Public Sector Pensions: The Parasite Devours Its Host

The Wall Street Journal recently highlighted a better method of analysing the impact of public sector pensions on state and local budgets. The results are ominous for government finances, the bond markets, and pretty much everything else:

Why Your Pension Is Doomed

A new study shows that benefits are rising faster than GDP in most states.

Pension costs are soaring across the country, and government unions blame politicians for “under-funding” benefits. Lo, if only taxes were higher, state budgets would be peachy. The real problem, as a new study shows, is that politicians have promised over-generous benefits.

In a novel analysis, the Illinois-based policy outfit Wirepoints compared the growth of state pension liabilities relative to state GDP and fund assets. Most studies have examined “unfunded” pension liabilities, which is the difference between current assets and the present value of owed benefits. But this obfuscates the excessive pension promises that politicians have made.

According to the study, accrued liabilities—how much states are on the hook for—between 2003 and 2016 grew more than 50% faster than the economies in 28 states and more than twice as fast as GDP in 12 states. Leading the list are the usual suspects of New Jersey (4.3 times faster than GDP), Illinois (3.23) and Connecticut (3.18), as well as New Hampshire (3.46) and Kentucky (3.08).

Between 2003 and 2016, New Jersey’s pension liability ballooned 176%. Unions blame lawmakers for not socking away more money years ago, though lower pension payments helped them bargain for higher pay. The reality is that New Jersey’s pension funds would be broke even had politicians squirrelled away billions more.

Ditto for Illinois, where the pension liability has grown by 8.8% annually over the last 30 years. Yet when the Illinois Supreme Court in 2015 blocked state pension reforms, the judges rebuked politicians for inadequately funding pensions. The solution, according to unions, is always to raise taxes. But no tax hike is ever enough because benefits keep growing faster than revenues.

New Jersey recently raised corporate and income taxes on high earners, but the state would need to spend billions more on pensions each year to adequately finance promised benefits. Illinois’s Democratic Legislature last year overrode GOP Gov. Bruce Rauner’s veto of a corporate and income tax hike. Yet the Democratic candidate for Governor, J.B. Pritzker, and unions are now campaigning to kill the state’s flat tax rate and raise taxes again.

Stanford University lecturer David Crane has calculated that every additional penny that California schools have received from the state’s 2012 “millionaire’s tax,” which raised the top individual rate to 13.3% from 10.3%, has gone toward retirement benefits. The only salve to state pension woes, as the Wirepoints study notes, is to rein in current worker benefits.

A case can be made – and was made a long time ago by F.D.R among many others – that the whole idea of public sector unions is misguided. As F.D.R said, “It is impossible to bargain collectively with the government,” because when government unions strike they strike against taxpayers, which he considered “unthinkable and intolerable.”

We’re seeing the truth of this now, as public sector unions use their growing clout to convince politicians to write checks that taxpayers can’t cover.

The inevitable result of a parasite that grows faster than its host is the death of the host. In this case that means municipal bankruptcies on a vast scale in the next recession, default on hundreds of billions of municipal bonds necessitating a government bailout – culminating in a system-wide crisis that pops the Everything Bubble here and around the world.

Unless something else blows up first. These days it’s not if, but when and in what order the world’s unsustainable imbalances tip over.

*********