February 24, 2020
Jose Pinera provides an Entitlement State 101 lecture, in which Chile’s former Labor and Social Security Minister demystifies the U.S.’s $100 trillion unfunded benefits problem. Since Pinera is the man who many years ago privatized Chile’s entitlement system, America, and the entire Western system, which for the past century has been relying on unfunded liabilities to provide benefits to the population in the hopes that funding day will never come, may do well to listen to what he has to say. His message: the American way of life, more so than anything else, in which reckless spending, living on credit and not saving for the future, is precisely why the US will be bankrupt very soon. Chile swallowed the bitter pill 30 years ago and after a lot of pain, managed to get out of the hole. Will enabler state #1, America, fail where this allegedly “backward” South American country succeeded?
Some insight from Pinera:
“$100 trillion is the present value of what Americans will have one way or another to pay, unless they default on their obligation to their citizens. And that is the future, and I am extremely worried because you are like passengers in the Titanic. You see the Titanic is going toward the iceberg of aging populations but populations the feel entitled to all these huge benefits that the politicans have promised the people, but they have not funded the benefits for the future. So how are you going to pay them? That is the big issue, the big domestic problem facing America.”
The problem is the entitlement state. The problem is that there is a gigantic disconnect between what the people want the government to pay them in the future, in health, pension, and what the people want to pay in tax. And because the entitlement state is based on promises for the future, you don’t have to pay it today, this is growing, because to win elections politicians offer benefits to people that would be paid to people in the future. So this big hole is not only a problem in America, it’s exactly the same problem in Greece today, in Southern Europen, in France, in Germany. The west will go bankrupt unless you reform deeply the entitlement state. You are all prisoners of the Bismark unfunded entitlement system…With the aging of population, the extended life, you have been accumulating these huge liabilities that eventually will bankrupt the government. A huge fiscal crisis is coming to the west unless you face it and confront it directly…You either will have to raise taxes big time in America, or you will have to cut benefits. But it is extremely difficult to do that, in a system in which you have people entitled to all this things.
America’s failed fiscal policy, its corrupt government, its kleptocratic financiers, its unsustainable deficits have all become the butt of jokes of the former developing world. And here we stand, with the market trading up or down 1%, based on which rumor is leaked on any given day about Greece’s upcoming €5 billion auction. In this context why even worry about $100 trillion. That amount, as Feynman would appreciate, is not even digestable in Bernanke (the 21st centuiry equivalent of economic, f/k/a scientific) numbers (just yet). Why indeed, when, as Pinera says, the problem is not contained in some building in downtown Washington, it’s in all of us. And those are precisely the problems that, at least so far in America, have never gotten any resolution.