Pension Storm Warning
The comments above & below is an edited and abridged synopsis of an article by John Mauldin
Mauldin zeroes in on ‘the bubble in government promises,’ arguably the biggest bubble in human history. Elected officials have promised workers they will receive pension benefits without taking the steps necessary to deliver on those promises. This will end badly and hurt many people.
Mauldin talks about pension plan shortfalls, a known risk for which state and local governments must prepare; public sector bankruptcy, up to and including state-level bankruptcy, which is fundamentally different from corporate bankruptcy… the pension crisis will likely expose those differences as deadly to creditors and retirees; and total unfunded liabilities in state and local pensions, which have quintupled in the last decade.
Much of the US will likely end up like Puerto Rico, but the hardship map could be more random than that. Some sort of authority will have to seize pension assets and figure out who gets hurt and how much. Some courts in some states will require taxes to go up. But courts don’t have taxing authority, so they can only require cities to pay, but with what money and from whom?
On the other side will be homeowners and small business owners, already struggling, and then being told their taxes will double. This may happen soon in Dallas, and it won’t be the only one.
In places like New York and Chicago, pension funds have more retirees collecting than workers paying into the fund. It is smart for a Chicago police officer to retire as early possible, locking in benefits, go on to another job that offers more retirement benefits, and round out a career by working at least three years at a private job that qualifies the officer for Social Security.
This crisis can’t be muddled through. While the federal government can print money if it has to, state and local governments cannot. They have to tax to pay their bills. It’s an arrangement that could cause political and social upheaval not seen in decades. Of all the intractable economic problems to come, this is the most daunting.
