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Pension Woes Could Lead To Tax Spike

Regular Via Meadia readers are well versed in the ups and downs of the public pension crisis unfolding across the country. Having promised future retirees generous plans, state pension funds are proving to be woefully underfunded, having made overoptimistic assumptions of future growth before the financial crisis hit.

Most people immediately jump to discussing what kinds of benefit cuts would be necessary to make the funds solvent again. But two researchers at the Washington Post are looking at the issue from a different angle: If the government were to pay off all its pension obligations over the next thirty years, how much would taxes increase?

Not surprisingly, a lot. On average, annual taxes would need to rise $1,385 per household to cover the cost of pensions without serious cuts to services. For New York residents it’s particularly bad—the authors estimate that taxes would need to rise a staggering $2,250 per year to make up the shortfall.

And unfortunately, there doesn’t seem to be any way to avoid this problem through growth alone:

Each additional percentage point of growth in gross domestic product reduces the required increase by $120 per household per year, so more economic growth would help — but typically when the economy as a whole grows, public-sector employment and compensation grow as well, which means more pension promises.

How about increasing public-employee contributions? To obtain the necessary amount, contributions would have to rise by 24 percent. Cutting public employees’ take-home pay by this magnitude is infeasible and would place a huge burden on younger public employees.

Thus far, politicians—particularly blue state pols with strong union backers—have been loath to renegotiate pension plans for current workers for fear of alienating their biggest supporters. But asking the public to support massive tax hikes for large public pension plans not enjoyed by the majority of citizens will be tough sell regardless of party affiliation.

Something’s got to give. The numbers do not lie.

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