Mish Shedlock takes a look at a new Milken Institute report about California's massive unfunded pension liabilities. The disaster is epic in scope. What is most important about this problem: Governments are losing the ability to pay off all their major interest groups. Governments are going to be forced to deliver less year after year.
Obviously retirement ages must be raised. People can't work for fewer years than they collect benefits. That's ridiculous and should be stopped pronto. You might think that the state pension funds deny the size of the problem and that maybe the outsiders complaining are just anti-government rabble-rousers. But no. The chief actuary of CalPERS (one of the 2 big Cal state pension plans) says the system is not sustainable. He's the chief actuary saying this. The unfunded liabilities hole can't be filled just with taxes.
The problem is not limited to just one state government. A former mayor of LA says the bankruptcy of Los Angeles is inevitable. Many state and local governments underfunded their public employee pension programs. Since state pension funds use unrealistic assumptions of 7.5% to 8.5% yearly average returns on their investments their underfunding is worse than their official claims. Imagine we go thru a 10 year period with near 0 returns on stock market. The unfunded liabilities of the states would balloon so large that bankrupcty would be hard to avoid. I expect The Impending World Energy Mess to slash state and local government tax revenues while also turning stock market returns negative.
So which interest groups will take the biggest hits? The hits might not be proportional to how much each group is getting now. Current government employees, retired government employees, poor folks, children, car drivers, firemen, school administrators, school teachers, bureaucracies that build low income housing, and assorted other groups will all lose something. How will the hits fall? Which groups have less defensible positions? Which groups are least sympathetic?
Government outlays could rise even as their perceived levels of delivered benefits decline. How? Partly because of interest payments. When interest payments rise faster than tax revenues then outlays for services today go down.
Also, retirement benefits deliver large numbers of tax dollars to a small fraction of the population (e.g. Cal state government retirees). So the surge in outlays for retirees means that a far larger number of direct and indirect recipients of smaller amounts of government outlays will feel the pinch. Everyone will experience worse roads for example. Parents will watch their local schools get their budgets cut for expenditures on current teachers, administrators, supplies, and buildings. Fewer police will mean more crime.
The fiscal disaster of US states such as California and Illinois has a lot of parallels with that of Greece and other PIIGS. What we see in California and Greece presages a much larger government funding crisis that is building up. This crisis is obviously important because of its impact on taxes and government services. But it is even more important because it effectively is a wall that the growth of the welfare state is running into.
Hitting the wall of government growth means resentment of elites will grow. It also means the elite factions and other factions will come into more direct conflict and settled issues will become unsettled again. Fixed entitlements will become unfixed. Decades long promises will be broken. As governments approach bankruptcy old settlements of political battles will be repudiated out of necessity.
Firemen have always been popular with citizens. But government employees are coming to be seen as having it much better than the masses. Conor Friedersdorf points to a great xtranormal video on extremely well-paid fire fighters in California.
Resentment of fire, police, housing agencies, and assorted pieces government will grow as people feel more economic pain. Lots more mocking and angry videos to come. On the bright side, we should get to watch some really good biting satire.
|Share |||By Randall Parker at 2010 October 22 08:08 PM Economics Sovereign Crises|