Wednesday, April 17, 2013

How private pension systems screw over youngsters anyway

[Ahh, Vasyloo, so nice to see you at your best. Enjoy this guest post and put your hands together for a return of one of Poland X's founders.]

There is a lot of debate in Poland over its pension system. The local incarnation of CNBC asks non-stop financiers and businesspeople why they hate the public pension system. The most common criticism is that it is not "trustworthy" or "these are not real savings." The overreaching agreement is that the public pension system screws over young people, who will have to suffer higher taxes in order to dish out cash for those bastard "pensioners."

By the way, I love that term. Pensioners just has such a vile ring to it. Not mothers, fathers, grandma or grandpa. Pensioners. It just sounds...evil.

One of the main arguments against the state pension system is "the state will have to raise future taxes to compensate for demographics." Alternatively, we should obviously go private. What these people don't say is the fact that the private systems screws over young people just the same, only through different mechanisms and different groups.

But...but...Well, it is quite simple. What pro-private pension proponents forget is the little tiny fact that both wealth and the lack thereof is transferred between generations. What this means is that if old people spend their savings, their descendants don't get a dime, just as in the public pension system where the government collects the taxes and then pays out the pensions.

Once a pensioner spends all his or her savings, they will tap other available assets, and then start depleting (or taxing) the wealth of descendants (it's often called family). The fewer the descendants, the higher the tax since the same cost of living must be spread out over a smaller number of people. (Notice any similarities?)

Ok, ok, but what if these people are thrown out by family, are single and ate away everything they created? Well, social security will step in. But higher spending for social security is financed by...yup, you guessed it. 

Ok, so let's scrap social security -- make the bastards die in the streets! Well, if there is no social security, two things would happen. Those who are able to work would start seeking their old jobs back (they would actually never leave them). Higher demand for work means lower salaries and higher unemployment, mostly for the inexperienced, for entry-level positions held 
by...aha, you get the picture now?

The bottom line is that no matter whether it is the public or private pension system the young generation will be stuck with the bill. The real difference is who benefits and makes the money on the issue.

Obviously, the private pension system is good for the finance industry -- fees, fees, fees, feees, feeeeeees forever. Indirectly, it is also good for businesses who get cash from the finance sector. On the other hand, state pensions are good for bureaucracy, the government, etc. 

Last but not least, the private pension system is better off for wealthier people because in the case of the private system poverty is inherited. Poor people are more likely to be a drain on their direct descendants than people who are better off. In the public system, these are more averaged out by taxes. If you think this is BS, look at the wealth disparity in the US. 


I guess in the end it's damned if you don't, damned if you do.

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