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Promise or Ponzi Scheme?
02/25/2011 7:30 am EST
It seemed a distant show when the protests took place in Athens or Paris late last year. The citizenry raised voices of complaint when Greek government workers learned their pensions would be cut, and the French were outraged that the retirement age would be raised from 60 to 62.
Now it’s happening here—in Madison, Wisconsin—where government workers (except police and fire) are being asked to contribute more to their promised pensions and pay for more of their health care.
This is not the poor against the rich. It is the taxpayers against the tax beneficiaries. And there are so many of the latter because they’ve had such a good deal. Public workers vote—and they can bargain collectively in Wisconsin. They used that power to extract financial promises that have been made and cannot be kept.
They were the promises of a better economic future, made by politicians who could not deliver—and did not expect to be around to be held accountable when payment came due. They were promises made to buy votes, to buy peaceful co-existence, and to buy dreams. And now those promises are being broken.
Should we be surprised? I think not. A simple search of quotations about the value of promises—especially when it comes to money—leads to a treasury of global and historical perspective on the subject.
- The ancient Romans understood it: “Everyone is a millionaire where promises are concerned,” said the poet Ovid.
- Edmund Burke, the English philosopher, was another skeptic: “Hypocrisy can afford to be magnificent in its promises, for never intending to go beyond promise, it costs nothing.”
- A promise implies a future obligation—something now becoming obvious in our pension funds. "A promise made is a debt unpaid,” rhymed Canadian poet Robert Service.
- And what happens when those financial promises are broken? “The promises of yesterday are the taxes of today,” said William Lyon MacKenzie, the first mayor of Toronto, in 1834. It’s a lesson our own elected officials are belatedly being forced to learn.
- Ben Franklin predicted today’s protests: “Promises may fit the friends, but non-performance will turn them into enemies.”
Financial Planning Promises
When it comes to your own financial planning, promises are critical. We need to rely on promises that are made by our government—everything from the safety of bank deposits to the laws that govern pensions. We can’t be accountants or actuaries, but we have relied on our politicians to use sound financial projections.
That’s why today’s crisis is so scary.It cuts to the heart of your financial security.
Generations of politicians have postponed facing the inevitable through a process of “accounting legerdemain”—borrowing from the future to pay the present. It’s a giant Ponzi scheme. And it’s still going on. But just like Madoff, the weight of the scam is eventually and always the undoing.
Years ago, I did a television report about a pyramid game making its way around the suburbs. It revolved around an “airplane” theme, with people buying their way in on the lower level as passengers, and then as more people came on board, they moved up to eventually become the pilot—and collected big money. Those who hadn’t yet “collected” were furious that I had interrupted the scheme before they cashed out.
Similarly, over the years many people have become angry at my attempts to explain that Social Security is another version of the same game, and that it will either default on its promises or change them—so those who paid in over their working lives, and also saved additional money for their retirement, will be told that the benefits are only for the poor.
Few are willing to face reality. Everyone hopes to the game will keep going until the promises come true for them. And just like all those people who have been caught up in the pyramid schemes, those protesting today are angry and embarrassed—and looking for someone else to blame.
Planning, not Promises
I’ve written frequently about the importance of having your own savings, your own “chicken money” set aside safely to give you control over your financial future. Similarly, this column has made a point of suggesting you continue to invest in growth opportunities for your future—and that you hedge your bets on the value of the currency.
Those are promises you make to yourself—and keep for yourself. Those are promises that give you some control over your own destiny.
Here’s one more quote on promises from a most unlikely source, the Renaissance artist Michelangelo:
Clearly, Michelangelo could not only sculpt the human body; he also understood human nature. It is perfectly natural to want to believe in promises made by others. But first, you must understand their motives.
Then you may conclude that the safest course is to rely only on yourself. And that’s the Savage Truth.
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