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The War Against The Young: NY State

From Business Week:

New York State Comptroller Thomas DiNapoli says state and local governments will have to come up with more money for their workers’ pensions in the next fiscal year to offset losses in the stock market.

The average contribution rate to the state pension fund for public workers will rise from 16.3 percent of salaries to 18.9 percent. The average for the police and fire retirement system will rise from 21.6 percent to 25.8 percent.

Note to younger readers who don’t pay attention to boring subjects like pension contributions: over the years, politicians got votes from public worker unions by promising generous guaranteed pension plans and early retirement.  But because they didn’t want trouble with voters who weren’t public workers, they didn’t put enough money aside from year to year to pay the pension bill when it came due.

When pressed, state officials said that the money they did set aside for the pensions was invested so cleverly in the stock market that it would earn very high rates of return and, therefore, the pensions would all magically be paid.

They lied.  The money did not earn the big returns they claimed to expect, and now, as Baby Boom era workers (your grandparents) start to retire, the bills are coming in — and there isn’t any money to pay.

So what happens?  Cities and towns now have to start taking more of their general tax money and using it to pay the pension bills.  That means less money for schools now so that retired teachers can collect their full pensions.  It means fewer cops on the beat now, and fewer firemen and firetrucks now, because the old ones still need to be paid.

At the state level it means higher tuition in public colleges, because the state has to cut other costs to pay state pension bills.  For the rest of your lives you will likely be paying higher taxes and getting less back for them because you are going to be paying for the lies that these weasel politicians told in order to keep the unions and the voters happy.  Many of these irresponsible liars are still in office and still asking for your votes.

You, unluckily, are not going to be able to stick it to your children and grandchildren the way the older generations stuck it to you.  Investors and the bond markets have finally figured out just how sleazy government finance has been these last thirty years, and they aren’t going to keep lending unless governments start keeping honest books and show the true cost of all the debts they have outstanding.

Even as you pay taxes to honor past pension promises, people in your generation won’t get the same pension promises that older workers get.  For one thing, a favorite tactic of union leaders when they have to negotiate contracts with states that don’t have any money is to sacrifice the pensions and benefits of future workers in order to preserve the privileges that the current ones have.  Younger workers will then have the joy of doing the same job for less pay as their older colleagues — and they also get to pay union dues to support the labor leaders who created this mess.

Ironically, when the Boomers were your age one of their favorite slogans was “Don’t trust anyone over 30.”  It’s not a slogan we Boomers repeat much today, but confidentially, kids, there just might be something in it.

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  • Jordan

    Thank you WRM for stating so clearly how the older generation of politicians have, for lack of better words, screwed over the younger generations.

    Public union obligations are just the start. You are forgetting the ~$14T debt plus the unfunded obligations of Social Security and Medicare. (Back in 2006, my congressman would not acknowledge that the Social Security “trust fund” held no actual assets — I’m glad that lie seems to be subsiding a bit.) Furthermore, the younger generations have been priced out of the housing market for the past 10-20 years, and prices are only *starting* to come back down to the range of affordability.

    Note that I said “older generation of politicians” rather than “older generation”. While it seems easy and convenient to blame the Boomers, I am also guilty of having unwittingly voted for some of those who have lied and spent beyond our means. Perhaps you, WRM, as a historian, can make a better case that the Boomers as a whole can be blamed, if that is indeed the case.

    I’m actually quite surprised everything came crashing down much sooner than I thought. I thought the Boomers would not be affected, but I believe they very much are. And Gen-X is simply too small a cohort to pay all of the bills due.

  • Peter M. Todebush

    It’s ironic that Congress mandates ‘Sarbanes Oxley’ on the private sector, with the threat of felony prosecution, while employing accounting procedures that would put most people in jail. The Public Sector must use ‘accrual’ vs ‘cash’ accounting and ‘dynamic’ vs ‘static’ analysis in their economic forecasts. All the entitlements have to be converted from ‘defined benefit’ to ‘defined contribution’. Paul Ryan explains this; it’s the only way out.

  • Heather

    Excellent article about the difficulties that younger workers are facing.
    Some of your facts about demographics are inaccurate, however. The statement “Don’t trust anyone over 30” generally is attributed to Jack Weinberg who was born in 1940, six years before the baby boom started and the statement itself was first said in 1964, the last year of the baby boom. It was actually the so called “Silent Generation” who picked up on this statement.
    Also, the article is geared to young people 18 through 20’s. It’s unlikely that their grandparents are baby boomers, who are now aged 46 to 64. It is most likely that the boomers are their parents.

  • WigWag

    Professor Mead is right about most of what he says in this post, but his predilection to gild the lily is on ample display yet again.

    The Professor says,

    “Investors and the bond markets have finally figured out just how sleazy government finance has been these last thirty years, and they aren’t going to keep lending unless governments start keeping honest books and show the true cost of all the debts they have outstanding.”

    It seems to me that this is a gross exaggeration that is highly unlikely to come true.

    Does Professor Mead really think that investors are about to eschew the market for government securities? Where in the United States can we find evidence of that? In fact, all of the evidence points in exactly the opposite direction.

    The federal government is financing its debt at record low interest rates. Investors are literally falling all over each other to snap up U.S. debt. So anxious are they to lend their money to the United States Government that they are willing to accept virtually no return at all.

    Has Professor Mead checked out the interest rate on recently issued government debt? Interest rates are at historical lows. When S&P downgraded federal debt a few weeks ago, what was the result? Did the purchasers of bonds demand a greater return because they were being asked to accept a greater risk? The opposite is true; they literally threw their money into government bonds and interest rates fell even lower.

    Despite the fact that sovereign debt as a percentage of GDP is significantly higher than it has been in the recent past, the annual cost of financing that debt is far lower than during the 1980s and 1990s because interest rates are so much lower. If Professor Mead is talking about the federal government, he’s got it all wrong; “Investors and the bond market” aren’t threatening to stop lending unless the government keeps honest books; they’re threatening to keep lending money to the federal government even if interest rates fall to zero.

    What about state governments? We all know that many state governments are facing a fiscal situation far more dire than the fiscal situation of the federal government. Which of these state governments is having any trouble at all financing its debt? While a few municipal governments may face bankruptcy, is there any evidence that “investors and the bond market” are threatening to stop lending or even demanding higher interest rates for debt issued by state governments?

    Even the worst of the worst, California, has absolutely no difficulty finding takers for its bonds and despite California’s financial difficulties, the interest rate California pays on those bonds is significantly less than it was during the 1980s and even the 1990s when the state’s finances were in better shape.

    The bond market has spoken and the message that it is delivering is precisely the opposite message that Professor Mead and other harbingers of doom want the public to believe. What the bond market is saying is that both federal and state debt is rock solid and that there is no threat of default. The bond market realizes that there are dramatic differences between Greece, Ireland and Spain on the one hand and the United States or the several states on the other. Mead may disagree; but his point of view has been thoroughly rebuked by the bond market.

    It’s not just me who thinks Professor Mead’s comment about government debt is all wrong, its millions of investors from all over the world who are voting with their feet and putting their money where their mouths are.

  • Jim.

    @WigWag —

    Your advice is so reckless as to be practically, yes, treasonous.

    90% of GDP is the commonly-accepted point of no return for government debt. (It is in fact worse in the US’s case, because since our debt is the highest percentage of *world* GDP — meaning, the highest percentage of the world’s available capital.)

    The US has a halo right now, it’s true. But with a debt of 90-100% of GDP and climbing, ***if we lose our halo, we lose our head.***

    What’s going to happen first, WigWag? Are we going to pay down our debt to lower than 90% of GDP, or is someone else going to pick up the “Safe Haven” halo?

    Considering how difficult it is to balance the budget, much less run surpluses, I do see how any rational human being could believe that we will continue to be a safe haven, unless Cut Cap and Balance is enacted NOW. Are you in favor of that?

    The bond markets are in a pre-crash runup right now. The current crop of traders believe they can dump their Treasuries before the crisis hits. After all, so many other people are buying, there’s bound to be someone, right? They’re voting with their feet, along with all the other lemmings.

    They’ve been left holding the bag before, and they’re going to be left holding the bag this time too — and there’s going to be nothing left of America.

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