Ticking Time Bomb


USA Today examines the financial ticking time bomb that is the public workers pension system.  Thanks to the handiwork of the union bosses America’s fiscal ledger is starting to look like Greece:

Even the most casual observers know the federal government has a serious debt problem that’s propelling the USA toward the same cliff as Greece. Less well known is that certain states and localities are even worse off. Or at least their problems are coming to a head sooner, as they have fewer options for kicking the proverbial can down the road.

States can’t print money, and they have limits on borrowing. Much of their shortfall, moreover, is the result of pension obligations that are binding contracts, not just political promises. The looming shortfalls were hidden in recent years through a combination of outright deceit and overly rosy projections for annual investment returns. But the truth is now emerging.

Last month, a panel from Stanford University concluded that California’s public employee pensions were underfunded by $500 billion. That’s about $35,700 per California household. Nationally, the American Enterprise Institute estimates that state pension funds are more than $3 trillion short.

The problem is twofold. Many states have lavish programs that allow workers to retire in their 50s with ample pensions — and health insurance to cover them until Medicare kicks in. Second, regardless of how generous their benefits, some states have simply failed to put away adequate funds to cover them.

These lavish programs are a good deal for public employees and politicians seeking their votes. But the deal is a bitter pill for taxpayers, most of whom are private sector workers without the types of benefits that state and local workers see as their right.

The first thing that must be done is to acknowledge the colossal irresponsibility of lawmakers who have engineered a massive transfer of wealth from non-unionized workers to unionized ones.

The next thing to do is to take steps to limit the damage. One good idea is to move new state and local government employees to 401(k)-type programs. This won’t solve the problem of current workers and retirees, but it will keep the problem from getting worse. Alaska and Michigan have already moved broadly in this direction, while several other states have 401(k)s for certain types of employees.

The ability to rein in spending for current workers and retirees varies from state to state. In about a third of the states, pensions are not the result of collective bargaining agreements and can be adjusted within the confines of what is politically possible. Health benefits are often easier to trim, at least from a legal standpoint.

Without dramatic action, it is not difficult to see states such as Illinois and New Jersey falling into downward spirals of tax hikes and service cuts to finance their unaffordable promises.

In New Jersey, recently elected Gov. Chris Christie is finding out how tough the issue is.  His state faces massive deficits even though it has some of the highest taxes in the country. With little ability to trim pensions, he is demanding that the teachers’ unions agree to pay freezes or layoffs. For his efforts, Christie is being portrayed as a Scrooge-like character who is anti-education. Many other states will soon be forced into the same type of contentious fights.

The story of state pension shortfalls isn’t as well known as the national debt. But given the severity of their problems, that probably won’t be true for long.