Monday, May 24, 2010

The Welfare State Killed Itself

A narrative is emerging across the developed world - General Motors, Greece, Spain, the United Kingdom, federal, state, and municipal pensions....Put simply, the welfare state is no longer able to fund itself.

Defined-benefit pension plans and cradle to grave social systems- that are funded by subsequent generations - are driving massive deficits. Moreover, investors are refusing to finance deficits, forcing gut-wrenching but necessary cuts to the welfare state.

Importantly, the culpability of these cuts lies not with international investors, the IMF...but rather with the politicians, both Republican and Democrat, that ignored years of warnings and continued to enact welfare programs and pensions obligations that were impossible to deliver.  The villains are politicians who insisted it was a "right" to receive benefits that are simply impossible to pay for.

The private sector went through a painful, but necessary migration from defined-benefit to defined-contribution pension plans over the last thirty years.  Moreover, in the US, flexible labor laws allowed companies to restructure and eliminate tens of thousands of jobs that were no longer viable or necessary.

The public sector, however, has simply refused to confront the hard facts that laws and programs enacted for the "public good" - life time teacher tenure, full pensions for public workers, job guarantees - were in fact creating a fiscal monster that is eating an increasingly larger share of government budgets.  

The system is killing itself and its proponents need to move from defending existing programs to taking a vested interest in making changes, as soon as possible, that will make changes, while painful, not disastrously so.