The safety is gone, only the net remains
December 6, 2010 2 Comments
During the middle-ages, there were the aristocrats and then there were the peasants. The peasants pretty much worked for the land-owning aristocrats. Then came the industrial revolution that replaced the aristocrats with the industrialists. Then came Karl Marx and countries chose to swap the aristocrats and industrialists with socialists. I’m pretty sure that at each inflection point, the idea-sellers made some pretty cogent arguments to the peasant-class as to why their best days were ahead of them and how the new model will carry them to utopia: all that is needed is some good-ol’ fashioned hard work and some elbow grease.
Two centuries ago, a somewhat obscure Scotsman named Tytler made this profound observation: “A democracy cannot exist as a permanent form of government. It can only exist until the majority discovers it can vote itself largess out of the public treasury. After that, the majority always votes for the candidate promising the most benefits with the result the democracy collapses because of the loose fiscal policy ensuing, always to be followed by a dictatorship, then a monarchy." – Elmer T. Peterson
The born-again sceptic
I hope that the experiences in Argentina, Hungary, France and Ireland rekindle the sceptic within the voting class. In case you’ve been living in a cave, you would know that:
- Argentina transferred about $24 billion of pension assets from the private to the state sector in 2008, with the result that $4 billion of annual contributions flowed into the government’s coffers.
- Hungary created a mandatory supplementary pension system in 1998 with contributions deducted from wages and invested in a private fund. These funds have since accumulated nearly $14 billion of assets. Those assets (and the employee contributions) are now being taken back by the government.
- Ireland’s National Pension Reserve Fund is providing €12.5 billion (half the fund’s assets) towards the bail-out of the banks.
- France seized the €36bn assets of the Fonds de Reserve pour les Retraites, the country’s reserve pension fund.
And there are talks of benefit cut-backs in the US as well.
So what exactly has the social safety-net achieved other than reducing savings rate and increasing consumption up-front and yanking away the net when pensioners and the poor need it the most?
Not only have the west collectively destroyed self-correcting market mechanisms in their own countries, but now they are trying to sell that model to Asia. They (principally the US) want us (principally China) to consume more (reduce savings rate). And after penalizing savers over successive generations through a combination of hidden inflation and low interest-rates, they want China to adopt the same policies so that they can all become “consumers”? Given the initial reaction of the Chinese, it looks like even the communists do not believe that this model will work.
Boil the milk
I remember arguing with my mother as to why she insisted on boiling packaged milk (that was pasteurized) before letting the family have it. Doesn’t “pasteurized” mean that its already boiled? And she said: “that’s what the label says. But I don’t trust them”.
Given the experiences with “just trust us” crowd, it makes sense to have at least some of your monies in gold, buried in your backyard.
Update: The funding shortfall faced by the UK’s biggest pension schemes has widened by 50% during the past four years. Faced with this looming fiasco, the Government allows a change in the measure of inflation that pensions must be increased in line with each year from the Retail Prices Index to the Consumer Prices Index, which tends to be lower. The research quoted below estimates that the move could reduce the shortfall the 200 biggest defined benefit schemes face by around £35 billion – effectively halving the current deficit.
http://www.reuters.com/article/idUSTRE6B710K20101208
Middle-class Americans think they need $300,000 to fund their retirement, but on average have only saved $20,000, according to a survey released on Wednesday by Wells Fargo & Co.