Monday, July 19, 2010

Fully Funded Retirement Programs

I while ago, I wrote an entry about how to fix social security. I stand by the idea, btw; I still think it's the most feasible approach to unwinding the pyramid scheme that FDR left us with before its inevitable collapse. However, recently I was pondering that the social security problem is not isolated to that one (admittedly gargantuan) government-created disaster in the making, but is a more general problem with retirement plan accounting and funding, and how ripe for abuse they are.

You see, the general problem with retirement plans is that you are collecting money now to pay benefits in the future, and it all goes into the same pool of money. Because the specific benefits are not directly tied to the money being paid in, and the expectations of investment growth are arbitrary, the system is easy to manipulate and abuse. In the government's case, FDR set up a classic pyramid scheme (which would be obviously illegal in the private sector, for good reason), in order to have immediate payouts to people by borrowing from future generations, and thus "game" the system for voter approval. In the case of unions, large defined-benefits for retiring workers have allowed federal, state, and local governments to create their own Ponzi schemes, which are now coming to their inevitable conclusions (with accompanying collapse and inevitable lawsuits). Even though private industries are not allowed to engage in such egregious practices, there are also problems there, from companies "borrowing" from retirement plans to manipulating expected growth numbers to over (or under) state corporate earnings, to pension plans which operate like indirect Ponzi schemes, and collapse when the company goes under. The whole class of situations is a giant systemic problem, in need of a general (and not circumventable) solution.

I would propose the following as a conceptual solution for the problem: require, at the federal level, that all "retirement plans" have fully funded contribution accounts, in the beneficiary names, managed independently of the organization (similar to how 401k accounts are currently). For all plans, there can be a certain amount which is reserved for extra benefits for particular individuals meeting well-defined circumstances (eg: early retirement due to disability, illness, etc.), but this should be capped at a low percentage of contribution amount (say, 10% maximum). Furthermore, the government should provide an estimate of expected inflation over the benefit lifetime (based on historical CPI numbers), and all organizations will be required to use that number as expected annual investment growth for assets in the plan, regardless of actual investments (which, also, should be required to be "safe" in all cases). The organizations can continue to manage the investments of assets in the plan as a whole, primarily to allow governmental organizations to continue borrowing the money from their own plans as long as they have the highest level of credit worthiness; otherwise they will need to be weened off the Ponzi scheme easy-money as new contributions go into private accounts.

Of course, the changes wouldn't be retroactive, and thus everyone already scammed by the various Ponzi schemes would be out their "contributions" to date: but that's really no different than the status quo, only it would be much more explicit and consequently less ignorable. Furthermore, if it was done correctly, it would fix a whole class of problems, and prevent future similar problems, which is the best type of solution. Hard to do, certainly, and most likely politically impossible... but still a good solution, in my opinion.

Monday, July 12, 2010

Federal Employees and Voting

So browsing other blog/news posts this morning, I came across a link to a Washington Post article which discussed how federal employees are largely happy these days, even in the face of the broad economic malaise in the US. This makes sense, of course: after all, (including benefits) federal workers are compensated roughly double what private workers are for the same jobs, employment is up, and the prospects of government largess into the indefinite future are arguably higher than ever. In addition, with the Democratic party essentially running all of the government, you might imagine the majority of people in government being Democrat inclined, which would generally make them more content with the recent direction of the country, and actions of its leadership.

However, this does raise an interesting dilemma for the country in general. With an ever increasing public payroll, and the real possibility that at some point the majority of the voters will be receiving public payouts in one form or another, we're creating a self-reinforcing incentive loop which might be hard to escape. When the government was small, and operating within means of revenue collected from the people, this was not a problem: the size and scope were limited by the revenue collected. To the current politicians running the country, though, limits such as budgets and revenue are not only ignored, but to some viewed as impediments to the conversion of America to a socialist dream (or nightmare, depending on your perspective) state. In the country's current state, we might do well to break the perverse incentive circle before it's too late.

I was thinking, what if there was a rule that if you took government money directly during the year (or two) leading up to an election, you were not allowed to vote in it. Yes, this would remove a lot of people's votes, and yes, it would lead to everyone not being equally represented in votes, and yes, people would complain mightily about it; but, consider the effects. You might have a fighting chance to rein in out-of-control government expansion, curtail implied bribery of the voting populace, and break out of the vicious expansion of the federal government before it's too late.

Of course, there are variations too. For example, you could prevent voting only for those who have received more from the government in any year than they have given back through taxes, fees, and donations to the IRS. This would allow anyone to still vote, as long as they assured their net income from the public was not positive. It would also prevent unscrupulous politicians from using the rule to negate entire blocks of voting through targeted handouts. It might also encourage more qualified people to vote, as their votes might carry more weight, especially since a large group of regular voters (namely, career public "servant" leeches) would be disqualified from influencing voting outcomes for which they clearly regularly have conflicts of interest.

I'm not sure if this would be a good idea, and I'm fairly sure it's too late to enact in the US in any case, but it's food for thought.