GAMING THE SYSTEM

If you’ve done any reading about the reasons for the economic collapse, you’ve undoubtedly come across something known as derivatives, or credit default swaps. This is basically a form of protection in which an entity taking on a loan or buying a bond pays a little extra for a guaranteed payment if the loan or bond seller defaults (say, because of bankruptcy). Sounds a lot like insurance, right? Well, it is, but somehow the powers that be decided not to call it insurance or make the sellers of the CDS conform to the same rules as insurers. In other words, when all went to hell in a handbasket (forgive the cliché, I forget myself at time), the members of this “protection racket” weren’t required to have the cash to handle the defaults. So the system started to fail and the government had to rush in with the defibrillator (i.e., your tax dollars). Anyway, that’s my understanding of this part of the debacle.

Now, on to defined benefits. Hardly any of us doesn’t know someone who has retired in their 50s on their pension. They were promised fifty, seventy-five, maybe one hundred percent of their yearly salary upon retiring if they worked for twenty or twenty-five years. Perhaps they are now employed in a new, second career and are supplementing their salaries with a lordly yearly sum. That’s good, right? Well, what if nobody ever put aside or invested the money that’s being distributed? In other words, the generous benefit is unfunded; a guarantee made by people blind to the economic twists and turns of the future economy and a burden to all future generations of workers. The retirees, by definition non-producers for the company or entity making the guarantees, are shielded from the downturns of a tumultuous economy. And their numbers keep growing as longevity increases. In the case of government jobs, the guarantor is the taxpayer, such as myself. So, I’m committed to accepting the future economic risk for this retiree for the remainder of his or her life, through good times and lean, while no one has to guarantee me a dime. I’m subject to a lifestyle based on what I’ve managed to save and invest. If the investments go south, I’m expected to tighten my belt. But not those with defined benefits. And, in the case of the government’s obligations, filing for bankruptcy isn’t an option (or is it?—think Greece). In the private sector, the future of the pensioner hinges on the company’s not going belly up. Unless, like GM, it’s deemed “too big to fail,” in which case the government (i.e., the taxpayer) steps in.

So why have we reached this sorry state? The unions, which did a bang-up good job during the Industrial Revolution when the captains of industry were paying slave wages, have managed to tip the scales the other way. Now a significant sector of the working public earns more than they’ve earned. In other words, they are living at a higher standard of living than they should be. Fortunately, we have China, our children and grandchildren willing to subsidize this through a special unfunded program called the national debt. Or are they? And for how long?

Next, let’s talk about our favorite export—jobs.

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