The Looming Public Pension Disaster

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"The Looming Public Pension Disaster"

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High up on my list of sources of national doom that people don’t talk about enough is the looming fiasco in pensions for state and local public employees. For obvious reasons, no governor or mayor wants to raise taxes or cut spending to give public employees a raise. But a public employee strike is also bad politics. So you can promise people generous amounts of money in the future via a defined benefit pension plan, and kick the can down the road.

Now of course the existing system isn’t 100 percent braindead so future pension promises are scored so as to have some budgetary cost. There’s a rule about how much money needs to be set aside each year to cover the future cost of retirement benefits. But almost everyone has long believed that the assumptions underlying that budgeting were too optimistic. And given the past ten year’s worth of dismal stock market performance, plans based on optimistic assessments of investment outlook are not looking so hot. In effect, state and local government was making leveraged bets on the stock market in order to afford a combination of low taxes, public services, and labor peace that couldn’t otherwise be financed. How bad is the situation? Somewhere between very bad and totally horrible:

The US public pension system faces a higher-than-expected shortfall of more than $2,000bn that will increase pressure on many states’ strained finances and crimp economic growth, according to the chairman of New Jersey’s pension fund. The estimate by Orin Kramer will fuel investors’ concerns over the deteriorating financial health of US states after the recession. “State and local governments are correctly perceived to be in serious difficulty,” Mr Kramer told the Financial Times.

“If you factor in the reality of these unfunded promises, their deficits will rise exponentially.”

Estimates of aggregate funding requirement of the US pension system have ranged between $400bn and $500bn, but Mr Kramer’s analysis concluded that public funds would need to find more than $2,000bn to meet future pension obligations.

Yeargh.

I think a high-tax regime is much more politically viable than American conventional wisdom would have you believe. But the viability of high-tax political units is driven by a belief among citizens that they are receiving valuable public services in exchange for their taxes. Paying off pension obligations to now-retired public employees, however, doesn’t fit that bill.

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