Increasingly state governments in the US are facing budget shortfalls over entitlements paid to public servants and those on the public dole. And like the Social Security program, the shortfalls have been wholly predictable as government makes bigger and bigger promises to a select number of citizens who then take up a bigger share of the public pie.
There is a dirty secret about state entitlements that liberals don’t want you to know. The collection of a state pension increases the chances that a pensioner will live in poverty. That’s because money put aside for state-guaranteed benefits can not be safely invested at rates that provide for more than a modest retirement unless the state subsides retirement benefits through taxes or if retirement savings are invested in riskier, higher yielding investments. Since governments are loath to raise taxes to subsidize a riskless retirement, benefits are eventually reduced. It works that way in London and Moscow as well as Madison and Sacramento.
In Moscow, public pensions and social programs helped bankrupt the Soviet Union in the 1980s while “transfer to pension status greatly increase[d] the likelihood of poverty,” according to Mervyn Matthews’ Poverty in the Soviet Union (Cambridge Press, 1986). In London, the former Labour Minister John Hutton’s Independent Public Services Pension Commission has recommended changes that would calculate pension benefits on lifetime earnings rather than current salary, in line with recommendations for pension reform from the Office for Economic Co-operation and Development (OECD). Trade unions in U.K. say that such changes will lead to “increased pensioner poverty.” In Madison, WI public retirement applications have risen 73 percent according to the Wall Street Journal as workers try to lock in higher retirement benefits that will likely shrink for those public employees retiring in the future.
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