Email to Terry Savage
Return to:   Site   or   Emails   Description

20121224                        Government


Terry, I much enjoy many of your columns, you seem to be a breath of fresh air in the fog. Anyway, I was just reading todays column headlined "State pensions: Something's gotta give" and noticed the sentence, "Yes, the employees have been contributing their fair share". I suggest not. You addressed the problem mostly as a mathematical problem to balance "revenue" and "expectations", but I suggest it really a moral problem in that expectations of "retirement benefits" are way out of line with "contributions". Fair? What is fair? Any amount really. But what will that "contribution" get you? That is where the expectations are way off. I ran into a fascinating analysis the other day about retirement savings. Since inflation generally keeps pace with wages, we can "extract" from our "invested contributions" a monthly sum that is

   1. the same as the monthly contributions we made if we want "payouts" for as long as we worked
   2. Half of what we contributed monthly if we want "benefits" for a number of years equal to half our "contributing" working years
   3. Or any other ratio

For example, if we want to retire for 20 years after 40 years of working at 1/2 our final pay, we would need to "contribute" about 25% of our wages (one half time factor times 1/2 benefit factor). I think the "moral" problem arises because most people believe they have "earned" their pensions. I have polled people from PhD's to HS dropouts, and they all believe that "they are getting screwed" and "not getting what I invested plus interest earned". People don't want to steal or live off the labor of others, and they don't think they are with their pensions. I believe it is that wrong but very widespread belief that needs to change. I have an Excel spread sheet that shows my "account" for social security (by the way, the biggest Ponzi scheme in history). I know what I "contributed" (12.6%), but I had to assume "return rates"; I know what I am and have received but had to estimate, of course, future "benefits" assuming some COLA. I am receiving about one fourth my final salary. I "contributed" to Social Security for about 20 years. My account" will be depleted in about 10 years. To get "what I earned", what some would call "my fair share", for 30 years, my expected longevity, I should only get about 7% of my final income (66% [30 years benefits / 20 years contributions] times 12.6% of 100,000, my final salary). Nobody can live on that, but that is what Social Security "contributions" give us. My spreadsheet also has a hypothetical account for the "typical" first baby-boomer; born in 1946, starts work at 25 years old, works 40 years, retires in 2012 at 65 with a final salary of $50,000, receiving a monthly "benefit" of $1416 (from SSA web site). For this "typical" account,

At retirement, about $175,000 total "contributions plus interest”
Age 85, after 20 years retirement benefits total about $525,000, nearly three times "contributions" plus interest
Age 95, after 30 years retirement benefits total about $1,000,000, or 4 to 5 times what was put in, plus interest

This excess over "contributions" plus interest earned is the problem. Why do people believe they "earned" that excess? I don't think they do morally, but they currently believe they have "earned" it, "mathematically". For example, see the quote of a letter to the editor on December 25, the day after I wrote this, as a perfect example of this thinking, which, of course, wrong, but a common myth that must be busted before the pension "crisis" can be solved. So I suggest that people need to be made aware of the "value" of their contributions plus interest, and the fact that they are taking other people's money forever after their 10th year or so of retirement (the Illinois Teachers Pension Fund "accounts" are "used up" in about 7 or 8 years). Younger generations have always contributed to the care of the old, but $1,000,000 for every 30 year retiree? Terry you are in a position to call attention to such individual "account" deficits. Maybe I am naïve, but I think once old folks realize the burden they are placing on others they will be more amenable to cuts. Today's paper, the one with your column, mentions that each person's debt is over $7500 for state pensions.

This helps, but this doesn't really hit home. Most old folk "don't want to be a burden". Perhaps not, perhaps we will continue to scream "Gimme more" like everyone else if we think we "earned it". But perhaps if we are shown how each of us old folk are taking other people's money when our "savings plus interest" run out, and thus are becoming a burden. We don't seem to believe that now, but I am sure that as long as we think "we earned it", which is a myth, at least financially, we will defend it to the end. I think the political problem is currently intractable given that widespread myth (we vote in larger percentages than any other age group). So I suggest prosyletizing the "value" of individual accounts, telling us old folk who don’t want to burden people that we are taking half a million to million dollars of someone e lse's money with our "earned" retirement. Perhaps the issue is totally intractable; perhaps we already know it is someone else's money but demand they give it to us anyway for our "morally earned" pensions and expensive end-of-life medical care. If so, put up your pen on the issue, it will bankrupt every "social democracy".

The issue of why and how such expectations of "earned comfortable retirement" came to be is the topic for another day, other than to note that nobody ever said pensions would let someone live in comfort, the politicians and bureaucrats just let our hopeful thinking "evolve" into that expectation. Now we are stuck with it, and to be redundant, must be changed to address the issue.

I wish you well in addressing this, a most difficult of moral issues for our time (and any time), i.e. the respective roles of individuals and community in the creation and distribution of excess (tradable) material wealth,. i.e. the economy. I find knowledge is never harmful and often helpful, and peoples' correct understanding of the "value" of their retirement "accounts" is, I believe, essential to the ongoing, never-ending "resolution" of this issue. That understanding is not yet upon the land. I know that no such "accounts" exist; everything is tossed into the "fund" hamper, but they can be "constructed". I offer my spreadsheet as a starting point for your Excel gurus (which you may have access to through the Sun Times). I am a didler scientist, so it's not ready for prime time, but its certainly sufficient to point the direction to make it "publishable", as well as any conclusions that may be drawn from it.

So Terry, keep up the good fight, to use an un-Christian metaphor.

(My internet is down, so I won't be able to send this for a few days, but I don’t think the issue of "the economy" will go away in that time)

Scott Sinnock
205 West Todd Avenue, Apt 201
Woodstock, IL 60098

Quote of letter to the editor, page 18.
"Everyone is pounding teachers on their automatic annual pension increase - otherwise known as a COLA - even when we paid for it out of our pay checks (Italics mine). In order to get the increase compounded (instead of just being on the original base pension) the deal to get it passed by the General Illinois Assembly, all Chicago teachers, myself included, had to immediately increase our pension contribution by another half percent. We paid for this upgrade. (Italics mine) and were promised it would be there for every year of our retirement. If it is stolen (Italics mine) from us now, will we be reimbursed the amount it cost us for years?"
I think we see the problem. Is our math so bad in this country we believe that 0.5% now will pay for 3% exponential growth forever. Can we not evaluate the "promise" because we can't understand the math? Should we be able to vote about how to spend other people's money given that terrible misunderstanding about their money? The last one is a pretty deep question, and the current answer is, "of course". Given that, can we correct the misunderstanding, if it is such? This note is a suggestion of a tactic in that overall strategy, a strategy I believe your column is all about: economic understanding.Thanks