
This is why the movement towards two income households was so ineffective in boosting real household incomes.
Actually real household incomes have gone up. It’s just that a lot of the increase has been absorbed by healthcare spending and rising taxes, to pay for the increasing number of retired people. Households where both parents worked may be no better off, but they are supporting a lot of households where no one is working, say because they have retired.
See for example this analysis of the two income trap.
Dan Weber
Aug 12 2010 at 1:52pm
The biggest problem with public employee pensions is that they are defined benefit, not defined contribution.
No, that is not a problem. If employers bought their pensions for their workers on the private market as they earned them, there would be no problem whatsoever.
But employers (both public and private, but private employers that do this wrong have largely already been filtered out) often don’t fund their plans, instead borrowing from the future with the promise of future contributions.
If they want to borrow for future promises, that’s fine, but it should be an explicit borrowing. They sell bonds and use the proceeds to buy annuities today.
Silas Barta
Aug 12 2010 at 3:00pm
Thomas_Sewell has it right, though I’d put it differently.
Someone paying for their retirement consumption out of investment returns has enabled at least as much production as they are consuming. Yes, if you were to arbitrarily deny them their contractual investor rights (whether as a stock- or bondholder), you’d keep more for everyone else. But then, if that’s how it worked, you would never have the capital to get that production in the first place!
In contrast, government retirement benefits are just a pure transfer.
Think about it this way: Farmer A funds his retirement milk needs by secretly siphoning the milk stocks of everyone. Farmer B does it by setting aside cows in his working years so that, even after paying some of their milk to farmhands, he has enough for himself.
Which farmer is a problem? Well, funding retirement through dividends is just an advanced version of Farmer B.
And to be a bit frank, I find it disturbing when people see these as equivalent. It’s like making an employment contract with some worker and then saying, “Gosh, I’d sure be wealthier if I didn’t have to pay you. You know, you’ve already given your labor, so what do I need you for now? You’re just a leech on my wealth, and people like you are bankrupting my company.”
Um, hello? They were the *cause* of that production in the first place!
floccina
Aug 12 2010 at 5:01pm
I have a new fascination with command verses market systems in that it seems to me that it is easier to get people to work for something in a market system than a command system. Mr market says work and save and you can have food, shelter, health care, retirement etc. Mr Command says I will guarantee you food, shelter, health care and retirement, everything else you need to get from Mr market. But here in the western world he still has trouble making you pay taxes. He can make fork over any market income but he cannot make you work nor can he yet prevent you from making your own goods and services for your own consumption. You can tax the guy who mows my lawn but you cannot tax me for mowing my own lawn.
So the more the state supplies to all the higher the tax rate the higher the tax the more likely one forgoes taxed income to provide ones own goods and services. That home made bread tastes so much better anyways. BTW it is mostly married women that will drop out of taxes work.
That is not to even mention (as they used to say it) getting paid under the table.
On Thomas_Sewell’s point, do not forget that things like increased insulation in a home that you plan to retire into is an investment. So investment can clearly increase future goods and services not just in the case of companies.
Two Things
Aug 13 2010 at 2:22pm
Tracy W:
Your theory that “more population => more prosperity” doesn’t seem to explain differences between countries you haven’t mentioned.
For example, Brazil, Pakistan, Bangladesh, Nigeria, and Russia all have larger populations than Japan or the UK (Britain), yet they are all much less rich.
Have you considered whether variables other than sheer population might affect the relative affluence of different countries?
For example, it’s well known that some populations are more educated and productive than others. Perhaps the quality of the population could have some influence on its prosperity, wouldn’t you agree?
If that were so, it might be the case that adding a lot of less productive people to a highly-productive population might reduce its overall productivity and put downward pressure on its growth toward prosperity, mightn’t it?
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