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The Death of the 'Defined Benefit'


Democracy and Power 103:  Government money

In general, the art of government consists in taking as much money as possible from one party of the citizens to give to the other. – Voltaire (1764)

The money taxed and spent by the politicians comes from the labor and ingenuity of millions of working persons.  Politicians spend other peoples’ money.

 The politician transfers money from productive people, to favored special interest groups.

The Death of the 'Defined Benefit'

In The Washington Examiner, Michael Barone describes how the private sector converted to a defined-contribution for employees’ retirement.  In 1978 government passed a law which allows employers to contribute to an employee’s 401(k) account, which is then owned by the employee and who is not taxed on the account until withdrawn after they retire.  This is a defined-contribution plan.

Prior to 1978, most employers had defined-benefit plans, which guaranteed an employee a fixed retirement benefit.  Defined-benefit plans assume populations, economies and institutions are predictable and everlasting.  To the contrary, many companies have gone bankrupt and the federal government has assumed the responsibility of paying promised pensions.  Many steel and airline companies have defaulted on their obligations.   For example, Barone describes General Motors as a company thought of as one that "… would always be a big enough company to pay for the pensions and health benefits promised to hundreds of thousands of retirees. Turned out it wasn't.

Of course, the biggest defined benefit plan in the world is Social Security and Medicare. Government promised to protect the elderly, by taxing working Americans and transferred the money to the retired.  This is the Ponzi scheme first used by Bismarck to quell social unrest in Prussia.  However, as Barone writes Bismarck and American politicians did not account for increases in longevity and the declining birth rate:

There would always be enough new workers to pay for retirees' Social Security and Medicare. Benefits were raised on the assumption that the baby boom generation would produce a baby boom of its own. Oops. Birth rates near replacement levels, which we have now, are not enough. The ratio of workers to retirees is in inexorable decline.

 Thus, Social Security and Medicare are bankrupt because Congress has not saved any money to pay the promised benefits.  Resultantly, America has debt and a gigantic future debt, which risks catastrophic destruction to the American economy.

Beyond Social Security and Medicare, state and municipal governments have failed to save for their promised retirement accounts.  Factually, government and corporations have failed to adequately save to provide promised benefits.  No institution - Congress or corporations - will invest and safeguard a person’s retirement as will an owner of their own account.  This is human nature, which will not change.  Thus, society must facilitate and encourage every American to save and invest for their retirement.  Beneficially for everyone, savings and investing spurs prosperity and freedom for the individual and society.

Harmfully, politicians loath to terminate established programs, especially programs for the ever vigilant senior voters.  Barone reports on the mindset of President Obama:

Barack Obama seems to believe we can shore up these policies by taxing high earners more. But there's not enough money there to keep things going as they are, and a big tax increase on high and middle earners would increase the risk that our current sluggish economy becomes the norm. That's not a risk worth taking.

Ultimately, the defined benefit plans – Social Security, Medicare, and public employee retirement accounts – will be rejected by working/taxed Americans, and Americans will save and invest their own money.  It took corporate America around 20 years to convert their systems.  Political America will forestall the inevitable as long as possible. However, for personal freedom and prosperity, America must start the conversion immediately.

Every minute the conversion to a defined-contribution savings does not occur government debt increases, which reduces the standard of living of all Americans.  Instead of government created debt, America must become a nation of savers.  Prosperity and freedom will ensue.