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.