My colleague (and fellow high school alum), Josh Rauh testified on the new systemic risk posed by underfunded state and local pensions. Why is this a systemic problem? Because, if cities and states start defaulting and/or massively raising taxes, will you let these elderly retirees go hungry and/or without healthcare? Remember, they are not eligible for Medicare and Social Security – their pension is their safety net. They took jobs and worked for the public sector at given wage and pension promise. Maybe some of them got good deals, maybe some of them got overworked for too little money. But they all taught our children, protected our lives, administered the services which we take for granted, and so on with pay and a promise of a pension and healthcare. But the politicians gave us lower taxes or higher benefits instead of setting aside the money to pay for the pensions and healthcare that they were promising to public employees while they worked. Now the workers are old and the bills are coming due. And some states are woefully underfunded (see here).
We in these states and localities have four options: pay more taxes, drastically cut spending, default on debt, or default on our promises to these elderly. In Illinois, up until the latest tax increase, we have such a big hole that if we cut all spending – 100% of schools, cops, everything – our projected taxes would just about cover our pension and benefit obligations. The recent tax increase is a small and temporary fix to a major problem. (Is it just a coincidence that so many of our governors end up in prison?)
Now the question is, what of these scenario’s is not systemic? Default on debt looks pretty systemic. If states and localities default on debt, these defaults will reduce the assets of other local governments’ pension funds and presumably some private defined benefits plans and whatever foreign institutions hold the debt also, oh, and probably banks. A large increase in state and local taxes sure sounds systemic. As does massive cuts in spending – poor law enforcement, public education, public health etc are national problems. And in the case of defaulting on pensions and healthcare, won’t we through the Federal government step in to stop elderly from dying of minor infections and starving, especially after these people worked their lives for these benefits?
Josh’s testimony is here. Very troubling but worthwhile reading.