Unfunded Pensions at the Brink

Posted on March 7th, 2011 by admin in Political Economy, Retirement, Scenarios

As many in the USA know, California has the biggest state economy and also is in immanent danger of financial collapse. Even the Democrat politicians who own the entire California state government seem to recognize this. In February, the non-partisan Little Hoover Commission released its report on recommendations to save California finance (Public Pensions for Retirement Security, Report #204, February 2011). This report recommends such politically nasty actions as reducing pensions for those currently retired public employees. Naturally, such recommendations are not well-received. But the fact remains: the pension system is unsustainable and also dominates the budgets of most communities in the state.

A recent article by Steve Greenhut in the Orange County Register elegantly describes the situation and the political framework. Quoting Greenhut (who refers to the Little Hoover Commission report):

This is a battle over the future of California, as communities spend more than a third of their budgets on pensions (plus even more for other retirement costs for public employees, such as health care), which means “an intensifying fight for diminishing resources from which government can pay for schools, police officers, libraries and health services.” And because public employees “appear to have little incentive to push for reforms,” they, too, will suffer, as they look at cutbacks in public services. Per the report, “A pension cannot grow without a job attached to it.” Maybe that reality eventually will get the unions’ attention.

Yet I’m convinced that the state’s public employee unions will take the state over the cliff rather than pare back their generous benefits. What happens when these pension costs push the state toward insolvency and the dominant political players refuse to give in? We might get to watch this unfold, and the result is unlikely to be pretty.

Little Hoover hit on the real problems: Governments are in the position of paying employees for more years in retirement than they worked thanks to the very low retirement ages creating, in essence, a shadow workforce that costs as much as the real workforce but doesn’t do any work! Police, fire and other public safety pensions must be addressed – California politicians cannot make a devil’s bargain and put the biggest part of the problem off the table, as did Wisconsin Gov. Scott Walker, who made a craven political calculation.

What will happen as the unions and the Democrat politicians (elected with massive help from union dues) defend their pension goodies? This is a system at it’s Boundary. Meaningful changes to make the system financially sustainable will hurt those who got the sweetheart deals, or the entire state can suffer by working to provide the pensioners with a risk-free future.

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