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March 09, 2011

Poetry for Cowboys: Left's Latest Meme Is That There Is No Crisis in State Pensions!

Veronique De Rugy explains why this is bunk. Here's just one of her reasons:

the fact that states’ pension obligations are a small share of their budgets today is a relatively meaningless point, given the explosion in spending that’s coming now that bureaucratic baby boomers are starting to retire. As I note in my recent Reason column “The State Pension Time Bomb,” according to Joshua Rauh, professor of finance at Northwestern University, some states’ pension funds are scheduled to run out as soon as 2017. The below chart shows the ten states scheduled to run out of cash first:

[chart omitted; but Oklahoma runs out in 2017, and Indiana runs out in 2020 -- we are not talking about a distant cyberpunk future here]

Once the pension plans run out of money, the payments will have to come out of general funds, meaning taxpayers’ pockets. What does that mean concretely? In her testimony before Congress last month, Norcross explained:

By 2018 Illinois will run out of plan assets which will require that the state begin contributing $11 billion annually from revenues between 2019 and 2023. Currently, the state contributes $3.5 billion annually, and has often bonded its contributions. Using less generous assumptions, this scenario is much worse. Indeed, as Dr. Rauh notes this will present a “catastrophic shock” to Illinois’ current revenue needs.

The situation is not much better in New Jersey. Dr. Rauh estimates New Jersey will require $10 billion annually out of its revenues to pay for pension benefits it has already made beginning in 2020, which represents one-third of the state’s current budget. Other plans have a longer time horizon but face even more difficult scenarios. In 2031, Ohio will require 55 percent of its projected revenues, or roughly $13.8 billion annually to pay for existing liabilities.

Fifty-five percent? That’s quite different from the rosy 3.8 percent the McClatchy story is talking about.

I've heard similar spin from the left on Social Security -- there's no problem with Social Security, lefties say, because it's "only" going to be underfunded over the next fifteen years by (say) $2 trillion dollars. No problem, they conclude -- that just means we'll raise taxes $2 trillion dollars. What's the big fuss?

This is how they always treat these problems -- there is no crisis with the amount of money flowing out because, hey, no big deal to increase the amount of money flowing in.

Therefore, no crisis. Just expect to see taxes climb $2 trillion for this and $3 trillion for that and $10 trillion in state taxes and federal taxes used to fund states and etc.

What if we'd like to keep government spending, as a share of the economy, at the 20% rate which has proven to be effective in generating growth and innovation?

Well, no, sorry, that's not on the table. There is no crisis in any of this, but oh, by the way, middle-class Americans should be ready to start forking over 60% of their wages to pay for hyperbolically-accelerating government payouts.

Monty sent this to me, and has more thoughts on the specific claim that there is "no crisis" in state pension plans:

The meme has been running around that the pension mess in the states is really just a wingnut fiction cooked up by Jesusland agitators. In the linked piece, Veronique de Rugy skewers that fallacy by pointing out the obvious problem -- they're using aggregate, not specific numbers [that is, they are taking all states and lumping them together instead of looking at the states specifically in crisis -- ace]. It's like saying that I have five dollars but my neighbor has two million dollars, so on average, we're both millionaires.

This problem predates the 2008 crash by decades. That's why New York
now has a Pension Tier V instead of a Pension Tier I.

That while "discount rate/expected rate of return on investment" is another load of bullshit the state actuaries keep shoveling. They're expecting returns in the 7.5-8% range, when the "risk free" rate is really more around 4% (and even a higher-risk porfolio would be lucky to get 6% in the environment we're looking at for the next decade or so). [He means here that the actual situation is far worse even than states project, and what they project is horrifying enough, because their pension funding is invested and projected to be earning unlikely-to-ridiculous rates of return. Even assuming these low-risk investments start bringing in absurd 8% rates of return, we're still in trouble; but take the more likely situation where they bring in only 3.5%, and that means we're on the hook for all those additional trillions that investment has failed to bring to the table. -- ace.]

And griping that pension debt is only 3% of total state spending misstates the case, because it doesn't take into account that these pension funds are almost broke. (In many states, like Illinois, this is functionally already true). So any shortfall has to either be made up out of general funds, new taxation, or borrowing. In any of those scenarios, the percentage of money diverted to pension funds is money that cannot be used for anything else -- even if spending doesn't increase (ha!), the *proportion* of existing funds going to cover pensions rises. This means cuts in other services.

I would just add that if we only had the Social Security problem, or the Medicare problem, or the Medicaid problem, or the pension problem, we could probably just borrow the money and put our problem on future generations. I mean, that wouldn't be responsible, but it could be done.

But since we have all of these problems coming simultaneously, even that is out the window. Sure, I can lock up $2 trillion in new government debt to take care of Social Security, but I can't lock up another $10 trillion for Medicare -- there is a limit as to how much someone will lend you, after all. If it appears that you have no way to pay this money back (and it does appear that way), your credit limit gets cut, doesn't it?

Sure, if we had one multi-trillion dollar problem we could just borrow and put it off on the next generation. But no one's going to extend to us tens upon tens of trillions in credit when our only method of paying debt seems to be taking out new loans to pay the old debt.

And this way of looking at it -- piece by piece instead of at the whole picture -- also allows people to say stupid things like "No big whoop, we'll just increase taxes by 2 trillion for Social Security." Okay, 2 trillion dollars in raised taxes, and now, yes, with so much more of our money being taken by the government, Social Security is fixed.

Okay-- and now what do you do about Medicaid, Medicare, and pensions? Are we to just rack up a another dozen or so trillion in new taxes to handle those problems?

Of course that is the liberals' plan -- that has always been their plan.

It's about time we begin forcing them to say so, and confess that the future they wish to win consists of the middle-class paying 60% of their hard-won wages to pay for further growth of the behemoth super-state.

That's what Obama's doing -- he is doing Reagan in reverse. Whereas Reagan "starved the beast" of income to force it to slim down, Obama is force-feeding and fattening his pet the government in order to make it not merely politically acceptable to jack up tax rates to Italy-in-the-1970s levels, but absolutely required if we are to avoid default and bankruptcy and depression.

It's high time the American people were presented this plan forthrightly and had their say on it.

By the way, Monty will have more on this later, he says.

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posted by Ace at 03:50 PM

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