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Intergenerational War
Save Pensions, Burden the Young

Puerto Rico, our very own Greece, got another credit downgrade from Moody’s this week, despite the government’s presenting a new budget which features $674 million in spending cuts, as well the efforts of the territory’s governor to pass a bill with a stiff sales tax increase. The reforms are meant to lay the groundwork for a hedge-fund backed $3 billion bond sale, which would see the territory through another year. Moody’s, however, doesn’t believe the cuts, if and when they pass, will be deep enough for the bond sale to happen.

Illinois, take note. Moody’s, which downgraded Chicago last week, did so in response to the Illinois state supreme court’s ruling a pension reform bill unconstitutional. Puerto Rico’s pensions are also grossly underfunded (at only around 5 percent), and are a large part of the territory’s problems.

As the FT noted earlier this week, Moody’s changed its internal methodology for rating states in 2013 by giving pension plan solvency higher prominence. And, the article reports, a slew of accounting rules are just now coming into effect that will make municipalities’ pension obligations more transparent for investors. The end result: higher borrowing costs are just around the corner for many of the poorly-administered blue municipalities around the country.

In most cases, however, this doesn’t necessarily mean we are headed for dozens more “Detroit” scenarios:

“The most likely scenario is rather than triggering defaults or insolvency, pensions will squeeze out other spending, such as infrastructure investment, educational spending and social services,” Mr [Matt] Fabian [managing director at Municipal Market Advisors] says. “It is not a great scenario, but different than default or bankruptcy.”

People need to understand the stakes here: favoring pensioners seems like a nice idea, and in many ways it is. But if it raises the cost of municipal borrowing, it basically means slashing services for the young to pay off the old. There is no other magical way out of problems of this scale.

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  • FriendlyGoat

    I guess I would be bashed over the head for pointing out that “the young” are usually in the same extended economic units (the families) as “the old”, right? This is perhaps not uniformly applicable to EVERYONE in Chicago and Puerto Rico, of course, because not all the oldsters were public employees. But this same line of thinking is often discussed in connection with Social Security and Medicare—–where nearly all the oldsters participate, and nearly all of them have youngsters in their families.

    • LA_Bob

      Then let me be the first to bash you over the head.

      I think the underlying issue is that there is a presumption that everyone is entitled to government-guaranteed income security, but sober minds wonder whence comes the resources to provide this entitlement. The post-WWII boom years saw a growing population of productive people with small cohorts of seniors and others. It made sense to help out the aged and less fortunate, and the cost was low. Unfortunately, political leaders are structurally incapable of anticipating changes to their growth forecasts, so what might have been affordable in 1972 became less and less so as demographics changed (baby boomers making fewer babies) and medical technology made longer life more expensive as well as more likely.

      Lavish pensions are great (for recipients) when you have the dough to pay for them, but not so great for the payors stuck with the bill in an era when job and wage growth are less compelling than they were forty years ago. This means the young (or maybe just “the younger”) will not only be hard pressed to pay benefits for older folks they may never themselves receive, but they will experience a lower standard of living as many “necessary and proper” government services become too expensive and thus scarce as well.

      There is no end to need, but there are limited resources; they should be managed with some concern for the younger folks who are going to need them for a long, long time.

      • FriendlyGoat

        Though you are bashing me over the head, you are not doing so for me pointing out that “the young” and “the old” almost all have direct financial connections inside extended families. Why not?

        • LA_Bob

          When I wrote my reply I didn’t think it especially relevant. Since you want to make the point, I’ll reconsider.

          I think “the young” in this case refers to younger adults, and, no, they do not always live with their parents or vice versa (this might even be the intrinsic problem with the solvency of these old-age benefits — they’re not adequate to support a model in which “the old” live alone, a phenomenon which goes against the grain of the human history and culture but which seems to be embraced in the USA).

          Along those same lines, just because young and old are part of extended families does not mean resources are necessarily pooled. I’m sure this varies from family to family,

          But, the broader point is that I think your point really is not relevant. There are plenty of old folks with no family or no family that wants them around. So the burden of caring for these people falls on the young and productive members of our society through taxation and reduced government services. That was the point of the OP.

          • FriendlyGoat

            Isn’t it fair to imagine that old people who receive Social Security and Medicare are more likely to be able to leave something behind for their heirs than they would be if they didn’t receive it? I think we might want to ask the kids about that before we indulge in this young vs. old debate. The damage to young people is being done from high-end income and estate tax cuts , not from taking care of the elderly of modest means. Trying to do tax cuts of a trillion for the wealthiest families and then make it up with spending cuts of half a trillion from the families with the least makes no sense to me. But, as you know, that concept is everyday Republicanism. You or they can substitute different numbers than a trillion and half trillion, but the concepts they routinely propose are hard to skirt around.

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