Chapter 45: Pensions
Updated: 1/13/20
Christian Economics: Teacher's Edition
Honor your father and your mother, that your days may be long in the land that the Lord your God is giving you (Exodus 20:2).
A positive sanction is attached to this verse: long life in the promised land. This is a clear indicator that this verse is associated with inheritance: point five of the biblical covenant.
The nation was chronologically ready for the inheritance immediately after the exodus, but the generation of the exodus did not inherit the land. They rebelled against the report of Joshua and Caleb, who said it was time to invade the land of Canaan. God brought Israel under negative sanctions. He told them that they would not inherit the land (Numbers 14:35). Their children would inherit.
Paul wrote that this was the first commandment with a promise. “Honor your father and mother” (this is the first commandment with a promise), “that it may go well with you and that you may live long in the land” (Ephesians 6:2–3). This statement appears in a presentation on family authority. He immediately added this: “Fathers, do not provoke your children to anger, but bring them up in the discipline and instruction of the Lord” (v. 4). He understood that the commandment was about family authority.
There are economic implications of family authority. Throughout history, in every society until the modern West, children have supported their parents when the parents became infirm. This is part of the process of inheritance. Parents bring up children, but they know that they may become dependent on these children when the parents are aged. Parents have always had an economic incentive to provide training sufficient to enable their children to support them in their old age. This calculation has been basic to civilization from the beginning. It was built into the curse (Genesis 3:19). We return to dust. But in the interim between productivity and death, there are threats. We age. We sometimes become infirm. We may become a financial burden to our children. They are supposed to sacrifice on our behalf when they are in their most productive years. They must bear the burden of parents who are no longer productive, while training their children to be productive. It is a double responsibility. It is inherent in the process of death.
The modern world, beginning around 1800, has steadily reduced this economic burden. First, per capita wealth began to increase sometime between 1780 and 1820. The compounding process was not reversed for the first time in recorded history. Second, life expectancy began to increase. So, as parents aged, they did not become infirm in the days when their children had young children. They may have become infirm at age 70 or 80, but by then their children were close to finished with rearing their families. Everywhere else on earth, parents normally died much younger. They became a burden much younger. As life expectancy has increased, worldwide, men and women have remained productive longer. They have had more years to accumulate capital to support themselves in their old age. They became more likely to leave an inheritance to their children. By the 1880s, families in the West had reduced the burden of supporting aged parents to a level never seen before.
In the 1880s, Otto von Bismarck was Minister President of Prussia and Chancellor of the German Empire. He led the conservative political movement. The socialists were beginning to make inroads politically. They called for state-funded pensions. In order to undercut them, Bismarck also proposed this. In 1889, he succeeded in establishing the first state pension system. Payments began at age 70. This was when few people lived beyond 70, which was Moses’ famous limit (Psalms 90:10). This state welfare program did undermine the socialists. He called his program “practical Christianity.”
The principle here was clear: the state, not the family, is legally responsible for the care of the aged, if they have worked for salaries. Even if sons fail to honor their God-given obligations to their parents, the state will be faithful. Every retired worker can henceforth trust the state to support him.
This transfer of responsibility to the state substituted impersonalism for personalism. No longer would familial bonds guarantee an aged parent’s care. Henceforth, state bureaucrats would enforce the pension law, just so long as the paperwork was in order. The pension system became grounded in civil law, not in love or sentiment or custom or guilt. There was now a judicial agreement, and this agreement was public. It was enforceable in civil courts.
This program has been imitated in the West. It is almost universal. Workers pay taxes. They collect pensions from the government. But there is a huge problem. The payments are legally separate from the pensions. These are not legally enforceable annuity contracts. The revenues generated by retirement taxes are spent immediately by the government on general expenses. These taxes are a matter of politics. The payments are also a matter of politics. Politicians promise low taxes. They promise high payments. But the politicians do not invest the money generated by the retirement program’s taxes. They spend it. Every national government has built up enormous obligations to retirees. These are unfunded liabilities. There is no possibility that governments can meet these obligations. While these obligations are a fraction of the old age health care obligations, they are nevertheless enormous. They will be bankrupt before the twenty-first century is over. Most of them will be bankrupt before the halfway point.
The state is a false heir. We see that it has assumed the legal responsibility associated with inheritance. Throughout history, sons and their wives have been ready to bear the responsibility of supporting aged parents. The parents have known that their support was coming out of the budgets of their children. They have also known that the sons would inherit any family land. There was a quid pro quo involved. But as the state has steadily replaced the economic function of the biological heirs, parents have used politics to extract greater retirement support out of the common wallet of the nation. They have not exercised self-restraint. They conclude that they owe nothing to the impersonal budget of the government. The masses of workers owe the retirees. This is clear to the retirees. As for the taxpayers, they put up with this because they hope to be on the receiving end soon enough. Perhaps at age 62 they will begin to receive monthly checks. They may live two decades with this stream of income. They hope not to move in with their sons and the sons’ wives. The sons and their wives also hope that the parents will not move in.
The commandment to honor parents has been broken by the compulsory pension programs around the West. The personal bond of the family covenant has been broken. The oldsters have traded the security of the family covenant for a mess of pottage: the promises of politicians. Most of these politicians will not be in office when the fiscal crisis hits. The children of retirees still hope to inherit more from their parents because their parents are receiving subsidies from the government. But the taxes required to support the retired parents are consuming the capital of the nation. This will reduce economic growth. It will reduce the flow of future funds. This is a form of disinheritance.
Politically, the people who are receiving payments will resist any reduction of payments. They will strongly resist the annulment of the program. “We paid into the program. The retirement money is ours by law.” This self-interested political pressure guarantees the expansion of the program. These people vote as a bloc. Politicians fear their wrath at the next election. Simultaneously, the workers who pay the taxes also resist any change. They want to be recipients of money at some point. Also, they do not want to become responsible for funding their parents if the government’s checks should cease. No one looks at the fiscal reality: future state bankruptcy. The unfunded liabilities will not be met. Why do voters ignore this? Because people are present-oriented. They discount bad news about the long-term future. They are also optimists regarding the state. They value good news about the short-term future. They want the state’s pension program to continue.
The state assumes the role of false parent when it funds the education of children. This moves education from the personalism of parental authority to the impersonalism of political and bureaucratic authority. Then, when workers retire, the same shift takes place again: from personalism to impersonalism. In the interim, from about age 20 to age 60, there is adulthood. The workers pay taxes to fund the pseudo-parent that funds education and the pseudo-heir that funds parents in their old age. This is the meaning of the English phase, “from womb to tomb.” The state substitutes impersonal power for personal authority grounded in the family covenant. The civil covenant is an impersonal imitation of the family covenant whenever the political order becomes welfare-based. Bismarck called this system practical Christianity. It is in fact impractical anti-Christianity. Fiscally, it is leading Western nations into bankruptcy. This is highly impractical.
What is a buyer buying? An annuity. He pays now, and he is guaranteed a stream of automatic income after he reaches a certain age until he dies. He can pay in the form of time and money invested in his children. Or he can pay taxes to the state. There is no contract with his children. He can invest whatever he and his wife decide is best, child by child. He is not guaranteed a specific return. There is also no contract with the state. Retirement taxes can rise, but will not fall. The economic return is subject to future politics. Returns will rise until there is a fiscal crisis. Then they are a matter of special-interest group vs. special-interest group.
With respect to the state, a buyer wants to buy low and sell high. He wants to pay in a minimum amount and withdraw a lot. He participates politically in an age-related voting bloc to achieve these goals. The older he and his cohorts get, the more political power they possess because they vote as a bloc. The state is not his heir. He wants to minimize whatever he leaves behind to the state.
With respect to his family, there is little trace of the “buy low/sell high” motivation. He wants to leave an inheritance to his children. The less money that he receives from his children when he is alive, the greater their inheritance. The element of inheritance separates this annuity from the annuity from the state. His children presume that this is his goal, although in some societies, such as the United States, only the very rich discuss these matters with their children. There is a cultural taboo about discussing parental finances with children, including the size of any inheritances.
With respect to the state, the relationship is strictly impersonal. The money is promised by politicians as a way to buy votes. It is administered by bureaucrats. The formulas for payments are arcane. Only the bureaucrats understand them. In fact, it is likely that in individual cases, different bureaucrats will decide on different payments to individuals due to the complexity of the formulas. The recipients are generally passive. They take whatever they are offered. So, there is a mixture of impersonal formulas and personal interpretation that is based on confusion.
The formulas are impersonally fixed. They have nothing to do with the recipients’ needs, wants, or cost of living. In this sense, retirement programs are analogous to annuities sold by profit-seeking insurance companies. But they are different judicially. They are not legally enforceable contracts. Politicians can raise benefits. They can also cut them in a fiscal crisis. There is nothing legally secure with government retirement programs. The program in the United States is called Social Security. The program is not social; it is political. The program is not secure. It is dependent on politics, including the purchasing power of the nation’s currency, which is administered by the central bank.
A seller is a politician who is buying votes. He promises that the retirement program “will always be there, no matter what.” In short, he lies. First, he knows that future politicians can reform the program by changing the formula. This may involve spending cuts. Second, he knows that there is no money in any trust fund. The fund is filled, if at all, only with government IOU’s. Third, he knows that the program is not secured by contract law. Fourth, he knows that the purchasing power of the currency is not sure. Fifth, he may know, and certainly should know, that the unfunded liabilities of the program are so large that the government will default on all or some of today’s obligations. These are not legal obligations. They are political obligations. They are based on today’s politicians’ promises regarding future politicians’ performance in office.
The sellers may mentally count on price inflation to reduce the government’s economic burden. But there are problems with this assumption. First, there may be a cost-of-living clause in the law. If prices go up, payments must go up. One way around this is for the government to declare price controls, meaning price ceilings. The index used to calculate price changes will make it appear that there was no price inflation in the previous time period. The problem here is the controls’ creation of shortages in the economy. The price signals are no longer reliable. The production system will be disrupted. Price ceilings cannot be left on for more than a few years. Second, the government’s central bank cannot continue with this policy of monetary inflation for long. The currency will fall to zero value. It will no longer allocate goods. There will be a substitute currency in the markets. There will then be a currency reform. At that point, the obligations of the retirement program return. They are inter-generational. Hyperinflation only delays the politicians’ decision to default on the program.
The children are not sellers of their parents’ old age security program. They do not promise anything in order to secure their inheritances. The parents assume that they will not be thrown into the streets if their wealth has been consumed. This is a safe assumption for the vast majority of families. Children will intervene. They may argue as to which child assumes what burden. That is when parents should intervene and arrange the inheritance in terms of which children pay what. But this is rarely done in societies in which discussing money with children is taboo.
A pencil company must pay money to the government for its share of the workers’ retirement program. In the United States, this is 50% of the tax. The politicians tell voters that companies pay half. This is incorrect. The companies pay workers in terms of the value of the workers’ output to the companies. Wages are set by the auction process: employers vs. employers, employees vs. employees. Employers will not pay more than the output of workers’ labor is worth to them. Businesses are not charities. Businesses are willing to pay the government a portion of this wage, but only on this assumption: they will pay the employees this much less. The workers could have negotiated for the money paid to the government. The politicians never mention this in their campaign speeches and form letters sent to constituents.
Think of this in terms of a pencil. The employer writes down a wage that goes to a worker. He also writes down the payment to the government retirement program. If the government disbanded the program, the employer would then erase the payment to the government. He would like the competition to end there. But a worker may come to him. “Write down the money you just erased, and put it into my wage.” If the company wants to keep him, that is what it will do. This is a matter of negotiation.
The creation of government pension programs has undermined the family structure of the West. Parents expect less from their children. The children expect to pay less. This has not been accompanied by an increase of guilt of the part of the children. The widespread acceptance of the morality of government pensions reduced guilt. The children are happy to vote for more welfare programs for the aged. They do not count the cost to the future operations of their national governments. They do not understand that the programs’ unfunded liabilities guarantee a great default.
Bismark’s 1889 program of compulsory state pensions set a precedent in the West. Other nations imitated this. This has led to a fiscally unsustainable series of state pension programs in the West. The promises of politicians at some point will be exposed for all to see as unconnected to fiscal reality. There will be universal defaults, along with defaults on government programs funding medical care for the aged. This will undermine confidence in national governments. It will also undermine their legitimacy in the eyes of voters. “But you promised!” Answer: “Sorry about that.” Children will have to make up the difference in their parents’ income. They have not budgeted to do this.
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