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 person 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 summarised 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: defence, 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 realise 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.

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