The Biggest Lie of All: Government Can Pay Its Pensions

State-local pensions are just one aspect of unsustainable government spending.

State-local pensions are just one aspect of unsustainable government spending.

Many people get infuriated by President Trump’s many inconsequential falsehoods — does it really matter how big his inaugural crowds were? — but they remain sanguine about the trillion-dollar untruths that our public pension system is built upon. The big lie that governments will make good on retirement promises to their employees is not merely mendacious but it is destructive. Millions of Americans have built their retirement plans around a fiction. And when the Ponzi scheme collapses, government workers won’t be the only ones to suffer.

In his latest column, George Will recites some of the more glaring examples of how the big lie is unraveling.

The Dallas police and fire fund recently sought a $1.1 billion transfusion, a sum roughly equal to the city’s entire general fund budget yet still not close to what is needed. Last year Illinois reduced its expected return on its teacher retirement fund portfolio from 7.5% annually to 7% (which is arguably still too optimistic), meaning that the state needs to add $400 million to $500 more to the fund — annually. Last September, the vice chair of the agency in charge of Oregon’s pension system wept when speaking about the state’s unfunded pension promises of $22 billion. Nationally, unfunded liabilities for teachers, not counting other government employees, amount to at least $500 billion.

And don’t get me started on the fact that the Medicare hospital trust fund is expected to run out in only 12 years and Social Security trust fund in 16 years, at which point payroll tax revenues will be insufficient to maintain full benefits… Or the fact that the pensions run by companies in the S&P 1500 Index were unfunded to the tune of $562 billion.

Some of the shortfall can be attributed to absurdly generous provisions of pension plans in particular states and localities, some to fiscal indiscipline by government at all levels, and some to the Fed’s seven years of near-zero interest-rate policies that have depressed returns on bond portfolios and juiced stock market gains that cannot possibly be replicated in the years ahead.

Will concludes with the salient point:

The problems of state and local pensions are cumulatively huge. The problems of Social Security and Medicare are each huge, but in 2016 neither candidate addressed them, and today’s White House chief of staff vows that the administration will not “meddle” with either program. Demography, however, is destiny for entitlements, so arithmetic will do the meddling.

Few elected officials are willing to deal with the issue that offers no immediate political reward. Here in Virginia, one of the few, House Speaker William J. Howell, R-Stafford, has announced that he will not seek re-election.

Thanks in part to Howell’s stewardship, Virginia’s budget, backed by a AAA bond rating, is in better shape than those of many other states. But the U.S. learned after the 2007 real estate crash what AAA bond ratings are worth when the economy shifts from normal conditions to crisis conditions. Boomergeddon is coming. The only question is when.

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2 responses to “The Biggest Lie of All: Government Can Pay Its Pensions

  1. Fairfax County’s pension situation is in bad shape. Boston College’s Center for Retirement Research, headed by former Clinton economic advisor Alicia Munnell, has prepared a study that compare state and large local government’s (read 50 biggest counties & 50 biggest cities) pension debt, OPEB costs and debt service costs as a percentage of entity controlled taxes, that excludes federal or state aid (in the case of local government).

    Virginia is found in the lower half of states, between Georgia and South Dakota. For counties, Fairfax County is 9th highest of the 50 largest counties, trailing Fresno, CA; Sacramento, CA; Kern, CA; Los Angeles, CA;
    Orange, CA; Cook County, IL; San Diego, CA; and Prince Georges County, MD.

    Now Fairfax County’s governing economic principles limit the amount of long-term debt that can be issued, so its debt service burden is low. Also, OPEB costs are quite small. But pension debt is a full 35.6% of local source revenues. This puts Fairfax County behind only San Diego, CA; Orange, CA; Kern, CA; and Fresno, CA when one compares only pension debt/local source revenue.

    If one compares Fairfax County’s pension debt/local source revenue to that of the 50 largest cities in the United States, only Chicago has a higher ratio.

    County Executive Ed Long’s FY18 budget presentation to the Board of Supervisors shows only small growth in residential and commercial assessments; office vacancy rates comparable to the early 1990s (not good); an business trend of smaller office sizes; and little job growth at the higher pay levels; growth in low-level jobs. Toss in some demographic changes where domestic migration is negative; an aging population and a much larger low-income population. Also, toss in the fact that the pension plans are not earning rates-of-return that are projected in calculating their solvency. So many are concluding Fairfax County is also on the road to some big-time financial problems and its pension plans don’t look good.

  2. Let’s me fair and honest here.

    The vast majority of pensions in Va are for local county and school employees.

    And in counties like Fairfax and Henrico – fully half and more of the school employees are voluntary and discretionary – not mandated by the Feds nor the State. The same is true of pubic safety, deputies, fire and EMS, etc. Again – many of these positions are additional to what the State mandates.

    This is a recurring theme in BR but the real question is – what would you do about it?

    Would you get rid of school positions that are not mandated?

    Would you pay school employees less and instead of increases – freeze salaries or even reduce them? Reduce their pensions and/or their health insurance?

    would you have less fire and ems or require the formation of user-fee-funded service districts and get the county out of the fire/rescue business?

    take your own county – what would you advocate for? would you vote for a candidate that promises to cut school staff and reduce their pay and benefits?

    Seems like we get a running start at the “pensions are going to bankrupt us” -we run right up to the edge of the cliff.. then we stop .. and walk back.

    it’s very predictable!

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