Monday, December 17, 2012

A difference in kind

Megan McArdle has a story about pensions today that is too clever by half.  The only problem, is that there is a complete dis-analogy between a firm and a government:

Such a pension fund would, of course, be illegal. And for good reason: we recognize that it is not, in fact, a pension fund. It’s a promise by the corporation to pay its workers at some later date, not a funded pension plan. The company can call this anything they want—trust fund, pension plan, Ponzi scheme—but whatever we call it, we’d recognize it for what it is: a meaningless accounting fiction that does not in anyway enhance the security of worker retirements. And if, say, Verizon tried to fund its pension plan this way, liberals would hit the roof. Because we recognize that a pension fund full of third-party securities is not, in fact, very much like a pension fund full of securities issued by the same entity—corporate or government—that owes you the pension. 
It is true that the Federal government can choose to stop paying Social Security at any time.  And it is also true that money is fungible.  But the main point of differences is that the Federal government has the right to tax the citizens of the United States (and armed forces to back this right up).  No company has access to such a long term asset. 

This has not stopped governments from defaulting in the past and it sure won't stop them in the future.  But this is the same entity that regulates contracts between you and your self funded pension fund.  Why doesn't a financial asset manager decide to cash in all of their clients assets and head off into the sunset?  Well, because it is illegal.  But if there is no government then there is no reason to give back these huge pools of cash.

So, yes, it is possible that the government will turn on you but they have a) a massive, long term asset and b) not much else in the financial markets is likely to survive if they cease to function. 

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