2010 June 22 Tuesday
State Pension Cuts Too Far In Future

A New York Times article by Mary Williams Walsh outlines many ways that state governments are cutting pension benefits that they can not afford. But there's one big twist: the states are not cutting benefits for existing workers. So the states are still going to run out of money in their pension funds decades before the cuts will start to cut outlays.

But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.

Lawmakers wanted to avoid legal battles or fights with unions, whose members can be influential voters. So they are allowing most public workers across the country to keep building up their pensions at the same rate as ever. The tens of thousands of workers now on Illinois’s payrolls, for instance, will still get to retire at 60 — and some will as young as 55.

I can understand not taking back benefits already earned. But why should it be illegal to tell existing employees they will no longer earn additional benefits at such a fast rate?

The article reports Colorado as an exception because the state is cutting benefits for existing employees. Some other states are on course to run out of money in their pension funds in less than 10 years.

Joshua D. Rauh, an associate professor of finance at Northwestern University who studies public pension funds, predicts that at the current rate, Illinois’s pension system could run out of money by 2018. He believes the funds of other troubled states — including New Jersey, Indiana and Connecticut — are also on track to run out of money in less than a decade, unless they make meaningful changes.

Illinois would need to spend half of all tax revenues on pensions after 2018 if it does not cut benefits. It is no wonder that insurance for Illinois state debt prices in a high risk of default higher than California's.

Many US states are headed for a fiscal disaster. My advice: Do not move to a state whose state government is fiscally unsound. Avoid the cuts in service, the increases in taxes, and damaged economy as industries flee. The fiscal disaster will be even worse than forecast by economists because another approaching financial disaster is going to choke economic growth and cut into expected tax revenues.

Share |      By Randall Parker at 2010 June 22 10:06 PM  Economics Sovereign Crises


Comments
Black Death said at June 23, 2010 6:43 AM:

Mike Shedlock said:

Joshua D. Rauh at Northwestern University is an optimist. Illinois will be out of money in some of its pension plans before 2018 because he is assuming 8% rates of return on investments. Flat to negative returns for the next 5 years are certainly possible, and in my opinion, likely.

Rauh has a plan to save the public pension system involving freezing benefits in conjunction with pension bonds. Freezing benefits for new hires certainly needs to be done, but that only helps down the road.

Something needs to be done now, and that means we have to scale back current promises for existing plan members. The union will not like it but so what? Public unions have had it too good, for too long.

http://globaleconomicanalysis.blogspot.com/search?updated-max=2010-06-21T13:49:00-05:00&max-results=3

....

The NYT article doesn't mention that Rauh accepts the pension fund's Fantasyland projected 8% return on investments. So the money well is likely to run dry a lot sooner than 2018. Rauh also said the he thinks the proper solution is for the states to seek a federal bailout. Yep, sounds like a winner to me - just wrap up your problems in a nice package, put a pretty ribbon on it, and ship it off to Washington. The folks there have been doing so well lately - I'm sure they'll be happy to cut a check so the states will not have to address the serious overcommitments that got them into trouble in the first place.

Michel Petit said at June 23, 2010 7:09 AM:

Why not taxing pensions incomes differently?
Give huge tax exemptions to incomes earned from work and overtax incomes from pensions.
De facto,people with huge pensions were given preferential tax privileges over other workers.

CamelCaseRob said at June 24, 2010 9:03 AM:

The states will have to be rescued by the Federal government, which will borrow money until it can't any longer, and then start printing it. So, all these pensioners will be paid off in worthless dollars. This will happen because it is the line of least resistence.

Social Justice said at June 24, 2010 9:13 AM:

It is important for all US taxpayers to pay for public employee pensions in California, New York, Michigan, etc. Everybody pays, everybody bleeds for California, Michigan, New York.

The US has to pay for its sins of the past, which means that socially responsible leaders must bring the US economy to bankruptcy as punishment for the US failure to join with enlightened and progressive governments in forming the great Internationale. Instead the US opposed the Internationale at every turning and made it into a laughing stock, except in universities and think tanks.

Randall Parker said at June 24, 2010 6:13 PM:

CamelCaseRob,

Yes, the deeper the US federal government gets into debt the bigger the temptation (or pressure) to inflate.

I doubt that the US government will bail out bankrupt states though. I expect the people in DC are going to be too busy trying to keep all the federal programs funded and Social Security and other checks flowing out to worry much about the states.

If world oil production doesn't peak until 2015 then the size of the debt load will have time to get even bigger before the wheels really start to fall off. I'm hoping the high prices for oil will so accelerate deep water production that we'll get small amounts of oil production growth for a few more years. That'll give the car companies more time to ramp up EVs and PHEVs. It'll also give me more time to save more money and invest it outside the United States.

Social Justice,

Certainly some people are going to be paying for some sins. But there'll be (as there already is) a big shift from the sinners to the payers.

CamelCaseRob said at June 25, 2010 4:59 AM:

Randall, given that we can switch to nuclear, coal, and oil shale, and that they wouldn't be that much more expensive than the current price of oil, why do you think peak oil is going to be such a world altering event?

Harry Tucanos said at November 7, 2010 10:30 AM:

Pensions must be cut.

Randall Parker said at November 7, 2010 10:20 PM:

CamelCaseRob,

The substitutes won't be more expensive? Oil is used for cars and trucks. What replaces it? Electricity? Cheap enough. But what abotu the storage for the electricity? Batteries are very expensive and even lithium batteries weigh too much.

Liquid hydrocarbons are extremely convenient.


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