May 30, 2014 | by Remberto Latorre-Artus Print

Over the past few years, Chinese experts have been concerned about the increasing financial burden of China’s aging population, which was propelled by the family-planning approach known as the “one child” policy. Yang Yansui, a pension expert from Tsinghua University, suggests that the sleeping dragon will become a “super ageing society” by 2035, with only two workers to support each retiree. 

The proposal from Tsinghua University is to increase the retirement age for men and women from 60 to 65. However, this will merely buy some time and prolong the agony; it will not solve the systemic problem. Therefore, Chinese officials have been studying another course of action based on individual retirement accounts.

Over the past two years, Chinese delegations have been visiting Chile to learn about its fully funded individual pension model, and several meetings have been held with the pension-fund administrators. Chilean experts have also traveled to China to explain the Chilean model.

Meanwhile in the bizarro western world, political elites are reversing whatever common sense remains in the pension systems.

For example, in 2008 Argentine President Christina Fernández de Kirchner announced the massive takeover of the accumulated funds from pension contributions, confiscating the lifetime savings of its citizens and scaring investors away. Tragically, the looted citizens didn’t seem to care, which greased the wheels for other countries to join the raiders club. Soon after, Bolivia (2010) and Hungary (2011) followed suit.

These revolt-free seizures of private capital were possible because the pension system’s employer- and employee-funded second pillar lacks individualization and because the political elites engaged in creative accounting: the seized funds were exchanged for (unfunded) promises of future payment. Thus responsibility for the new unfunded liabilities will fall not on those who made the promises, but in the long run, on future administrations, when the legal plunderers are long dead.

Considering the unique nature of this legal robbery--the seizure was possible thanks to an un-individualized common pool resource (the SEcond Pillar) and to the ingenious maneuver of kicking the issue to future generations (Somebody Else’s Problem) -- it would be fair to call this exclusive clan of nations the “Club SEP countries.”

On February 3, 2014, Poland became another member of the Club, which illustrates a tragic global trend that will soon include Bulgaria, Ireland, France, and even Chile if President Michelle Bachelet succeeds with her socialist reforms. These devious moves will eventually cover the accumulated savings of most public pension programs around the world, proving that governments are champions at enforcing participation in their schemes, but poor at protecting the rightfully accumulated property of their people.

The growing evidence from the Club SEP countries demonstrates that the incentive behind politics to deplete their citizens’ savings is no different from the incentive to deplete a common pool resource in the private sector. However, governments have the power to coerce, which makes the outcome worse. This goes to show that people behave similarly, no matter the institutional context. That is the big lesson here.

When Nobel Prize-winning economist James Buchanan defined Public Choice theory as “politics without romance” (PDF, pp.45-46), he wanted to explain that politics, as markets, also fail. In his view, educating the population about government failure is a key element to improving governance. Public Choice theory—or the economic theory of politics—offers the insight of behavioral symmetry, that is, people are self-interested and responsive to incentives in both the political and private sectors. In other words, self-regarding individuals do not magically become altruists in public office.

Public Choice uses economic theory and empirical evidence to demonstrate why looking to government to fix things often brings more harm than good. The ongoing tragedy of the pensions commons, exploited by the Club SEP countries, is a perfect example of the unintended consequences of political control over a common pool resource.

Unfortunately, the growing literature on pension reform, since its inception in 1980, as well as the media coverage and political discourse, has focused almost exclusively on the normative aspects: redistribution, insurance, the smoothing out consumption over time, and poverty relief. The accountability and incentive problems that stem from political monopoly are methodically—and naïvely—shrugged off.

Thus individualization of the second pillar is the only way to minimize the tragedy of the commons, because it would empower people through ownership and, most importantly, through knowledge. Once the second pillar is properly individualized, people will be able to see how their retirement accounts grow over time. They will know better what the second pillar is all about. This knowledge in society would help constrain the political manipulation—and inevitable depletion—of what should never have been treated like a common pool resource.

While China looks at Chile as a role model to reverse the unintended consequences of its one-child policy, the rest of the world is undoing the success of sound savings.

China is rowing in the right direction while the rest of us are drifting away.

Remberto Latorre-Artus is a research fellow at the Austrian Economics Center and a PhD candidate from the University of Vienna, Austria. Remberto is a former Army Officer, Entrepreneur and a recent graduate from a dual MA in Economic History (University of Vienna) and Economic Policy (Central European University, in Budapest). Learn More about Remberto Latorre-Artus >