Friday, March 12, 2010

Austrian School of Economics: Why Social Security and Pensions Ruined the Economy

Last night, I attended my monthly discussion group. One of the topics of discussion was economic theory. I found the writings of an Austrian economist in 1950 very interesting in what he said the results of pensions and social security would be. Now that it is 60 years later, this man was so prophetic that his theory needs to be shared. Essentially, he believed that the unions drive to have pensions and social security, rather than individual retirement, would be counter-productive. It works in a couple of ways. First of all, pensions and social security remove the individuals interest in the issues of the economy and stock market that they become less able and interested to see how political decisions would adversely affect the economy. These people become divested in the economy. So, over the last 60 years, we have seen endless encroachments by the government into the economy go unchecked by an out of touch work force. Which, then accelerates the second aspect. The pursuit of security itself in retirement undermines the return on investment. As the government is more free to intervene into the economy, the less valuable the dollar becomes, which means the secure dollars in a pension or social security have less buying power. Additionally, because money is removed from the individual and added to pensions and social security, there is less money available in the market to grow the economy. It is like removing fertilizer from the soil and expecting a healthy flower. As pensions have gone away in my generation and social security is bankrupt, perhaps the pendulum will swing back and establish the correct equilibrium.

1 comment:

Kansas Bob said...

Do you feel that 401k plans are good or bad? Should the government not defer the tax on these govt entitlement accounts?