Massive tax increases will be needed to keep lavish public employee pensions afloat according to a new study from Norwestern’s Kellogg School of Management. Via CNBC (emphasis added):
Economists predict that American households will have to contribute an average of $1,398 per year to fulfill pension promises, according to a new study from the Kellogg School of Management at Northwestern University.
The paper, “The Revenue Demands of Public Employee Pension Promises,” is co-authored by Joshua Rauh of the Kellogg School and Robert Novy-Marx of the University of Rochester. Rauh and Novy-Marx calculate the increases in state and local pension contributions that would be required to achieve full funding of state and local pension systems in the U.S. over the next 30 years.
“This figure is above and beyond revenue generated by expected economic growth,” said Rauh, associate professor of finance at the Kellogg School. “To achieve fully funded pension systems within 30 years, contributions would have to rise today to the levels we calculate, and then continue to grow along with the economy.” For taxpayers, these contribution increases would likely be in the form of tax hikes or spending cuts in public services. Without policy changes, a total of 13 states would require contribution increases of more than $1,500 per household per year, according to the study. Five of those states would need contribution increases of more than $2,000 per household per year. New Jersey would require the largest annual per household contribution increase of $2,475.
“It’s similar to credit card debt,” he explained. “The longer we wait to start paying down these promises, the more the contributions will have to rise.” State accounting methods are not reflecting the reality of the tax increases or spending cuts that will be required to pay for pension promises, Rauh said. The distortions made by public sector accounting have hidden the fact that if pension promises are to be honored, taxpayers and recipients of public services will feel substantial financial pain in many states, he added.
More here. That Democrats have a long history of promising public employees unaffordable benefits, including lavish tax-payer financed pensions in return for campaign “contributions” via coerced union dues, is not news. But to actually see a price tag on the promises made by ignorant or unscrupulous politicians, for which taxpayers are responsible, is. These public employee pension obligations are ticking time bombs given the demographic realities America is facing in 2011. Defined benefit plans, which are really nothing more than state-sanctioned Ponzi schemes, have no chance of remaining solvent as currently constituted absent massive and politically unpalatable tax increases. This, by the way, is the same reason Social Security will collapse if it’s not reformed.
Private sector workers, I suspect, will be less than enthused to see their taxes rise $1400 per year in today’s dollars in order to provide opulent pensions to workers simply because they happen to be employed by the government which means, or is supposed to mean, that they work for us. And I suspect that $1400 figure will be revised upward. Cost figures associated with these kinds of schemes always are. Workers in the private sector, of course, have long since seen their pensions converted to funded, or defined contribution, plans (such as a 401(k) plan) as private sector employers have adjusted their pension plans to account for demographic and economic reality. Private sector workers can’t count on taxpayers for a bailout, even if their public sector counterparts believe it’s their divine right.
Governor Palin has been far ahead of the curve on this issue. Much has been made of the efforts made by current Republican governors such as Scott Walker, John Kasich, and Chris Christie, to reform their state’s public employee pension systems. Even liberals like Andrew Cuomo and Jerry Brown have been forced to at least pretend to address the unsustainability of public employee benefits. But all of these governors had no choice in the matter as their states are flat broke, a point I made in an earlier post. Governor Palin, on the other hand, began reforming Alaska’s pension system in 2007 before it was faced with imminent collapse. And, I hasten to add, she did it before it was fashionable to do so as I noted in a post last year:
Governor Palin actually tried to address the problem by enacting some much needed reforms to the Public Employee Retirement System (PERS) and the Teacher’s Retirement System (TRS). She ratcheted down obligations by using a tiered system for current employees that allots their pensions according to seniority. She also enacted a totally new system for those who are newly employed while honoring past commitments which she was legally bound to do.
By acting sooner rather than sweeping it under the rug for a future politician to deal with, Governor Palin was able to enact far less traumatic reforms than would otherwise have been necessary. Ask Chris Christie, who’s pension shortfall is the most acute in the nation as noted in the Kellogg study. In a December 2010 Facebook Note, Governor Palin directly linked the fiscal problems states were facing to their refusal to enact meaningful reforms to their public employee pension systems, while highlighting the imperative to convert them from defined benefit to defined contribution plans:
These states still won’t reform their costly defined benefit systems for fear of offending the powerful public sector unions. Sooner or later, their pension systems will collapse unless they do what states like Alaska did, which is to swap unsustainable defined benefits, which are more like glorified Ponzi schemes, for a more prudent defined contributions system.
My home state made the switch from defined benefits to a defined contribution system, and as governor, I introduced a number of measures to build on that successful transition, while also addressing the issue of the remaining funding shortfall by prioritizing budgets to wrap our financial arms around this too-long ignored debt problem.
This presents policy makers with a rather stark choice. On the one hand, we can move to save public employee pensions proactively by enacting timely and prudent reforms as Governor Palin has actually done. Or, alternatively, we can keep dithering so that the problem worsens and just hope that taxpayers will ultimately be willing to accept massive tax increases in order to provide public employees with pensions far better than their own. This choice will also have to be made when politicians in Washington get around to addressing the world’s biggest Ponzi scheme, Social Security. Unlike the current occupant of the White House, Governor Palin has demonstrated that she has the sense and fortitude to face the problem of unfunded pension plans head on rather than making it infinitely worse by ignoring it.
Exit question: Would taxpayers prefer to spend another $1400 per year to finance public employee pensions, or would they rather use the $1400 to finance their own?