A Stitch in Haste

I casually noted in my most recent post on the pension reform bill that the situation regarding defined-benefit pension plans for state & local government employees is far worse than the situation for plans of private corporations. The last number I had access to was a $279 billion deficit between projected obligations and projected accumulations — all of which will, someday and somehow, fall on the shoulders of each jurisdiction's respective taxpayers (assuming of course no federal bailout at some point down the road — big assumption).

Today we get some updated numbers:

It is hard to know the extent of the problems, because there is no central regulator to gather data on public plans. Nor is the accounting for government pension plans uniform, so comparing one with another can be unreliable.

But by one estimate, state and local governments owe their current and future retirees roughly $375 billion more than they have committed to their pension funds.

And that may well understate the gap: Barclays Global Investments has calculated that if America's state pension plans were required to use the same methods as corporations, the total value of the benefits they have promised would grow 22 percent, to $2.5 trillion. Only $1.7 trillion has been set aside to pay those benefits.

So the situation has worsened from an estimated $279 billion to an estimated $375 billion or even $800 billion. One way or the other, the situation is getting worse, and at an increasing rate.

When private employers short-change their pension plans, they are penalized legally, in the financial markets and through the media. When hack politicians short-change their pension plans — bupkes.

Indeed, to them, having a twelve-digit shortfall is something to boast about:

As a group, state and local pension systems have nearly 90 cents for each dollar they owe in liabilities.

In other words, they openly acknowledge having "only" a deficit of ten percent — of $3 trillion, give or take. "Move along folks, nothing to see here..."

As with the Pension Benefit Guarantee Corporation, as with the fraudulent Social Security "trust fund," so too with the pension fund volcano under the city fiscs: It is only a matter of time before the eruption.

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One thing that the private and public defined-benefit pension crises do share is the role of labor unions in pressuring employers into offering lucrative pensions that prove impossible to maintain. Almost every major private pension default has been in a ubiquitously-unionized industry: steel, autos, textiles and airlines come to mind. Just as the unions collectively bargained themselves straight into bankruptcy, so too are they collectively bargaining themselves straight into pension default. Because "it's all about the future." Go figure.

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It's been far too long since I called out an example of the Broken Window Fallacy:

State and local pension plans fuel national, state and local economies. Public plans distribute more than $130 billion annually (an amount greater than the total economic output of 22 states) in benefits to over 6 million retirees and beneficiaries, with an average annual pension benefit of roughly $19,500. These payments are steady, continuous, in great part adjusted for inflation and provide a strong economic stimulus to local economies throughout the nation.

This is, of course, utter nonsense.

No one denies that government employees deserve pensions if that's what they contracted for, just as they deserve the paychecks they contracted for. But every single dollar paid to a government employee comes from a taxpayer, either directly or indirectly. And every single dollar paid as a tax is a dollar not spent directly in the economy. That is not "a strong economic stimulus" — it is the exact opposite. The drain on the economy from the drag of bloated government overwhelms — totally swamps — any purported stimulus effect of pension flows. And the fact that pensions are "in great part adjusted for inflation" is also not something to brag about — but that's another blogpost.

No economy has ever taxed itself into prosperity. End of discussion.

Read the Broken Window Fallacy here.