The Burning Issue of 2012

Five years from now, one issue is going to dominate the news on the state and local level.  It's not going to be civil marriages or abortion of light rail.  It's going to be unfunded pension liabilities.  Nearly every city, county, and state government body has promised over-generous pensions to millions of their employees, and almost none of them have been putting any money aside to fund these future liabilities (unlike those evil and untrustworthy private companies, who may not always put enough aside but are at least doing something).

Most of us know that the government uses accounting methods and practices that would put private individuals in jail.  For example, Enron managers have gone to jail for accounting practices that allegedly attempted to hide liabilities and keep them off financial statements.  The government does this all the time, and routinely. 

Over the next few years, the GASB will require that governmental bodies reveal the size of these unfunded liabilities.  And you heard it here first, the numbers are going to be MASSIVE.  I am almost sure that the numbers will dwarf the shortfalls in Social Security and maybe Medicare as well.  Anyone want to be that politicians will propose to close these gaps by intelligent spending cuts rather than new taxes?  HAH!

From Cato@Liberty
:

A common criticism of Social Security choice
(and defense of the Social Security status quo) is that there
are dishonest actors in private markets who would put people's private
account assets at risk of (in the words of the AFL-CIO) "corruption, waste and Enron-ization." These critics argue that society is much better off keeping Social Security in the honest, benevolent hands of Uncle Sam.

What must these critics be thinking about today's NYT above-the-fold article on teacher pension fund shenanigans in New Jersey? The lede says it all:

In 2005, New Jersey
put either $551 million, $56 million or nothing into its pension fund
for teachers. All three figures appeared in various state documents "”
though the state now says that the actual amount was zero.

Like many state and local government pension systems,
New Jersey's is woefully underfunded compared to the benefits it will
have to pay in the future. (This situation will make headlines in the
coming years, as state and local governments begin to disclose their
pension fund and retirement benefit system shortfalls in accordance
with a recent GASB
requirement.) In New Jersey's case, the shortfall is more than has been
publicly acknowledged, however: "an analysis of its records by The New
York Times shows that in many cases, New Jersey has overstated even
what it has claimed to be contributing, sometimes by hundreds of
millions of dollars."

  • And if the states have chief accounting officers as honest as the U.S. federal government (I'm not being sarcastic this time: see http://www.usatoday.com/news/washington/2005-11-14-fiscal-hurricane-cover_x.htm), then they too will be declared "broken business models."

  • mjh

    Isn't there a big difference between an unfunded liability that a private corporation incurs and one that a government incurs? Namely that the government doesn't cease to exist and can (even if it's ridiculously expensive to do so) fulfill its unfunded obligation either through debt or increased taxes, whereas a private company can go out of business and never fulfill its obligation.

    Doesn't that difference have a marked effect on how people view the risks associated with unfunded government liabilities vs private ones?

  • dearieme

    FDR reneged on Federal obligations: abroad it was called The American Default.

  • markm

    mjh: (1) The government is still being dishonest when it hides a future huge hit on the budget.
    (2) It's not always possible to raise more money by more taxation. Past a certain (generally unknown) point, higher tax rates will result in lower tax collections as the economy tanks.

    Governments have defaulted on their obligations. The State of Michigan did, about 1961. One result of that was a new state constitution, that requires the budget be balanced each year - but I don't know if that requires setting money aside for future pension obligations or not. It's even happened on a national scale, and even to first-world countries. In the 1920's, France got into a position where the interest on the national debt exceeded the maximum that could be collected in taxes. (And squeezing the Germans for "war reparations" owed from WWI accomplished nothing except destroying the German economy too, getting Hitler elected, and causing WWII.) Much of this debt was in what Americans would call "savings bonds", owed by the government to individual Frenchmen. After some years of digging themselves deeper in the hole by borrowing to cover interest payments, the French government issued new francs, at a 10:1 ratio with old francs, and in the process devalued their debts by 90%. That destroyed many individual retirement plans which had been based on those bonds.

    AFAIK, that huge default was the last time French politicians united to act courageously or responsibly, and the ones responsible were never elected to anything again.

  • Dan

    Let's hope you're right and that this is the big issue dominating in 2012, for that will mean that peak oil hasn't really hit yet, as I suspect it will before then.

  • Dan

    Let's hope you're right and that this is the big issue dominating in 2012, for that will mean that peak oil hasn't really hit yet, as I suspect it will before then.

  • bbartlog

    Maybe peak oil will *save* us from the pension problem by triggering some sort of hyperinflation, thereby rendering the pension obligations manageable :-P.