Sunday, December 28, 2014

Pensions Part II

Pensions Part I

It is fair to ask "How did the public pensions get into such bad shape?"

It was very simple.  Legislators chose to fund more immediate projects and consistently deferred funding pensions until some unspecified time in the future.

Life cycle costs

Mature people comprehend the concept of "life cycle costs."  One might look at purchasing a $26K  vehicle.  It may look like the budget can benchpress the monthly payment.  But then the adult will look at sales tax, insurance costs, registration costs, fuel and maintenance costs.  Only after investigating all of these less obvious costs will the prospective buyer have a grip on the actual sticker price he/she should be shopping.

This concept shows up in many other places.  I may have the hots for a new handgun.  Do I have room in the gun safe?  Is there room on my reloading bench?  Do I need to purchase different brass, powder, projectiles?   Will I be able to afford the time I will need to invest in practicing with that pistol so it is a seamless extension of my body such that I can operate it at an instinctive level.

At the governmental level

One of the banes of the British Nationalized medicine is private sector donations.  This is counterintuitive.  But consider a philanthropic foundation raising money for a new CAT scan or MRI machine.  People are partially motivated to donate because they believe there will be a tangible, durable monument to their generosity.

Owning and operating a piece of high-tech medical equipment creates many financial obligations on the downstream side of the purchase.  Staff must be hired.  Floor space dedicated.  Maintenance and consumables purchased.  Utilities paid for.  In a zero-sum environment those resources must be robbed from other missions.

The same thing happens on the statehouse floor.  Pension funding is robbed to pay for social missions that are more salient to the legislator's constituents.  The growth of those social missions inevitably result in more future demand on the pension....more social workers, more prison guards, more highway workers, more educators, more maintenance workers, more administrators.

Law makers are fooling themselves if they think it will be easier to fix pension funding in the future.  Their actions today (and in years past) guarantee that it will only get harder.

The Millionaire Next Door

Stanley and Danko, authors of The Millionaire Next Door devote a chapter to ensuring that one's wealth does not negatively impact future generations of one's family.  It is surprisingly easy to poison your legacy and end up with children and grandchildren languishing on "economic out-patient care".

They emphatically state that the worst thing a parent can do is to give (or loan) a child funds for a down payment in a neighborhood they could otherwise not afford.  If they cannot afford to save up a down payment, then they cannot afford to live in the neighborhood.  They will be that surfer who missed the crest of the wave and is frantically paddling to slowly slip behind.

So it is with funding more social programs by starving pension funding.  It is the first hit of crack cocaine.

1 comment:

  1. Well said... And that 'elephant' IS coming home to roost...