It’s Time for the Public Sector to Follow the Private in Retirement Plans


Let’s say that you went to a bed and breakfast, checked in, and went up to your room.  The room was a mess with bed-clothes strewn on the floor, breakfast dishes piled up on the table, and a big black ring around the whirlpool tub and soap suds near the drain at the bottom.  You are then told that you owe a $100 cleaning fee to get the room back in shape so that you can enjoy it.  At least, you might get to enjoy it, but then again they may need to raise the rates after you pay the cleaning fee, or maybe they’ll just shut the place down entirely.

You protest, saying that you were not the ones who used the room last and that the ones who did should pay the fee.  The host replies that the last people have gone, that someone needs to pay to have the room cleaned, and that the someone is you.  You try to back out of your reservation, but you’re told that you must pay the fee or they are calling the cops.

How would you feel?  Would you feel that you had a responsibility to pay the fee?  Would you begrudgingly do so, hoping that the next person would pick up the tab for you?  If you paid the fee, would you then feel entitled to having the fee paid for you by the next guest?  A guest who, just like you, hasn’t stayed in the room yet and had nothing to do with any bargain you make with the inn keeper.

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The same thing happens with things like public pension plans and Social Security.  People long ago made agreements with politicians long since gone to receive something far in the future in exchange for their services or tax money.  In the case of public workers, voters and residents forty years ago received services for which they paid some taxes, but salaries were low in exchange for promises of generous retirement pensions, free healthcare for life, and other benefits.  Those benefits were not paid for by the residents who hired the politicians who made those deals.  They only paid for the salaries of the workers and in exchange they received various city, state, and federal services. Now that the workers are retiring or have been retired, the next generation is expected to pay for those retirement benefits.  This next generation is paying for the retirement of workers from which they received no benefit based on agreements they did not make.  Kind of like needing to pay for a room to be cleaned that you did not use.

Social Security is the same way.  Back in the 1930’s, people voted for President Roosevelt and a Congress who created Social Security, originally charging about 2% of pay in exchange for just enough retirement income to avoid starvation and to keep the lights on.  Voters at the time agreed to pay these taxes and pay out benefits to people who were starting their retirement at that point even though those people had paid next to nothing into the system, in exchange for the promise that they would receive a payment in the future.  As it looked like more people were going to retire than the system could sustain, the tax rates were raised in anticipation of needing more money, eventually reaching more than 12% of pay even though benefits remained flat.  This would have helped, but all of the extra money was spent as soon as it was collected, leading to the current situation where benefits will need to be cut in the near future unless taxes are raised further.  Again, people who had no part in the agreement are expected to pay up.

What if they say, “No?”  What if they decide to cancel Social Security, or cancel public pensions?  If they are forced to pay for these items because they are in the minority, what if they just decide to work minimal amounts, or quit work and raise a garden, producing just enough to feed themselves?  What if they move away to other countries or simply stop working and go on the public dole themselves?  What then?  Are you going to try to force them to work?  Isn’t that called, “slavery?”

Sorry, but those in the next generation are no more morally obligated to pay these bills than you would be if you would be obligated to pay for the cleaning of a room if you showed up to a bed and breakfast with a dirty room.  They did not make this agreement.  They did not continue to vote the politicians in who made these arrangements.  They did not look the other way while all of the extra money raised for Social Security was blown on battleships and public rail lines.  It is neither their agreement nor their responsibility.

“But someone needs to pay the bill,” you say.  There is no good answer for this.  Somebody will feel some pain because of bad agreements made years ago.  Perhaps the pain should be spread around a bit, but perhaps those who made the deals should take a greater share of the pain.

Going forward there is a better way.  Public employees and public retirement plans should follow the lead of private employers.  Rather than a future promise, retirement should be paid for as-you-go.  If a politician promises a lavish retirement in the future, the city, state, or Federal government should pay for their share of it right away by putting money away into an account owned by the employee.  Future governments are free to stop putting money into the account, just as the employee is free to leave and find another job if the retirement benefits being funded are not to his/her liking.  When the employee retires, his/her retirement is paid for and there is no need to rely on future taxpayers.

Likewise, money for Social Security should be paid into private accounts.  These could be invested automatically in broad stock and bond market index funds to eliminate the risk of poor personal management.  When individuals are ready to retire, they would have their own account and not need to rely on future workers contributing in order to continue to receive a check.  Isn’t that a better way?

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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