David Sirota has a very important scoop today: the PBS series "Pension Peril" has secretly been funded by John Arnold, a billionaire powerbroker with an aggressively anti-pensions political agenda. This looks very bad for PBS - but it's also bad for Arnold, who generally gets glowing press, and who would seem to have no good reason to have insisted on secrecy when writing the $3.5 million check that made the series possible.
The PBS series in question seems to fall uncritically into line with the beliefs of Arnold and other Very Serious People - that pension liabilities are a huge problem, and that the only way to fix them is to reduce the amount that pensioners get paid. But of course it's not nearly as simple as that.
The John Arnolds of this world tend to assume that three things are always true:
- Defined-contribution pensions are better than defined-benefit pensions;
- Funded pensions are better than unfunded pensions;
- Individual pensions are better than group pensions.
It's easy to see why people think this way. If there's no money, then what assurance do you have - really - that you'll be paid? If you have to share your pension with others, how can you be sure that they won't end up with more than their fair share? Isn't it better to just keep all your money for yourself, and make sure to save enough that you can live well in retirement?
This is a pretty libertarian, every-man-for-himself view of retirement: it makes few concessions to the idea that there's a societal obligation to the elderly, or that groups can achieve more together than they can individually. At heart, it's a view which benefits people like John Arnold, who pay a lot of taxes, at the expense of the poorest members of society, who might take out more than they put in. And, of course, it's a view which benefits successful investors, like John Arnold, over schmucks who have no idea how to best invest their paltry 401(k) funds.
In reality, big pooled pension funds are much more efficient - and generate much higher returns - than anything an individual is likely to be able to manage. And in the specific realm of public finance, the case for group-funded defined-benefit schemes is even stronger. That's because public servants - police officers, elementary school teachers, you name it - tend to have much longer tenure at their jobs than, say, hot-shot fund managers. They are also willing to work for relatively low salaries precisely because they know that their pension benefits are good: that they don't need to worry about how they're going to make ends meet in retirement. That peace of mind is hugely valuable, and rarely factors in to the calculations of the pension opponents, who seem to think that worrying about your individual retirement investments is a good thing.
Around the world, indeed, in places like Hungary and Poland, the roll-your-own pension plan model is being reversed, and governments are reverting to the "trust us" model. The mechanism has been particularly drastic in Poland, where the government recently confiscated some 150bn zlotys (€36bn) of Polish government bonds and government-backed securities, seizing them from private pension-fund managers. The Poles then cancelled those bonds entirely, which had the effect of reducing Poland's national debt overnight, by a substantial 8 percentage points. Given debt-ceiling rules, that gives the Polish government a lot more room to run deficits than it had before. In return, the Poles who were counting on the retirement income which was going to be generated by those bonds are just going to have to make do with a standard pay-as-you-go system, where they'll receive a state pension which is paid for out of general tax revenues.
This is not as dreadful as it necessarily looks at first blush. Governments can always find a way to reduce pensioners' incomes, through taxes or any other means. And now, at least, those incomes will be less tied to the vagaries of market returns. Indeed, Poland isn't all that far from the United States: although we do put a lot of government bonds into the Social Security trust fund, it's entirely up to the government how much money pensioners take out of that fund. It can be less than the fund is earning, or more: the decision is political, and doesn't bear much relation to the income being generated, or even whether the trust fund has any money in it at all.
Still, the Polish move is a pretty bad one. The pension funds still exist, but now they've lost most of their fixed-income component, so they've become a lot more volatile. The playing around with the national-debt figures is a silly, and dangerous, trick. And without strong domestic pension funds, Poland has now lost an important source of investment flows - the kind of money that helps to keep an economy innovative and productive.
So pension funds are, generally, a good thing. And when you have a pension fund, it's a good idea to fund it well. But they're not a panacea, and in general the answer to the problem of underfunded pensions is just to fund them better, rather than to start cutting benefits.
The John Arnolds of this world should remember one thing: it's just as easy to tax retirement funds as it is to cut defined pension benefits. If America really needs to start taking money from future retirees, then maybe the politicians will start looking at a much juicier target - the massive tax expenditures being spent on things like IRAs and 401(k) plans. Those tax breaks are not fair - they benefit the rich much more than the poor. Maybe the sensible thing to do is to take those tax expenditures, and use them instead to shore up distressed public pension plans. If indeed those plans are in as much peril as John Arnold says they are.