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Pension Meltdown
The Pension Problem Is Worse Than You Think

It’s not just stagnating cities in states like California or Illinois that are running into pension troubles. The pension vise is now tightening around Houston too, an oil-rich metropolis that has been enjoying rapid job growth for years. The Wall Street Journal reports:

Houston is weathering a prolonged plunge in oil prices, but the city may have an even bigger problem: its pensions.

Though economic growth has only slowed, not stalled, in Texas’ largest city, its finances are showing what several investors and analysts describe as warning signs.

Those include a rapidly growing gap in funding its retirement plans for public workers and a limit on its revenue-raising capabilities imposed by a voter-approved cap on property taxes.

The $3.2 billion pension-funding gap is threatening Houston’s Aa2 credit rating from Moody’s Investors Service, hurting demand for its debt and emerging as an issue in the city’s mayoral race.

Houston’s experience is a cautionary tale. The city counted on oil money and didn’t manage its finances well when times were good, and, like many cities, built its pension promises on overly optimistic projections for future growth. Pensions are in trouble in states and municipalities all over the country because while politicians have strong incentives to over-promise in the short-term, they have little incentive to plan for future slowdowns. And if Houston can’t create sustainable pension systems, despite its impressive economic fundamentals, what hope is there for Chicago?

The WSJ story also highlights the many divisions and conflicts that will flare up in the coming years as a pension reckoning approaches. Houston residents are “reluctant to support any tax increases” even as the pension woes “have contributed to reductions in hiring of police officers and spending on pothole repairs, which have become issues in the mayoral race.” This type of tradeoff is part of what we call the blue civil war. Various interests (in particular, the people who produce public services and the people who consume them) will be pitted against each other as the unsustainability of the blue model of governance, present in both Republican and Democratic states, becomes more and more clear.

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  • klgmac

    The current pensions of most people are unsustainable. And Federal Reserve ZIRP is crushing pension funds and insurance companies. It’s almost like they want to put them under.

  • FriendlyGoat

    “Pensions” do not have a problem. “People” have a problem.

    • Dale Fayda

      Or to be even more exact, unionized government employee “people” have a problem. A big one.

      • FriendlyGoat

        In the context of this article, yes. A broader group of people in the private sector had their potential pensions killed by the effect of high-end tax cuts on free enterprise decades ago.

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