Monday, 6 March 2017

Retirement: What would a libertarian do? [updated]

 

Paying people to retire is neither moral nor just – nor sustainable.

Like most things in politics, superannuation started and has been sustained with lies. The great lie when the experiment was started in 1938 was that the new universal pension  would be “self-funding.” It never was: it was simply paid for out of other people’s taxes. The greater lie said that it wasn’t welfare because those who contributed were those getting the benefits. Not true: they were paid by those who were still working. What it meant was that, in the name of economic security, the money that people could have saved (and as savings would have gone into financing the construction of new housing, new factories and better machinery that we would have now been enjoying) went instead into the hands of government to be distributed and consumed, undermining to this extent the wealth and productive ability of the entire economic system.

The lies and the waste racked up as time went on. Muldoon’s election bribes guaranteed that the scheme would be both immoral and unsustainable. He lowered the age at which folk could become eager beneficiaries to 60, raised rates unaffordably, and made it payable to anyone who voted after being here for just ten years.

Not unsurprisingly, a generation took the bribe – and we have been trying to pay the bill ever since. The age at which the welfare check could be cased was raised progressively from 1992 to 2001, and a “surcharge” that became a political football was unpopularly applied, and a decade later was popularly abolished.

And there this most populist of welfare payments has sat since, discouraging folk from the necessity of saving (why save for later if other taxpayers will foot your bills?) and sucking up fully one quarter of the state's core operating expenditure. One quarter, and rising – with forecasts suggesting the number of people aged 65 and over would double in the next 30 years – delivering a “fiscal gap” second in the world only to the demographic basket-case that is Japan and with, until recently, a Prime Minister in denial that any of this is a problem.

Yet this morning, at the start of an election year, we heard the new Prime Minister chirping happily that he has the solution to solve all this is we can all of us only be patient. Ruling out “drastic changes” – no means-testing for superannuation and “no change to the way it is paid out” – he offered few clues but one to what that might be.

People would have to wait and see whether the age of eligibility would change.
    But there would be no change to the entitlement to superannuation. "We are not contemplating any change to the way the national super is paid," he said.

At least he’s acknowledging the problem, the first step in breaking any addiction. Yet it’s as clear as all politicians are liars that any “solution” will only be a temporary one – and in election year it will be one that will frighten few horses.

The retirement commissioner reckons the age for this form of welfare should be raised to 67. ACT’s David Seymour agrees. So too at the last election did the Labour Party – who were hammered for their own show of fiscal responsibility (and timorous leader Little has firmly backtracked on that since).

So what would a sensible libertarian do?

Clearly, rightly or wrongly people have made plans based on the lies and election bribes of politicians past, and few are in any position to change those plans immediately. Yet it remains iniquitous that generations priced out of housing by the borrowing power of these older generations should be forced to help supplement their retired ease. And it remains a serious handbrake to the saving and capital formation that would have made this whole country wealthier.

Raising the age from 65 to 67 should be just a first step towards abolition.

Economist George Reisman argues that the first step to painless abolition (arguing in the US context, take note) would be (with a grace period of to to three years to allow folk time to adjust) raising the retirement age from 65 to 70, and at the same time making anyone in that age bracket exempt from income tax. This would, upon implementation, slash the costs of this benefit by a third and allow those burdened by paying for it to increase their own savings by this amount, and increase also the community’s concomitant capital accumulation.

For some politicians, that might be enough. But if one could be found serious enough about abolishing this drain on saving, it would be easy enough after say fifteen years of having the age at 70 to then continue progressively raising the age at which folk become a beneficiary “by an additional calendar quarter every year” – which would see the progressive abolition of this failed experiment while giving all involved plenty of time to plan for alternatives.

Even without this long-term goal, writes Reisman1,

an immediate way to begin reducing the cost of these programmes would be for the government simply to make the kind of tax-exemption offer described above, to everyone eligible to receive [or soon to receive] these programmes’ benefits… If enacted, this proposal would achieve some significant immediate good, and, in addition, help to prepare the ground for further reductions in the cost of [the retirement welfare programme].
    It should also be noted here that the phase-out …, or the undertaking of any other measure that would be accompanied by an increase in the number of people seeking employment, calls for an intensification of efforts to abolish or restrict as far as possible pro-union and minimum-wage legislation … in order to make it possible for the larger number of job seekers to find employment.

At the same time, to help those with many years to go, there should be a very significant carrot …

The government's very considerable savings from reduced pension obligations over an initial phase-out period totalling almost forty years from start to finish, should be earmarked for tax reductions for workers who will never be able to enter the system, i.e., in the above scenario, workers aged 34 and less at the time of the reform's enactment. As these workers advance in age, new workers will be entering the labour market. There will thus be an increasing number of workers to bear the burden of the [pension] system's final phase. This will permit … tax rates to be steadily reduced on this group, until they disappear altogether.

This, or something like it, needs to happen if the carcass of the politicians’ decades-long bribe to voters isn’t to become our albatross.  It would be both moral and practical.

The end of [state pensions] would be the end of something that should never have been started in the first place. The root of the system is the philosophy of collectivism, in that it forces everyone into a giant stewpot as it were, in which individuals are compelled to support the parents and grandparents of total strangers, whether they want to or not, in exchange for themselves later on being compulsorily supported by the children and grandchildren of total strangers.
    And, of course, standing between the generations has been a mass of politicians and government officials who have used whatever excess has existed of these forced exactions over current pension payments, to fund ordinary, current government spending.
    If a private insurance or annuity company had done such a thing and used its excess of premium income over current payments, to finance the consumption of its owners and employees, for whatever purpose, including the funding of charities and public works, the company officials would now be spending long terms in prison. For it would be very clear that they had embezzled the funds of their clients. Yet exactly that in essence is what politicians and government officials have done, on a scale far surpassing all private financial frauds combined over the whole of human history.

I have no expectation however that the new Prime Minister will do anything remotely along these lines however – or espouse anything like these arguments -- especially not in an election year.

But I am prepared to be surprised.

UPDATE:

Billy Bob has now made his announcement, and there re no surprises at all. Like his colleague Nick Smith, Bill English makes no promises for this decade or even the next decade, but only a promise for 2040


NOTES:

1. Reisman’s proposal appears in section 4 of the last chapter of his book Capitalism, which can be found online here.

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