Jun 222011

Oregon would have to increase taxes on each household by more than $2,000 each year for several years to fully fund the pension obligations of its public employees (those working for states, counties, cities, school districts, etc).

By this measure, only in New Jersey and New York are the burdens unfunded public pension obligations heavier. The calculations are  by two academic economists who have been sounding the alarm since early last year about the growing scale of unfunded pension promises to the employees of states and their political subdivisions. They are highlighted in an article in the New York Times that starts on Page A1 today. Here’s a link; here’s the related tabular material.

Take the specifics with a grain of salt.  They are disputed by the research director of the National Association of State Retirement Administrators (link). Give the New York Times credit for taking note of his criticism, both in print and on line. The estimates are based on assumptions about many factors, including the rate of contributions by employees. All forecasts are bound to be wrong. At best, forecasters get the direction right. The longer the time horizon, the less accurate the forecast.

Yet the crisis is real, the alarms necessary. The coming clash between taxpayers and growing public-pension obligations has been brewing for years, especially in California, where many public employees can retire at 55 with pensions as large or even larger than their pay while working. The looming iceberg flashed on to the radar screen of the general public last year over the scandal in tiny Bell, California, where Robert Rizzo, the now-disgraced city administrator, was earning $800,000 a year and in line for an annual pension after special supplements of more than $1 million a year.

Two thoughts:

Public pension obligations are like hell (and financial derivatives): Easy to get in to, impossible to get out of. Governors, mayors and legislators who make promises that will have to be kept by their successors follow the same logic as bankers who sell dodgy mortgage paper: When it is time to keep the promises, “I’ll be gone, you’ll be gone” (abbreviated IBG, YBG). Kick the can down the road and let the kids and grandchildren worry about it. That is obviously the road to financial ruin.

And faster economic growth would help everyone climb out of the deep holes created by unfunded public pension liabilities as well as entitlements (Social Security, Medicare, the prescription drug benefit) claimed by the 10,000 baby boomers who will retire each day for the next two decades. Today’s extraordinarily low interest rates — a sign of economic weakness rather than economic strength — aggravate the burden of these inter-generational promises.

Ending some of the today’s policy uncertainty would certainly help. Corporate America is sitting on record amounts of cash which earns very little at least in part because of uncertainty about future tax rates, energy costs and health-care costs. Odds of doing anything about these uncertainties before the 2012 presidential election? Low.

I realize that pessimism about economic prospects and bearishness is fashionable these days, and that we usually somehow manage to muddle through the kind of financial difficulties we face today. We’re not Greece, after all.

One alternative to muddle — and a distinct possibility in my view — is to inflate away the burden imposed by these promises. Debase the currency, erode purchasing power, give everyone a haircut. You can make a decent argument that haircuts already have begun. Just ask the corrections officer or library worker who’s being required to take involuntary days off this summer. Haircut. Or your Aunt Minnie who is renewing a bank certificate of deposit on which she depends for income. Haircut. The reality is that we can’t afford the promises that we have made to one another, partly because of demographic trends. Haircuts, a form of default, may in fact be our only way out.

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