Lessons From Greece for Everyday People

Greece's economy is, at best, a withering mess. And it will probably get worse before it gets better.

For economists, there are all kinds of lessons to glean from the country's downfall -- how a shared currency caused overinvestment and uncompetitive wages, how structural unemployment brought growth to a halt, and so on.

But most people don't care about exchange rates or credit spreads. They have real lives to worry about. So what can the average American learn from Greece's nightmare? Quite a bit, I think.

In April, 77-year-old Dimitris Christoulas walked into a busy square in central Athens and shot himself after his government pension was allegedly cut. His suicide note was telling. "The government has annihilated all traces for my survival, which was based on a very dignified pension," he wrote. "And since my advanced age does not allow me a way of dynamically reacting ... I see no other solution than this dignified end to my life, so I don't find myself fishing through garbage cans for my sustenance."

I don't post this to be morbid, but there's a lesson from the tragedy (which, sadly, wasn't an isolated event): As much as you can, don't rely on someone else to keep you financially afloat, especially if that person has different priorities than you do.

According to Credit Suisse, 97% of S&P 500 companies with pension plans are underfunded. The Congressional Budget Office wrote last year that "By any measure, nearly all state and local pension plans are underfunded." The Social Security trust fund is currently set to be exhausted in 2033.

Why are so many pension plans underfunded? Partly because investment returns have been so lousy lately. But a lot has to do with a flaw in the way pensions are arranged. It's simple: If you're the future recipient of a pension, your highest priority is that the plan will be solvent during your retirement, which might be decades down the road. If you're the one running a pension, your highest priority is appeasing those currently paying into the system by keeping contributions low. Those priorities don't mesh; yours is long term, theirs is short term. Eventually, the two catch up and you have some sort of crisis. "Pensions are a perfect vehicle for procrastination," Roger Lowenstein wrote in his book While America Aged. Before it went bankrupt, former GM (NYSE: GM  ) CEO Rick Wagoner summarized it thusly: "The weight of history on our results has been significant."

Want to guarantee yourself financial security? You have to do it on your own, folks. If your employer has a 401(k) plan, use it. If you haven't opened an IRA account, do so. The pension overseers you're currently counting on to fund your retirement are probably doing a poor job and have a heavy incentive to look the other way (they'll be retired by the time the bill comes due). Greece is a tragic example of this happening in real time.

Something else we can all learn from Greece: how fast things change and how wrong popular opinions are.

I spent some time yesterday digging through Google Archive to see how many people were predicting Greece's implosion five or six years ago. I couldn't find any, but I found several boasting of its success, like this one from 2007:

During his first term, George Alogoskoufis, the canny finance minister, got public finances back in order and removed bureaucratic obstacles that were preventing Greece from receiving its full share of EU funding. The economy is growing by more than 4% a year. Tourism is headed for a record year, with more than 16m visitors expected.

Or this outlook, from the European Central Bank in 2005:

[Greece and Germany] can be expected to strengthen further as a result of the increasing integration of all markets in the European Union and as a consequence of the unique and irreversible connection between the economies of the two countries implied by their common currency.

There will be other crises in the future, and they will all share a common denominator: Very few people will see them coming, and they'll happen quickly. "History doesn't crawl; it leaps," the saying goes. That's one reason that you need to save, and be prepared for the unexpected. The unexpected happens every year, without fail.

Last up, Greece's riots are a good reminder that austerity isn't popular, no matter what your political jingles are or how necessary it is.

America's federal budget is unsustainable. Everyone agrees on that, and most want something done about it. The problem is -- surprise -- most people really like government benefits. The majority (75%) of government spending is on four programs: defense, income security, Social Security, and Medicare/Medicaid. Findings like this, from the Tax Policy Center, tell you everything you need to know about how popular these programs are:

Three-quarters of Americans believe that entitlement programs such as Medicare and Social Security "will create major economic problems" over the next 25 years. But two-thirds are opposed to addressing these challenges by reducing benefits, and 56 percent are against raising taxes.

Cut the deficit, just don't touch my benefits or raise my taxes. The same feelings appear to have swept Greece, whose protestors I think understood that austerity was necessary but felt the cuts should have been imposed on someone else. Alas, the deficit can't be cut on "someone else's" back because that someone else is eventually you. Very few people go out quietly when they realize that they personally have to make a sacrifice to cut the deficit. That was true in Greece, and I think it'll eventually be true in America, too.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of General Motors. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (18) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 19, 2012, at 1:35 PM, sheldonross wrote:

    "The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money."

    I thought this was Alexis de Tocqueville, but Wikipedia tells me it's misattributed. Still one of my favourite quotes.

  • Report this Comment On June 19, 2012, at 2:56 PM, whereaminow wrote:

    Nice article Morgan.

    Tragic that Dimitris learned too late that self reliance is the only way to guarantee financial security. Of course Dimitris wasn't alone in thinking that the government would care for him from cradle to grave. And his own government had been promising him for decades they would do that very thing. All governments desire to have that role. It means total control and total power.

    The most important thing any individual can do to protect themselves from both governmental and corporate robbers is to reject the Welfare State and the Warfare State.

    By doing so, one opens their eyes to the Complex relationships between powerful interest groups (big banks, big pharma, big medicine, military, big agra, etc) and the State. The opened eye discovers how these institutions (and the individuals in them) use false choices (austerity vs. stimulus, for example) to rob men like Dimitris to the point where they blow their own brains out over a lost pension.

    There is no Left/Right. That is a false choice between two tyrants. There is only Authoritarianism versus Liberty. Liberty requires self reliance and a rejection of the State's offers to "help." The "help" ain't worth the price they're charging.

    David in Liberty

  • Report this Comment On June 19, 2012, at 3:31 PM, wolfman225 wrote:

    ^Agreed, David. I'm just afraid that we may have gone so far down that road that Gov't now has the necessary power to refuse to accept a populace's decision to refuse their offer of "help". Witness the Paulson bailout offer to the banks. Even those who didn't need/want their help were told they had no choice.

  • Report this Comment On June 19, 2012, at 4:00 PM, ibuildthings wrote:

    Well said Morgan. Pensions, SS and Medicare were designed when people lived a few years after retirement. It is a happy thing that we live longer now, but that implies some changes in the social contracts. That takes money. When it is other peoples money, politicians get involved. The political process reduces, not improves, the efficiency of everything it controls.

    So developing our own investment skills may be difficult, but it is worth the trouble.

  • Report this Comment On June 19, 2012, at 4:06 PM, ibuildthings wrote:

    Wolfman: As much as I am irritated by the foolishness that made the bailouts necessary, I do understand why the Government required all the banks to take money, not just those who needed it for real.

    We are reading what? The FOOL site. The one that teaches us to invest, and maybe short-sell, based on fundamentals.

    Word leaks out that 7 banks needed bailouts, and 8 banks didn't. Fools everywhere study the details and make a few investment picks. But a panicked population trades first and researches second. That exacerbates an already difficult problem.

    So the government requires all of them to take money so that all of them make it through. Some put the money on a shelf next to the other 100 billion, and the others used it to stay alive.

    Emergency action.

  • Report this Comment On June 19, 2012, at 4:58 PM, Thaeger wrote:

    "Earned benefits" vs "entitlement programs" quibble aside...

    “Why are so many pension plans underfunded? Partly because investment returns have been so lousy lately. But a lot has to do with a flaw in the way pensions are arranged.”

    While pointing out the obvious -- that pension funds are essentially giant cookie jars just begging to be pilfered -- will reinforce your main point about self-reliance, mostly I wish to give a counterpoint to the conventional wisdom of unreasonable / overly entitled workers, and to the book you quoted, "While America Aged: How Pension Debts Ruined..." :

    ( http://online.wsj.com/article/SB1000142405297020413820457660... ) ('Retirement Heist' book review discussing a few common pension 'myths')

    "Spiraling costs force us to freeze your pensions."

    That's partly true -- but not the whole story. A little over a decade ago, pension plans had $250 billion in surplus assets. But employers siphoned billions from the pension plans to pay for restructuring costs, often by providing additional payouts in lieu of severance, and by withdrawing money to pay retiree health benefits -- and in some cases parachutes for executives.

    When the market cratered in 2008, there was no surplus to cushion the blow, and today, pensions collectively are underfunded by 20%.”

    With one big exception: Pensions for top executives continue to spiral, and account for much of the growing pension cost companies complain about.”

    ( http://www.forbes.com/sites/stevedenning/2011/10/19/retireme... ) (another review for a specific examples)

    "In December 2010, General Electric [GE] held its annual meeting in New York City for analysts and shareholders. CEO Jeff Immelt reported on GE’s financial health and said that GE’s pension plan was a problem. “The pension has been a drag for a decade,” he said. It would cause the company to lose 13 cents per share the coming year. In order to control costs, GE was—regretfully—going to close the pension plan for new employees. The implication was that workers’ pensions were dragging the company down.

    What Immelt didn’t mention was that GE’s pension plans had actually contributed billions of dollars to the company’s bottom line over the last 15 years, earnings that the executives had taken credit for. Nor did he mention that GE hadn’t contributed anything to the workers’ pension plans since 1987 and still had enough to cover all the current and future retirees.

    Nor did he mention that the executive pensions for GE executives were a burden. Unlike the plans for the 250,000 workers and retirees, the executive pensions had a $4.4 billion obligation that steadily drained cash from the company’s coffers, including $573 million over the past three years alone."

    ( For the curious, GE's response, and Schultz's response to that:

    http://www.forbes.com/sites/stevedenning/2011/10/21/ge-discu...

    http://www.forbes.com/sites/stevedenning/2011/10/22/retireme... )

  • Report this Comment On June 19, 2012, at 6:43 PM, xetn wrote:

    In the Keynesian world we live in, massive amounts of government spending and huge budget deficits are the "receipt" for economic growth, while "austerity" is bad.

    The Keynesian view is competely unsustainable over time with austerity is the only right course of eliminating debt and building surpluses.

    The problem is that the political sector relies on give-aways to keep the votes coming and ensure re-elections for those in power.

    This is what is playing out in the EU and will end up the same in most every other economy.

    When the populations in general have been convinced by their government that entitlements are "god given rights" the only end is default and a complete reset of the economy. (Usually as a result of hyperinflation.)

    Morgan quoted a couple of references to Greece proclaiming there economy moving forward, with no projections of it ending. Sounds a lot like Bernanke's comments about the housing market just before the crash.

  • Report this Comment On June 19, 2012, at 6:52 PM, TMFMorgan wrote:

    <<The Keynesian view is competely unsustainable over time with austerity is the only right course of eliminating debt and building surpluses.>>

    Keynes advocated surpluses during boom times and deficits during recessions. I think he'd agree with you that large deficits are unsustainable over time and that austerity is necessary. It's the timing I suspect he'd disagree with you on.

  • Report this Comment On June 19, 2012, at 7:48 PM, wolfman225 wrote:

    @ibuildthings--

    I understand the worry about a possible run on the banks. It's the underlying motivation by the administration I don't trust. Beyond the fact that the government shouldn't be in the bailout business (or the car business, or the real estate business, or the student loan business, etc.), it's my view that the bailouts were an attempt to obligate the banks to the Obama administration. Paulson had no right whatsoever to tell these bank CEO's they weren't going to be allowed to leave until/unless they signed the bailout agreements.

    In addition, giving bailouts to banks that didn't need them guaranteed a "success story" for the administration to point to when/if their fiscal policies are questioned.

    @Morgan--

    "Keynes advocated surpluses during boom times and deficits during recessions."

    The main reason why Keynesian economics will never work is that the power to tax & spend is like government crack. Politicians become addicted and, like any addict, they discover that more is never enough. When what passes for "austerity" & "budget cuts" in government accounting is nothing more than a slight reduction the rate of growth, as opposed to an actual reduction in the amount of money spent, it's obvious that no politician of any stripe will willingly allow the average citizen to regain the power to decide for themselves how their money is to be spent.

  • Report this Comment On June 19, 2012, at 10:19 PM, devoish wrote:

    I am not smart enough to manage my own 401k. I get emotional about losses, I put money in at the wrong time and get out at the wrong time, and I was suckered into buying facebook.

    I have done my best to live below my means but one years unemployment has completely depleted my savings.

    Now I clean 24 bathrooms a night for Jamie Dimon and I get paid $10,000/ year.

    I do not feel like this 401k thing is going to work out for me.

    Best wishes,

    Steven

  • Report this Comment On June 20, 2012, at 7:29 AM, capitalapprecia8 wrote:

    what is "income security" ?

  • Report this Comment On June 20, 2012, at 8:24 AM, HighVoltage627 wrote:

    @wolfman225

    I'm not normally one to quibble, but I think your mistaken. TARP was passed on Oct 1st, 2008, and the bankers meeting your talking about took place on Oct. 13th. Both of those events took place before Obama was president, or even president elect. I dont see how it could have had anything to do with "obliging the banks to the Obama administration."

    This all took place under the Bush administration.

  • Report this Comment On June 20, 2012, at 12:59 PM, JeanDavid wrote:

    "The problem is -- surprise -- most people really like government benefits."

    I am willing to give up 90% to 95% of one of my government benefits, perhaps even more. And that is the benefit of the U.S. military, counter-terrorism, and anti-drug budget. While I believe there is some benefit to a good coast guard, the rest of it is just a police force for the benefit of some multinational corporations who do not pay anywhere near the cost of the benefits they get year after year? Don't like a country's policy? Overthrow their government and kill off the citizens you find a nuisance. I will cheerfully give that up.

  • Report this Comment On June 20, 2012, at 1:01 PM, TMFMorgan wrote:

    <<what is "income security" ?>>

    Unemployment benefits, food stamps, earned-income tax credit, etc.

  • Report this Comment On June 20, 2012, at 1:34 PM, whereaminow wrote:

    Morgan,

    Wouldn't "income security" be considered a False God? Obviously, i view it that way.

    After all, the government can guarantee income to everyone. However, that doesn't mean that we have guaranteed them a life without poverty, real wealth security, self esteem, or actual

    Furthermore, in order to make the "guarantee" of income stick, there must be force employed. A government cannot guarantee income security and then allow people to do what they please with their money. An entire macabre apparatus of dreadful thoughtless bureaucrats and schemers needs to be developed in order ensure the transfer of wealth.

    Often the recipient - the individual who is supposed to be "secured" - has spent their whole life being the most abused by the very system put in place to "help."

    I shudder to think of being so dim that I only see the pennies I get back from the government, while somehow being blind to the dollars stolen from me my whole life. It takes real apathy and lack of personal responsibility to fail in making that connection.

    So in the end, income security provides nothing. It means stealing from people, taking a big cut out of it, and then handing back the scraps. "Hey, look how much we helped you!"

    That's for the birds. That's why I like this website. Despite hiring several anti-capitalist writers and promoting them on the front page, the overall message here is one of self reliance so you don't have to be that sucker asking for his scraps back.

    David in Liberty

  • Report this Comment On June 20, 2012, at 1:45 PM, hbofbyu wrote:

    @devoish

    It is too early to say that Facebook was a sucker's bet.

    And I don't know anyone who has a 401K that can even approach the pension of a government or state employee.

  • Report this Comment On June 20, 2012, at 5:19 PM, wolfman225 wrote:

    @HighVoltage--

    It was my understanding that the meetings took place shortly after the Nov. elections, and that the TARP funds were left largely unallocated, too be directed later at the discretion of President-elect Obama. If my source was wrong, I apologize and stand corrected.

    The ultimate point I was trying to make, however, still stands. Politicians--and, by extension, governments as a whole--quickly become addicted to the tax and spend power of their offices. This, in addition to the sincere (no matter how wrong) belief that they have somehow been blessed with a superior understanding of the present & a vision of the future make them reluctant to return the people's money, to be spent at their discretion.

    Keynes did advocate that it was within the scope of governments to deficit spend to help provide essential goods and services in lean times. He also advocated that government spending be substantially reduced when the private economy regained it's footing. It's that reduction that never happens. We're talking human nature here, and no one willingly gives up power once it's been bestowed and they've grown accustomed to wielding it.

  • Report this Comment On June 22, 2012, at 8:16 PM, Darwood11 wrote:

    @whereaminow, re: Income security. I agree with you on that. The government has talked social security for decades, but the numbers indicate that anyone under 60 might be prudent to adjust the rosy projections. Yes, a 60 year old may get their full SS benefit, but one has to ask "Will our government, the same people who designed a system to fail, bail out and reduce COLA benefits in the future or increase taxes on benefits?" My suggestion: betting against the house is always a bad bet.

    I am very conservative when making my retirement calculations. I've assumed lower returns on investments than the "pap" that was being spread. for example, remember when just about everyone was projecting 8% annual returns? That was about 5 years ago!

    Today people are talking about returns a lot closer to what I was using.

    I do feel some sorrow for the "retire early" crowd who used overly optimistic projections, retired at 55, or even 52! They assumed 8-10% projections and ever increasing SS benefits. Many simply didn't save enough, as they are now discovering.

    In the US, these retirees can use 5-10% withdrawal rates and party for a few more years, and then what?

    The Greeks are the poster child for this "hail mary pass" philosophy of retirement planning, and they are paying the price. It will get worse for them before it gets better.

Add your comment.

DocumentId: 1917320, ~/Articles/ArticleHandler.aspx, 4/23/2014 9:01:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

TREND TRACKER: Get Rich When the Web Goes Dark

It's time to say "goodbye" to your Internet! One bleeding-edge technology is about to put the World Wide Web to bed. And if you act right away, it could make you wildly rich. Experts are calling it the single largest business opportunity in the history of capitalism… The Economist is calling it "transformative"... but you'll probably just call it "how I made my millions." Big money is already on the move. Don't be too late to the party – find out the 1 stock to own when the Web goes dark.


Advertisement