There are three words that don’t get mentioned very much, but they should scare the dickens out of you. Those words are Public Pension Liabilities. It’s a problem that is largely flying below the radar, but if you live in a state with a lot of public pension liabilities, it could end up like Detroit.
Public pensions often end up swallowing up the state budget until there is little left over to provide basic services.
A pension is a guaranteed stream of income that is paid to you either over your lifetime or the life expectancy of you and your spouse. It used to be very popular in the private sector, but they became phased out as they became too expensive. However, they still persist in the public sector.
Public pensions are a great way for politicians to get elected. It’s very easy to make a promise to perpetuate lavish benefits when they don’t have to deal with the consequences for potentially decades down the road.
It will get to the point where certain states will go bankrupt because they can’t afford to pay the pensions that have been promised. California, one of the fiscally unstable states in the country, has over 62,000 pensioners that are getting over $100,000 per year. Illinois is on the cusp of bankruptcy because of all the unfunded obligations they have in regards to pensions.
These public employees deserve competitive pay, but people are living longer and cities are now in a unique position where they have to fund their current budget. However, they also have to pay one or two generations of retirees.
When we ask the states to total up their unfunded obligations they say it adds up to $1.4 trillion, but the Federal Reserve and others put that number as high as $5.3 trillion.
You have to realize the precarious position that states are in. They can only raise taxes so high before people start fleeing their state. They can’t print money, so their budget is limited to what they bring in. They will eventually have to cut services.
Some believe the federal government will intervene, but that’s not going to play out the way most people believe. We often focus on the broad national debt, but we often forget what’s going on at the local level. If the federal government opts to bail out the states, it will be by raising taxes on everyone.
There is a storm looming on the horizon. We have to keep in mind that public pension liabilities are a chicken that will come home to roost sooner or later. It won’t be the states that go into austerity to be able to deliver on these pensions.
You’re going to see the federal government intervene and raise taxes to be able to deliver these pensions from the fiscal abyss into which they have descended over the last couple of years. [
There are solutions that states could look at that could potentially fix the problem. Fix number one would be to wean new employees off of pensions so less of the onus is on the state government. [
Politicians love to bend the truth and promise people a lot of free stuff, so they may not be the ones that push a real solution forward. They have to be much more transparent with the price tag associated with what they are promising. [
We can no longer afford to lavish our public sector employees with very expensive guaranteed pensions. There is a big storm on the horizon, but one of the smaller storms that doesn’t get talked about enough is the public pension liabilities that are going to be a major issue for a number of states in the near future.