Public employee pensions have been in the news a lot lately. And it gets me to thinking that we are addressing the challenge of retirement entirely backwards.
We only have to look as far as Detroit to see the results of statism carried out to its tragic mathematical folly. Not only do the neighborhoods look like General Rommel just marched through, the bank accounts also look like they have been victimized by Nazi plunder. Detroit’s public employee pension plan is about $20 billion in the hole.
Several other large American cities are facing similar crises in unfunded pension liabilities, with Chicago leading in debt as tall as its skyscrapers. The state of Illinois, along with all of its city governments, combine for more that $200 billion in unfunded retirement promises to its public employees.
This national mess is purely the outcome of fantasy politics. Liberals vote liberals into office who promise liberals that they will liberally fund their pensions. The sum of all unfunded public employee pension liabilities across the country is now pushing $1 trillion. It’s just not funny anymore.
While less dramatic, Social Security is facing a similar demise. The insolvency date keeps officially moving closer and is now predicted to arrive about 18 years from today.
The United States Treasury withholds money from our paychecks during our working years with the good intent of making payments back to us during our retirement years. But the moment that our withheld dollars arrive in Washington, they are immediately borrowed by an out-of-control Congress to fund the dreams of the president’s father.
Three regrettable problems arise from this irresponsible practice: (1) The phenomenon of compounding interest over time is never realized, (2) individual contributions are dissociated from withdrawals, transforming Social Security from a savings plan into wealth redistribution, and (3) attempts to put the program on sound footing has become high-risk for elected officials, earning it the nickname “the third rail of politics.”
Those of us mere mortals trying to plan for retirement will plug in to such sanctioned programs as 401k, IRA, SEP, or SIMPLE. These plans have two things in common; regularly salting away small contributions, and deferring the taxes on those earnings until they are withdrawn in retirement.