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Thursday, May 18, 2006

The Next Big Crisis: Public Pension Liabilities

An interesting article in USA Today paints a bleak picture of the looming employee benefit obligations many state and local governments have taken on in recent years:

Taxpayers will soon get a surprise bill that could exceed $1 trillion for the cost of paying future medical benefits for state and local workers who retire.

Retiree medical costs are the biggest long-term challenge that state and local governments face. By comparison, state and local pensions have an unfunded liability of about $500 billion.

State and local governments have set aside $2.5 trillion to help pay pension benefits for 19 million civil servants and 7 million retirees. But they have set aside almost nothing to pay for retiree medical benefits.

"Taxpayers will revolt when they realize the enormous cost of this," Minnesota State Auditor Pat Anderson says. She says the financial burdens on local governments will be so great they will put pressure on the federal government to nationalize health care, which she opposes.

The overall problem may is much bigger than that. A report by the Yankee Institute, hyperbolically titled “America’s Second Civil War: The Public Employment Complex vs. Taxpayers,” says the root cause of many of today’s contentious policy debates is the trillions of dollars in future wages and benefits that have been pledged to government employees at all levels. Contrary to the USA Today article quoted here, the states have not "put aside" nearly enough money to fund employees' pension benefits: states such as Illinois have notoriously diverted pension money to cover budget deficits and have borrowed money ino order to meet current obligations. When the baby boomers begin retiring, the problems will be much worse.

It's a great lesson in public choice economics. Lawmakers across the nation have been using these benefits as a way to buy votes on the cheap (public-employee unions have proven very effective at getting out the vote and at donating huge amounts of money to favored politicans)—because the obligations don’t come due until long after the elections are over and the pols who voted for them are comfortably ensconced in think tanks, law offices, and visiting professorships. But those obligations are about to come due as baby boomers start to retire in large numbers, and taxpayers and bond-rating agencies will soon begin scrutinizing those perks: Next year federal rules will require state and local governments to estimate the cost of the medical benefits they have promised to civil servants when they retire.

At that point, of course, the big-government types will declare a crisis and insist that taxes be raised to solve the problem.


James F. Elliott said...

This is an issue near and dear to my own heart as I weigh my job offers. All of them are with agencies funded either by counties or the state. The bottom line, for me, is that government is the only institution actually interested in funding the kind of work I do.

But I also see a looming crisis. Fully half the workers for the state will be eligible to retire by early next decade. There will be huge opportunities for advancement and innovation, but also a potentially crushing amount of pressure on PERS (Public Employee Retirement System). For that reason, I've been pushing my old coworkers to argue for a system that allows them to contribute to both PERS and Social Security.

If health care is such a problem for both big business (General Motors, anyone?) and local government, I'd say this is a perfect time to discuss some sort of national healthcare system. I've seen talk of some very innovative systems in that regard.

Tom Van Dyke said...

I think I would favor socialized medicine, a sort of VA, for public employees, especially retirees.

We had to put up them while they were in government, so I'd like to see the shoe on the other foot.

Francis W. Porretto said...

Public employee unions are the last really strong unions in the country because "management" pays them with other people's money, and therefore has little incentive to control costs. When the costs are "back-end loaded," as is the case with pensions and retiree benefits, the incentive drops to zero; meeting those costs will be someone else's problem in every sense.

The strength of the public-sector unions and the weakness of the private-sector ones is an education in economics, all by itself.

Tom Van Dyke said...

Or governments. Officials come and go; only the bureacracy is permanent.

Hunter Baker said...

I think we're going to end up with socialized health care because more and more people are independent or with small firms and health insurance in that situation is a nightmare. I further fear that the socialized system will itself be a nightmare to be shared by everyone.

James F. Elliott said...

"...because "management" pays them with other people's money..."

This whole "other people's money" canard is very tired. Taxes are not your money. They are the government's. They use that money to pay employees, who are consumers, and to provide services that keep society functioning.

Reasonable discussions can be made as to what services government should be providing and what sort of funds it really needs, but once you are taxed, it is not "your money." That's pretty basic to linguistics, mathematics, and logic.

I think a lot of this discussion is misinformed as to the nature of government workers. Most, like myself, have undergraduate or graduate degrees, and do far more than manage a bureaucracy. We conduct assessments, assessments that require our advanced education. We provide services, protect people who can't protect themselves, alleviate problems, testify in court, and so on. That person you deal with at the DMV isn't earning much. Most public employees don't earn a fantastic salary, certainly not comparable to what we could earn from a private employer. Without pensions or health insurance, the personal sense of duty to public service would simply be insufficient incentive. Duty doesn't feed our children.

Barry Vanhoff said...

This whole "other people's money" canard is very tired.

Not a canard at all in the context provided by the original post. If I own a business and pay my employees it is *MY* money/sweat that is paying them. That is not true for benefits like PERS.

Duty doesn't feed our children.

You're right ... GREED feeds our children.

James F. Elliott said...

"If I own a business and pay my employees it is *MY* money/sweat that is paying them."

Isn't it technically THEIR sweat? Otherwise, why have employees? Anyways, as I pointed out, tax dollars are not *your* money. They are the government's.

"That is not true for benefits like PERS."

Sure it is. It's like Social Security - the employee and the employer make contributions.

Barry Vanhoff said...

It's like Social Security.

Exactly. It is not like a 403(b) or 401(k).

Isn't it technically THEIR sweat?

semantics ...

D said...

is it just me, or did we all completely miss the recent study that said, regardless of class, and the type of healthcare we have; americans end up being more sick. period.

something is seriously wrong with the way healthcare is provided in our country, i don't even know what to call it. i'm wondering if it isn't productivity related. if people who work more are likely to be sick more, like krugman says, why isn't their productivity affected...

the very definition of sick, and medicine i'm afraid has been changed, for the worse. did anybody catch the recent vioxx study that says, if you took it at all, you're affected... so, when we worry about healthcare pensions, it would serve us better to think about healthcare in general first.

The strength of the public-sector unions and the weakness of the private-sector ones is an education in economics, all by itself.

over the last 20-30 years, certainly, pricate-sector unions have crumbled. but, you're not talking about the uaw, that union is in a league of it's own.

is the difference between slavery and a job you're fairly compensated for semantic as well cla..