Young Americans Have Yet Another Debt Burden
The unfunded pension liabilities of state governments are being deferred to those who can afford them least
The following is adapted from “Disinherited: How Washington Is Betraying America's Young” by Diana Furchtgott-Roth and Jared Meyer (Encounter Books: May 12, 2015).
Look in the mirror. Along with everyone else in America, you owe $15,052 to cover the total unfunded pension liabilities of state governments. Both red and blue states face towering unfunded promises because the defined-benefit pension system allows politicians from all parties to grant something for nothing — and to defer the inevitable bill.
Tennessee is in the best financial shape, with $6,531 per person in liabilities. It is followed by Wisconsin, at $6,720; and Indiana, at $7,304. Alaska is in the worst shape, with $40,639 a person. In the continental United States, the state in the worst shape is Illinois, at $25,740; followed by Ohio, at $25,028; and Connecticut, at $24,080.
States are in this situation because during economic booms they deliver more generous pensions to their employees, but during economic downturns, these increases are rarely pared back. This means that states make promises to public-sector unions that they usually cannot afford.
Absent major concessions, these pensions will have to be paid over time to the 19 million men and women who work for a state, county, municipal or school-district government. If pension-fund income is insufficient to cover those obligations, as is expected, those who will be on the hook to pay will be today's young Americans, who have college loans, high unemployment rates and lower incomes than the public-sector workers. As they progress in the workforce, they will be responsible for the debts.
This debt has accumulated even though 49 states had balanced-budget requirements in 2008, according to the National Association of State Budget Officers. Forty-four states require the governor to submit a balanced budget, 41 require the legislature to pass a balanced budget, 37 require the governor to sign a balanced budget, and 43 prevent the state from carrying over a deficit.
Even when there are balanced-budget amendments, states are often free to use different funds that are not required to be in balance. The balanced-budget requirements typically apply only to general-fund budgets. This leaves large amounts of revenues and expenditures free from budget constraints.
States were lulled into complacency because a growing economy propelled increases in stock prices for many years, enhancing the coverage of many pension plans, public and private. Pension systems faced a surplus of funding, and they boosted benefits without regard for future market possibilities. Before the Fed's quantitative easing, interest rates were higher, too. Prudent planning cannot assume that interest rates will rise to prior levels or that stocks will resume their prior course — state budget projections need to reflect this reality. States must devise ways to reduce their debt so as not to burden their taxpayers, present and future.
Although private plans can reduce employee benefits and increase contributions to bring underfunded plans into financial health, some public-sector plans have been prohibited by the courts from doing this. New employees can be charged a higher contribution rate for lower benefits, but not current employees who were hired under more favorable terms. A municipality in bankruptcy, such as Detroit, can restructure its pension obligations — but not all cities want to, or should, go bankrupt.
In order to take the burden off America's young, states could gradually raise the age at which government workers can retire. In some states, employees can quit at 50 and start collecting benefits, at the same time as they get another job — and possibly start accruing a second set of pension benefits. Alternatively, states could allow workers to retire at the same age but postpone the age at which they begin to collect benefits.
States could convert their defined-benefit pension plans to defined-contribution plans, thereby eliminating the addition to future pension liabilities. Either older workers and retirees will have to accept lower payments or tax increases will be necessary. The switch to defined-contribution plans has been the trend in the private sector. Only union-managed multi-employer plans are sticking to their defined-benefit status, and many of those are in poor financial shape.
States could also reduce the power of the public-sector unions. Wisconsin, which has the lowest per-person pension liability, passed a law in 2011 stating that joining a public-sector union would be optional and that the state would not collect dues for unions. The percentage of workers belonging to unions in Wisconsin declined from 14.2% in 2010 to 11.7% in 2013, according to Labor Department data released in January 2015. This decline was driven by a steep drop in public-sector union membership.
With Uncle Sam strapped for funds, it is extremely unlikely that Washington will bail out insolvent state pensions. For the sake of the young, states need to bite the bullet and do it themselves.
This piece originally appeared in WSJ's Marketwatch
This piece originally appeared in WSJ's MarketWatch