mead cohen berger shevtsova garfinkle michta grygiel blankenhorn bayles
Blue Model Blues
The Pension Storm Cometh

Last April, we highlighted research from Joshua Rauh, a professor at Stanford’s Graduate School of Business, placing America’s state and local pension shortfall at an eye-popping $3.4 trillion. This year, Rauh has crunched the numbers again—and, despite a growing stock market, the situation has not improved. The Financial Times reports:

US cities and states face a “looming crisis” after the collective funding hole in the public pension system jumped by $434bn in just one year, raising fears of further Detroit-style bankruptcies.

According to academic research shared exclusively with FTfm, US public pension funds lack $3.85tn that they need to pay the retirement benefits of current and retired workers. […]

Big pension deficits have already contributed to the bankruptcy of several US cities, including Detroit. Puerto Rico, the US territory, this month declared a form of bankruptcy after amassing debt and pension obligations of $123bn.

The numbers are so grim that it is hard to see how America gets through the next recession and its aftermath without a wave of municipal bankruptcies. Public employee unions have managed to extract promises from state and local governments that are simply impossible to keep. And those governments have been papering over the extent of their obligations with accounting assumptions that are so overly-optimistic as to be deceptive.

Before the bankruptcies, however, there will be pain. School budgets will be cut, civil servant salaries will stagnate, welfare services will atrophy, new fines will be imposed, and infrastructure will be neglected as state legislatures and city councils try to make room in their budget for ballooning pension contributions.

If the governing class had shown more backbone, accounted for pensions more responsibly, imposed reasonable restrictions on union power, and distributed cutbacks more gradually, the situation might not be as dire as it is today. But now the pension vise is tightening fast, and it looks like decades of elite shortsightedness will come at a great cost, especially for the most vulnerable Americans.

Features Icon
Features
show comments
  • PCB

    Most likely, instead of having backbone and making responsible changes, state legislatures will seek to expand legalization of recreational vices such as marijuana and gambling in hopes of reaping windfalls to cover pensions.

  • Beauceron

    I strongly suspect the federal government will be forced to pick up the tab– particularly when we get another Dem President. I think most blue states and cities are not too worried about this simply because of that.
    The Dems have for years bought union votes with promises of greater benefits for state and local employees. The Dems won’t leave their clients hanging.

    • Andrew Allison

      Municipalites can file for bankrupty, so it’s likely that the first push will come from states (looking at you, IL) who run out of money. I suspect that the residents of Trumpland will go bonkers if it’s proposed that they bail out bail out IL, or whichever state is first past the functional bankruptcy post.

      • Beauceron

        Yes, municipalities can declare bankruptcy (and there is movement to allow states to also seek protection from creditors — see https://www.bloomberg.com/news/articles/2016-01-21/the-case-for-allowing-u-s-states-to-declare-bankruptcy) but that only resolves the debt problem the governments face. The state and local government employees will still be out of their pension, or at least a large portion of their pension.

        Do you think the Dems will allow their voters, most of whom are from deep blue states or deep blue urban areas, will allow their voters to be screwed like that, even if it’s the Dems themselves that are the ones who ultimately screwed them?

        That will not happen.The Dems will lambast any Republican who stands against them as wrecking the middle class and putting old people out on the street– and many government workers are minorities, so there will be the de rigueur charges of racism.

        I do not see the government of California or Illinois trying to get a handle on their budget. After saying their would be big cuts, Brown’s new budget actually increases spending by $2.5 billion. It doesn’t seem that Illinois, despite being run by a Republican for the moment, has done much either, although to be fair, I don’t think there’s much he can do at this point.

        I don’t see state and local politicians fretting over this alleged crisis much at all. Do you? I think they’re not worried about it because they are confident that in the end it won’t be their problem. It will be the federal government’s problem.

        • Andrew Allison

          Like you, I don’t see state and local politicians fretting over this alleged crisis much at all. Hence my comment that it will require something akin to hell freezing over before there’s serious reform. The issue, as you point out, is who pays. The is a move afoot to use PR as the State bankruptcy camel’s nose under the Federal tent, but I don’t think it’s going anywhere. You’re also correct that either way, a lot of State and local public employees are going to be SOL.

  • Andrew Allison

    Civil servant salaries will stagnate only after school and public sfety budgets have been cut to the bone, welfare services have atrophied, and infrastructure deteriorates or no more money can be squeezed from the public via taxes, fees and fines.

  • Anthony

    Joshua Rauh, whom I know since his University of Chicago days, is both a fine talent and public pension forensic expert (see his “How Pension Promises are Consuming State and Local Budgets”). Nevertheless, he only provides the alarm about state and local government pensions’ potential inability to pay promised employee/retiree benefits. Similarly, as mentioned before on this subject, there are a lot of willing parties to this fiscal fiasco – police, fire, state, city, judges, state legislators, etc. pension contracts and agreements.

    Yes, the numbers are grim (3.85 trillion) and this is not a Red or Blue issue but it remains a human character issue (human self-interest) So, now the Government Accounting Standards Board (GASB) guidelines reveal a consequence from the combination of self-interest and public indifference – the trillion dollars potential shortfall. The impending storm TAI alludes to has many rain-makers and that too ought to be a most pertinent concern, especially because tax payer resources may have to make up the trillion dollars shortfall.

    • Angel Martin

      “this is not a Red or Blue issue”

      I disagree. The inflection point on the costs of the public service, including pensions, came after WW2 when they were allowed to unionize.

      Public servants had defined benefit pensions before then, but the costs did not spiral out of control.

      Fixing this will require decertifying the public sector unions, just like Coolidge broke the Boston Police strike.

      • Anthony

        Martin, you may disagree and reference a 20th century president but as post states 21st century America has an ongoing problem that transcends partisan interests. Resentment of unionized public employees and their benefit packages may reflect a viewpoint but deflects from point of post – Joshua and others have analytically debunked the unionized focus. Read carefully some of Joshua’s research work (I think he may now be at the Hoover Institute).

  • Jeff77450

    The readers (and commenters) of TAI are probably better informed than most and so it won’t come as a surprise to most of them that the situation is even worse than presented here in that the federal government’s ability to ride-to-the-rescue is going to be severely constrained: http://calwatchdog.com/2013/11/11/u-s-unfunded-liabilities-really-222-trillion

    • ——————————

      If that article is even partially accurate, it is beyond scary.
      The article is 3 1/2 years old and the number was 205 tril. I wonder what that number is now?

      • Fat_Man

        The economist cited in the article (Lawrence Kotlikoff) used the same number in an OP-ed in the WSJ last week.

        https://www.wsj.com/articles/on-tax-reform-ryan-knows-better-1494543487

        It is an estimate and probably not good for more than 1 or 2 significant digits. I think the best you can say is that the number is between 100T$ and 1P$

        • ——————————

          Thanks FM!

          Whatever it is, it’s a lot more than I made last week….

  • Angel Martin

    Imagine another Depression with this fiscal scenario.

    “Saving” by stockpiling guns and ammo starts to look a lot less outre.

    • ——————————

      In fly- over country it’s not as outre as you think….

  • ——————————

    Sometimes you can Google an article title and find it for free somewhere.

    Try here:
    http://luxlibertas.com/on-tax-reform-ryan-knows-better/

    They could have used better font and a little wider line spacing to make better reading though….

    • Jeff77450

      I was able to read it! Many thanx!

© The American Interest LLC 2005-2017 About Us Masthead Submissions Advertise Customer Service