Politicians, Discipline, and Restraint and insurance surplus funds

In my household, we don't take on a new recurring expense every time we get a bonus. We might save it, spend it, or pay down debt with it, but we don't take irregular income and turn it into a regular obligation. I bet you don't, either.

Your government does. Give them a surplus in Social Security - a surplus built up because the money will be needed - and they can't keep their greedy little hands off of it. Soon, a massive surplus becomes a massive debt, double what they tell us because they have to pay back the Social Security trust fund.

In California, under the "fiscal restraint" of Governor Schwartzenegger, we took an obviously unsustainable bubble in real-estate related tax receipts and converted it into a fiscal crisis that reportedly will be declared a "state of emergency" this month. Instead of saying "Gosh, how nice to be bringing in extra money, let's put that aside for a rainy day, or return the surplus to the taxpayers," the State of California decided to increase spending. Now they are simultaneously fretting about a budget shortfall AND proposing universal health insurance.

If you're not familiar with it, here's basically how insurance works: I apply for insurance; the insurance company groups me with a bunch of similar policyholders and figures out how likely policyholders-like-me are to make a claim under the policy. The insurance company decides how much I need to pay them to give them money to pay claims and make a profit. (Now, here's the key part) The insurance company takes my money, and all the policyholders' money, pays expenses, and invests the rest. Usually, the insurance company makes their profit off the investments. This is what made Warren Buffet a world famous investor - he got control of an insurance company with all that money to invest, and he invested it well. The profits worked out to roughly $100k per share over the years.

Two things are likely to go wrong in insurance - higher-than-expected claims, and lower-than-expected investment results. Spreading coverage over a lot of areas, a lot of people, smooths the blips. Keeping a surplus fund keeps the insurance company in business even when claims exceed the budget for claims.

My dog is smart and well-behaved. He's not allowed to steal food, and he doesn't. But I'm not about to leave a filet mignon unsupervised within his reach. Governments are the same way - they might try to do what's right, but a pile of cash is just too tempting. They just have to nibble on it, and next thing you know, it's gone. This is one of the reasons I oppose government healthcare.