Wednesday, March 21, 2012

Soon Coming to a Retirement Plan Near You

Millions of workers lose pension battle with government

The linked commentary by Richard Evans at The Telegraph is addressing a specific government pension battle in the UK.

The case relates to Work and Pensions Secretary Iain Duncan Smith's decision to use the consumer price index (CPI) instead of the normally faster-rising retail price index (RPI) to measure price increases influencing pension upgrades.

The unions say the CPI route will see the value of pensions cut by up to 20pc over a normal retirement, costing every affected worker thousands of pounds.

They accused the Government of unlawfully attempting to reduce pension costs in the battle to cut the UK's financial deficit. The change from RPI to CPI is expected to save almost £6bn a year by 2014.

Throughout the Western and developed world, this is the reality faced by retirees and soon-to-be retirees. It is most certainly true for those dependent on government pension schemes – the promises will be broken. An examination of the tax and spending trajectories of these countries makes clear that the trends cannot continue. Further examination of the “promises” for retirement schemes, social security, medical care, etc., reveal an even more dire picture.

The future “promises” in the US have been estimated at anywhere from $60 trillion to well over $100 trillion. For a $15 trillion dollar economy (almost one-third of which is government spending), such promises will prove impossible to keep. Similar trajectories are projected in much of the developed world.

The promises will be broken. Inflation will erode the purchasing power of the retirement benefits. Or, as in the UK, the formula will be adjusted to reduce the future benefits. This is already true in the US, if one looks at the adjustments made to CPI both regularly and historically. Adjustments favorable to government budgets will be made, because they must be made. Economic law will allow no other answer.

…the Court said that where there were two different indexes, either of which could properly be used for the purpose of uprating public sector pensions, it was permissible for the Government to take into account the effect on the national economy when choosing between them.

The court (employed by the government) could come to no other answer. Members of the court are also relying on their livelihood from the same government. Is it possible these court members would jeopardize their future livelihood for the sake of other retirees?

Many of these government “promises” are not backed by contract, only legislation and regulation. These can be changed. Courts will back these changes. There is no contractual reason not to do so. Even if a contract stands in the way, political muscle will trump contract law.

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