The strong (if uneven) economic performance of coastal blue states like California and New York has led a number of leading liberal thinkers, including former Labor Secretary Robert Reich and political scientists Jacob Hacker and Paul Pierson, to conclude that Democratic economic ideas work better in practice than those of the GOP.
As we’ve explained before, this argument is misleading for a variety of reasons. But there is one factor that partisans of the blue state model are loath to address: The issue of America’s worsening public sector pension debt and the coming state and local fiscal crisis. We have long noted anecdotally that the pension funding problem seems to be worse in blue states (and especially blue cities) than in red ones, but a new analysis helps illustrate just how wide the gulf actually is.
Last month, Pension Tracker, a project of the Stanford Institute for Economic Policy Research, published its annual list of pension debt per household by state. While most state accounting boards inflate their expected returns and discount rates on existing assets, the Stanford economists use what they say are more realistic (and pessimistic) actuarial assumptions. The results are sobering: All 50 states face large per household unfunded pension liabilities in the tens of thousands or more.
It’s clear from looking at the rankings that the states with most acute pension problems tend to lean Democratic—with the exception of Alaska (at number one) all of the top 10 states went for Hillary Clinton in 2016, including the blue behemoths California and Illinois. But we decided to analyze the association more rigorously, using the partisan voting index from the Cook Political Report from 1994 to 2014.
Here’s what we found: For the 30 states that were on average more Republican during those two decades, the median per-household unfunded pension burden was $34,070. For 20 states that were on average more Democratic, that number was $45,950, or about 35 percent more.
As we narrow our sample to even more partisan states, the gap widens, driven by an increase in the debt level among Democratic states. For the 19 “strongly Republican” states (that is, those with an average Cook Political Index number of R+5 or more), pension debt per household is $33,800. For the nine “strongly Democratic” states, the number is nearly twice that much, at $65,080.
The chart below shows all 50 states arranged in order of Pension Tracker’s estimate of their pension debt per household, with the bar colors showing state partisanship. With the exception of Alaska, there is a clear concentration of deep blue states at the high end; states lower down on the list tend to be redder. (Click on the image to enlarge).
What might account for this gap? One difference is that Democrats tend to be more favorable to public sector unions, which act as a powerful interest in many state capitols, pressuring legislatures to increase pension outlays. It stands to reason that stronger unions could extract more money from state legislatures, creating more fiscal problems down the line. Democratic governments might also be more likely to approve of hiring more government workers, increasing the number of people who are owed pensions.
For the purposes of this short post, we couldn’t control for all confounding variables, but we did control for one: economic output. Blue states like California and New York have higher-than-average per-capita GDP thanks to their booming metropolitan centers. We wanted to make sure that our results didn’t simply reflect the fact that wealthier states are taking on higher than average pension debts, so we approximated each state’s pension debt as a share of its GDP. (We performed this adjustment using IndexMundi’s Census list of people per household by state and Wikipedia’s 2015 list of GDP per capita by state).
The result: While the partisan effect is diminished, blue states are still clearly in a deeper hole. For all Democratic states, median pension debt per dollar of economic output is 19 percent higher than for Republican states. For strongly Democratic states, median pension debt is 41 percent greater than that of strongly Republican states.
The chart below shows the states listed in the same order, but with the bar heights indicating pension debt as a share of GDP rather than pension debt per household. The same pattern is present, but weaker.
America’s overall state and local pension shortfall is in the trillions of dollars, and is sure to inflict more fiscal pain than it already is as the current crop of public sector workers retire. Any argument for the superiority of blue state governance needs to take this underreported problem into account.