The Pensioner's Dilemma : Is the right to a leisurely retirement practical or even desirable ?

"What government touches, government ruins" stands as apodictic a law as any in nature. To say "touch" is to be magnanimous, because government rarely touches, it inserts -- an iron fist mostly. And where intromission occurs, distortion, inefficiency, moral hazard, expense, corruption, and a lot of pain follow.

The examples are so numerous -- in commerce, in finance, in education, in ecology, in welfare, and in the law -- they appear on a whim to anyone conversant in Austrian- or Chicago-school economics. Retirement requires a little more vetting. Sure, there is the obvious: Social Security, which even a few enablers of government-sponsored ruination will acknowledge, during brief lapses into lucidity, is at its core a multitrillion-dollar Ponzi scheme.

Unfunded state pension liabilities are equally obvious: California is putatively $55 billion in the hole (unofficial estimates put the number at $500 billion), New Jersey posts a $53-billion account deficit, even small-fry Maine over-promised its public masters and finds itself $4 billion in the red. A 2010 Pew Center reports an official nationwide shortfall of $1 trillion, while Professors Joshua Rauh and Robert Novy-Marx estimate $3 trillion.

Before bloated pensions swamped the public sector, they flattened many in the private sector; none more notable than Bethlehem Steel, whose history spanned a century and a half of American commerce. By the 1950s and 1960, Bethlehem was sitting in high cotton, so high, in fact, that it doled out lavish retirement benefits like so much Halloween candy. By the 1990s, the high cotton had been picked away by foreign competition and what remained was crushed under the weight of unserviceable debt. In 2001, Bethlehem filed for bankruptcy. One year later, it transferred its pension fund and its obligations to the U.S. Pension Benefit Guaranty Corporation, which promptly scrapped Bethlehem's 30-years-and-out agreement with the union.

It should never have come to this. A hundred years ago, retirement plans were private-sector novelties, and played no role in attracting or retaining employees. That all changed when government got into the distortion business big time during World War II. The combination of wage and price controls on an evaporating labor pool made attracting employees difficult. Businesses discovered that offering retirement plans allowed them to circumvent these controls.

Over time, big business and big government embraced retirement-plan schemes, even though benefits-as-compensation is always bad business, because benefits are suboptimal compensation. Benefits force employers to rank workers' utility. With cash, employees are free to choice purchases that rank highest on their utility scale: retirement funding and disability insurance for those who value the future more than the present, Aruba vacations and BMWs for those who don't.

Defined-benefit plans demand more clairvoyance than is practical, so the best of times get extrapolated -- evinced by ridiculous compounding rates -- with no thought of subdued times, much less the worst of times. Defined-benefit plans are paternalistic and infantilize the workforce. Because of the promise to fund their retirement, employees are released of the adult responsibility of anticipating the future. Meanwhile, government -- by demanding social security contributions, insuring defined-benefit plans, and offering defined-benefit plans to its employees -- promotes the unrealistic expectation that everyone has the right to live as a rentier. The recent private-sector switch to defined-contribution has yet to shift the paradigm for government employees.

More insidious, defined benefit means defined mobility. Many workers exchange the prime years of their lives to work at jobs that are disagreeable in exchange for a thumb-twiddling retirement at an age that may or may not come. After all, not even government is so omnipotent to guarantee everyone reaches old age. Nor is government so omnipotent to guarantee the pension contract. Pensioners delude themselves into thinking they've earned their sinecure, so the contract is inviolable, but they are hardly in a position to impose their will.

The saga of Stefano di Poggio is both cautionary and revealing. In the early fourteenth-century, Castruccio Castracani rose to power in Lucca, Italy, thanks to political power of Stefano di Poggio and his family, who elevated Castracani to the dignity of prince. While Castracani reveled in his exulted position, the di Poggio and his family stewed in their irritation, believing they had been slighted by Castracani and deserved additional compensation and credit for their support. The family incited a rebellion against Castracani.

Stefano di Poggio, a peaceable old man, objected and compelled the rebels, by his authority, to lay down their arms. Di Poggio offered to negotiate with Castracani, on behalf of the family in order to obtain what di Poggio and the family believed they were due. Castracani listened patiently as Poggio eloquently recited all he and his family had done for Castracani. When di Poggio finished, Castracani invited di Poggio and his family back to the palace. When they returned, Castracani had them all imprisoned, including di Poggio, and then had them all executed.

Di Poggio's folly was to highlight what he had done for Castracani, not what he could do for him. Di Poggio was no longer valuable to Castracani. To the contrary, di Poggio was an obligation. Had di Poggio convinced Castracani of his value on future endeavors, di Poggio would have likely lived a longer life. Compensation is as much about tomorrow's work as it is yesterday's.

Today's pensioners are like Stefano di Poggio: they are liabilities because they offer no future value; liabilities are jettisoned first when times turn tough. Future Social Security pensioners will learn this lesson in time; benefits will continue to shrink and age requirements will continue to rise. Government retirees will experience a retirement more stressful than their employment. (Advice to government employees about those $200,000-a-year private-sector jobs you claim to forgo for the higher calling of "public service:" you might reconsider those offers.) The money is only yours when it is in your account. IOUs don't count. A pension contract is a unilateral contract.

Those of a confused bent believe that pensions are worthwhile because the old need to step aside for the young. The confused wax imbecilically on how economies are zero-sum contests: When China grows the United States must shrink; when a seventy-year old is employed, a twenty-five year old must go without. Because politics is a zero-sum contest, politicians are blinded to the reality that economic activity leads to more activity among all participants. There really is room for all.

The right to a leisurely retirement has been imprinted on at least five generations of Americans, which is why so few consider whether it is practical or even desirable to guarantee that everyone should meander through the last twenty years of life. Degradation intensifies when mental activity abates, and mental activity abates when there is nothing to strive toward and there are no problems to solve. Work for compensation is desirable because work for compensation is an expression of value creation, and value creation instills a sense of self worth. Work keeps the mind and body alive.

Work or play are personal choices; neither choice should be subsidized or deterred, nor should the choice be relegated to a disinterested third party. Whenever the individual abrogates responsible, he surrenders his independence to another people's intentions, and another people's intentions are always driven by what is best for the other person.

Stephen Mauzy is a financial writer, analyst, and principal of S.P. Mauzy & Associates.

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