The Wall Street Journal recently highlighted a better method of analysing the impact of public sector pensions on state and local budgets. The results are ominous for government finances, the bond markets, and pretty much everything else:
Why Your Pension Is Doomed
A new study shows that benefits are rising faster than GDP in most states.
Pension costs are soaring across the country, and government unions blame politicians for “under-funding” benefits. Lo, if only taxes were higher, state budgets would be peachy. The real problem, as a new study shows, is that politicians have promised over-generous benefits.
In a novel analysis, the Illinois-based policy outfit Wirepoints compared the growth of state pension liabilities relative to state GDP and fund assets. Most studies have examined “unfunded” pension liabilities, which is the difference between current assets and the present value of owed benefits. But this obfuscates the excessive pension promises that politicians have made.
According to the study, accrued liabilities—how much states are on the hook for—between 2003 and 2016 grew more than 50% faster than the economies in 28 states and more than twice as fast as GDP in 12 states. Leading the list are the usual suspects of New Jersey (4.3 times faster than GDP), Illinois (3.23) and Connecticut (3.18), as well as New Hampshire (3.46) and Kentucky (3.08).
Between 2003 and 2016, New Jersey’s pension liability ballooned 176%. Unions blame lawmakers for not socking away more money years ago, though lower pension payments helped them bargain for higher pay. The reality is that New Jersey’s pension funds would be broke even had politicians squirrelled away billions more.
Ditto for Illinois, where the pension liability has grown by 8.8% annually over the last 30 years. Yet when the Illinois Supreme Court in 2015 blocked state pension reforms, the judges rebuked politicians for inadequately funding pensions. The solution, according to unions, is always to raise taxes. But no tax hike is ever enough because benefits keep growing faster than revenues.
New Jersey recently raised corporate and income taxes on high earners, but the state would need to spend billions more on pensions each year to adequately finance promised benefits. Illinois’s Democratic Legislature last year overrode GOP Gov. Bruce Rauner’s veto of a corporate and income tax hike. Yet the Democratic candidate for Governor, J.B. Pritzker, and unions are now campaigning to kill the state’s flat tax rate and raise taxes again.
Stanford University lecturer David Crane has calculated that every additional penny that California schools have received from the state’s 2012 “millionaire’s tax,” which raised the top individual rate to 13.3% from 10.3%, has gone toward retirement benefits. The only salve to state pension woes, as the Wirepoints study notes, is to rein in current worker benefits.
A case can be made – and was made a long time ago by F.D.R among many others – that the whole idea of public sector unions is misguided. As F.D.R said, “It is impossible to bargain collectively with the government,” because when government unions strike they strike against taxpayers, which he considered “unthinkable and intolerable.”
We’re seeing the truth of this now, as public sector unions use their growing clout to convince politicians to write checks that taxpayers can’t cover.
The inevitable result of a parasite that grows faster than its host is the death of the host. In this case that means municipal bankruptcies on a vast scale in the next recession, default on hundreds of billions of municipal bonds necessitating a government bailout – culminating in a system-wide crisis that pops the Everything Bubble here and around the world.
Unless something else blows up first. These days it’s not if, but when and in what order the world’s unsustainable imbalances tip over.
15 thoughts on "Public Sector Pensions: The Parasite Devours Its Host"
The City, State, and Federal Government should be required by law to secure the pensions with publicly held assets like land and buildings. If government can longer afford to pay its Pensioners they would be forced to foreclose on a Library, Park, etc to meet their promised obligations.
If Baby Boomers weren’t willing to tax themselves at a high enough rate to pay for the government benefits they planned to receive what makes anyone think younger generations will be willing to pay high taxes for entitlements they know they won’t receive?
The last 100 years of human history is clear. Government pensions and entitlement programs are only popular with the public when they are understood to be ponzi schemes. Nobody would support these programs if they were expected to pay for them.
The contradiction of the 14th Amendment is therefore exposed…while of course freeing slaves is the focus of the amendment, the other details have become just as important.
Section 1. All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside. No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.
Section 4. The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned. …….
Now how can a person have due process with regard to their property when the debt they are being told they must pay (through taxes levied) was created before they were born (or prior to them being able to vote or challenge it in court)?
To my knowledge, this has never been challenged in court. Couldn’t an Illinois resident (for example) claim that the Illinois Supreme Court violated their 14th Amendment rights when making that ruling?
The “parasite” in question is the inflation caused by the govt to bail out wall st. Union agreements are based on the cost of living. Stop driving up prices and contracts don’t have to go up.
Yeah, things are gonna hit the fan in a few decades or so. Here in sunny south Florida some of the best jobs are government jobs. No problem so far except resentment among the public – which confusingly are called the “private” sector (the “public” sector being government.)
There is one case (owners of a house I built for them) in which the family can no longer afford their property taxes of about $30,000 per year, so they’re moving to Tennessee. Good luck to them.
Hey, Treasury yields are falling, so it’s all fine.
Bruce, I don’t think that the day of reckoning is “…a few decades or so.” away. Likely it is that “a few years” will be a more accurate estimate.
Not just pensions, either….
I sort of hope you’re right – but only because I hate the current system and want it to fail – but because most people seem to think the central banks have successfully controlled and rebooted the economies of the world, plus the revival of the US economically (albeit superficially) I don’t think another ten or twenty years is unreasonable at all. I don’t see even slight “cracks” in the financial system so far, never mind fissures.
A friend of mine said recently that the reason things may be holding together (e.g., the US dollar strength) is because nobody wants the system to fail. Let’s face it, the fiat money systems of the world are confidence games, and 60% of the wealth is in US dollars. Nobody wants to upset the apple cart because it would mean personal loses. Who knows how long that game of mirrors can last. As incredible as it may seem, I say for decades more.
Bruce, It seems to me that the furious accounting needed to keep the fiat currency (QE, QT, Too big to Fail, public debt that cannot be repaid or even serviced) makes it necessary to pull off the switcheroo sooner than that. But… You make reasonable points. As long as the players are making the game work for them, why change?
The fraud will continue until the real players think they can pull of the next stage with public support. I think that a precipitating event (horrible earthquake in a major Western city, for instance) could be used as pretense. Manufactured internal civil conflict is another. If they want it to last another 20-30 years to really wear the people down, they will certainly try.
Why not eliminate (i) professional politicians, (ii) all taxes and fees, (iii) all future borrowing, and (iv) print money as needed. If this results in inflation and worthless money perhaps a lesson will be learned. But if printing is limited by some objective standard and there are no professional politicians stealing at the trough, the system of just issuing a means of exchange worked for Rome for hundreds of years.