Saturday, September 2, 2017

UBI as a solution to the public pension crisis

Universal Basic Income (UBI) is a cash dividend paid to society's members with the primary philosophical justification being that members own the society, and deserving an equal share of social revenues should be the primary purpose of those revenues.  Diversion of social revenues to fund public programs is appropriate when the programs are useful and efficient enough to convince the majority of social members to forgo a portion of their dividend in favour of funding that program.  When UBI is a sufficiently high amount, it also happens to eliminate poverty.

Political simpliciy of UBI
If the UBI amount is higher than the value of any government entitlement, then reform can eliminate that entitlement as part of the funding formula for UBI, without causing any harm to the beneficiary of the previous entitlement, and so no rational political objection to it.  A public pension is a government promise, and government promises are fundamentally entitlements.  So public pension funds become part of the financial/program pools available to convert into a  UBI amount.

Pensions are fundamentally ponzi schemes
For a pension system to stay solvent for 1000 years, it cannot use a defined benefit (promise of a specific compound annual return) system, and it cannot pool funds for general use (as opposed to segregating shares for individual entitlees), and it cannot be administered by anyone controlled by any motive other than protecting and maximizing all pension entitlee's returns, including the 1000 year sustainability mandate.

Public pensions typically fail all 3 of these tests, and all pensions fail at least one of them.  The defined benefit rule is always either a corruptibly unappealing too low of a return, or one that is unsustainable in the long run.  To sell a pension system to enrollees, it is necessary to lie about magnificent promised returns.  The reason you sell a pension system to enrollees is to control their money.  Buying debt or shares of the organization with their money in order to boost those values, is the typically envisioned use of that control.  Paying employees with future promises may also effectively augment their work ethic/devotion, using the tax code to induce them into accepting less pay in exchange for dubious promises.

Defined contributions (the alternative to defined benefit, where enrollees' entitlements are not a specific promised return, but whatever the returns happen to turn out to be) have their own problems.  The administrators are interested in fees or in fulfilling the motives of the controlling party.  Any friendships (bribery or corruption) they can form by utilizing the pension pool can provide better compensation alternatives than performance fees, though the latter can eat through returns well enough on their own.  The ideal performance fee structure is more complex than pension enrollees can understand, but is one that mirrors the defined benefit promises, while also encouraging capital preservation.  The better the pension administrator, the more power for the administrator to set a fee structure that benefits the administrator in deviation from the ideal.

The most important determinant of the ponzi scheme nature of every pension system is that there is no genuine concern for the 1000 year mandate.  At any slight performance or sustainability risk, protecting the benefits of the majority of entitlees (always the oldest) is the tradeoff chosen in favour of an eventual sustainability calamity/bankruptcy.  Ignoring sustainability issues such that bankruptcy occurs in 20 years is the preference of a 60 year old (with average life expectancy) compared to the alternative of taking a pension cut to ensure longer term sustainability.

A pension fund that invests in the organizations' securities is one that insures its bankruptcy's dependence on the organization.

Pensions as a corruption of democracy
A promise made 40+ years from now where no one today will be accountable if it is fulfilled or not is empty, even if it can be honest.  The important essay goes into detail on the incompatibility of pension systems with democracy, and also into details given in the next sections on liquidiating public pensions for immediate payout.

Immediate pension liquidation alternative to forseen insolvency
Although a pension ponzi scheme, like most investment offerings, is designed to take in money while taking every (legal) opportunity to avoid paying it back, a fundamental option satisfying the inherent rights of the entitlees is immidate liquidation proportional to the vested balance of each entitlee prorated to the fund's current solvency rate.  This is the fairest solution when worsening solvency fears exist, but its also a fair solution under any circumstance (a pension system is just holding money for you, restricting your access to the future, "for your own good".  Removing that restriction is still not a real harm to you.).  The relevance of "solvency fears" is that a wide variety of corrupt pension modifications are proposed in the face of these.  Invariably, the proposals of no change, or stealing from the benefits of younger enrollees to sustain older enrollees' benefits are both generational warfare solutions, as they harm those at the end of the entitlement line.

While public officials have the same corruptibility as private pension systems, and the desire to control their stakeholder's money as long as possible, it doesn't change the point that the only fair pension variance rule is one of immediate dissolution.

Non-UBI pension dissolution solution
Considering that pension enrollees may not need immediate access to funds, and that current tax policies favour ponzi schemes  (tax due when deferred income paid), dissolution of pensions into an on-demand withdrawal fund based on current market value (and so defined contribution based from hereon out), and asset portfolio is both fair, and avoids the costly rapid liquidation of the pension fund, satisfying concerns of the pension inflictor.

A UBI solution is preferable and applicable in the case of public pensions due to its inclusion in broader tax and institutional reform that is needed for many federal and regional organizational jurisdictions.

UBI as cooperation among levels of government
Though UBI is most often proposed as a federal program, it can be implemented at any social revenue  level, and is best implemented as contributions from all levels of government.  Program savings from UBI can be in social services, justice, education, health care, and if the savings created by UBI come to 3 budget levels, ideally, so should the funding.

In the context of eliminating pensions, that is a major UBI funding source, if the UBI level is sufficiently high to eliminate most pension obligations.   This implies funding participation by all levels of government in order that the total contributions of each can help discharge each's pension obligations.

Mechanism that UBI replaces an entitlement or pension oblligation
A UBI of say $15k can fairly replace a pension obligation if that pension obligation is either below $15k, or if the pensioner still receives the excess over $15k, if their pension entitlement is above the $15k UBI level.

Under UBI the pensioner receives everything they were originally promised.  Considering the sustainability jeopardy present in almost all public pension systems, UBI being a stronger and permanent entitlement makes it much more preferable to the pensioner than potential bankruptcy negotiated or politically dictated cutbacks.

UBI replacement is fair to both strong and weak pension funds.
While weak pension fund entitlees are gratefully bailed out by UBI conversion, strong pension funds provide stronger funding for their UBI pool.  Though not necessary for fairness, strong public pension systems could offer a politically motivated incentive to pensioners offering them their pension entitlements above say $14k on top of the $15k UBI (an extra $1000 for those with pensions worth more than $14k/year).

The idea of replacing pensions with UBI is a key affordability facilitator for UBI, and it is fair to deny public pensioner's the windfall of a supplementary entitlement above and beyond their pensions.

Amount pension replacement contributes to UBI
US state pension obligations are $4.3T,   US state and local pension assets are a bit under $4T.  These assets could be liquidated over a 10 year period.  Contributing over $560B per year (over $2000 per 227M adult citizens) with a 5% assumed return on the fund (conservative considering the economic growth impact of UBI).

This is a substantial contribution source that means UBI can be $2k higher at the same tax funded cost than any baseline amount.  Funding UBI is a simple sum of all funding sources, as was done in this tax-rate neutral plan for Canada.  An extra $2k per person in funding can be either $2k more, or $560B is a flat 3.1% lower tax rate on GDP, or 18% less needed (federal) tax revenue.

The pension crisis
The figures of $4T assets and $4.3T liabilities come from the federal reserve (and omit liabilities other than state pension funds).  With Federal reserve numbers, Illinois has a $114B funding of $247B liabilities ($133B funding shortfall, at a 46% funding level) as of Q1 2017.

Moody's assesses total public pension liability shortfall at $1.75T

This article highlights California's problems, and how the state politicians are assuming 8% perpetual future returns as a device to use pension funds for other purposes.

Previously apparently nearly solvent states (Minnesota) crumble when forced into appropriate accounting rules.

A portal devoted to the seemingly innescapable pension calamity with over 10 topical articles per day

Federal pension plans (social security, Canada Pension Plan) have similar solvency cliffs.  Population pyramids with low birth rates in generations following the baby boom are a root cause of funding deficits.

There is no pleasant or fair solution other than public pension elimination and liquidation with UBI replacement.  UBI solves the ponzi scheme nature of pensions by insuring short term budgeting (rather than 40 year or 1000 year) of its funding.  Any program or financial crisis management policy is a cost taken equally from every citizen (by reducing their UBI equally to pay for the program/policy) instead of an act of political favouritism that has one group made to bail out another.

1 comment:

  1. my assignment is due in two days on this crisis and i a mglad i got to read this article. i am so thankful. your writing style is through which makes it way more easier for me t ounderstand