U.S. States Grapple with $6 Trillion in Pension Liabilities
Forced to decide between funding their pension plans and other government spending, U.S. states have chosen to neglect their pension liabilities. The problem is growing larger.
Governments, by nature it seems, spend quite a bit more than they take in. We could even say that this is the nature of democratic governments, where parties compete to outspend each other. We might need more fiscal restraint, a lot more perhaps, but this comes with a price and if we aren’t willing to pay it, no one will run on an austere platform because they will simply not get the votes.
Governments therefore spend too much on just about everything, creating more and more debt and just pushing it forward to be dealt with at some point in the future. Whatever the extent of the problem, it will simply have to be dealt with later.
If this were simply a straight exchange between present costs and future costs, perhaps we wouldn’t have to worry about this so much, but the real problem is that by pushing these costs ahead so much, they develop a life of their own due to ever increasing interest costs, as they would for us if we tried doing that with our own finances.
Our income is limited and if we take in $50,000 a year and spend $60,000. Each year you rack up this much debt, and in 10 years, you have $100,000 in debt plus the interest that this has accrued over the years, which adds up to well over what you make in a year. Both the principal and the interest costs represent a bigger and bigger percentage of our income every year.
You just keep pushing this ahead, where each year you borrow to make up for the shortfall as well as borrowing more to pay the increasing costs of carrying this debt. Along the way, you neglect your retirement savings we’ll say, and as you get closer and closer to retirement, you wonder how you’re going to save enough. This would require a certain level of austerity but you don’t want to do that, so you just keep pushing these retirement concerns ahead, which is another way to say you ignore them and the consequences this will bring.
This results in your not only dashing your retirement plans, but getting there with much more debt than you could possibly handle.
States Definitely Need to Make Good on their Pension Liabilities
This is similar to how states are managing their pension liabilities, and the blob that started out small many years ago is really growing, to the tune of $6 trillion dollars currently. It’s hard to imagine what $6 trillion dollars even means, it’s such a big number, but that’s about $18,575 for every person in the United States.
You don’t really owe this $18,575, but the money has to come from somewhere, and governments can raise taxes but they can only do so much here. They can reduce spending to make up for it, but there’s also only so much you can do without throwing us into a big recession and maybe even causing a revolt, as people’s standard of living takes a huge hit and the problem still isn’t being resolved very well in spite of all the pain caused.
The real problem here is that any attempt to deal with this is going to be recessionary, whether that be raising taxes or reducing spending. If you are in an economy that may already be teetering on a recession such as the case today, you can get away with even less.
Unlike public debt, pension liabilities cannot just be pushed forward, as people will retire and they will expect to collect the pensions that they paid into and were promised them. States could borrow even more to make up the shortfalls, but this is already being stretched pretty close to the limit now, and taking on this much more debt will affect their credit rating and cause all future debt to incur a higher cost.
To put this problem into more perspective, when we compare total state debt right now and this pension shortfall, the pension number is actually the bigger of the two. Borrowing to fix this would more than double the amount of outstanding debt that the states are carrying now, so this is far more than just adding a little to it to fix this, and the interest as well as the higher interest rates incurred would worsen the overall debt problem considerably.
We’ve pushed all this debt forward, we’ve set aside our responsibilities for maintaining our pension plans, so there’s only really one thing left to push forward, which is long-term spending such as that on infrastructure.
It’s not that we’re not trying though, as we’ve neglected our infrastructure as well and this in itself is becoming a big problem, to add to our other big problems. This really isn’t something that we can postpone forever, as there are real consequences involved when things really get to a state of disrepair. We don’t have to wait for this as it’s happening now, and it will only get worse.
It would be nice to say that it will only get worse unless we wake up to this, but it’s not that simple. It’s estimated that there are so many structurally deficient bridges out there right now that would take 80 years to fix this at the current levels that we’re spending on this. This doesn’t even account for all the other bridges that would become unsafe over these 80 years, so this isn’t just a big snowball, it will just get bigger and bigger.
There are degrees of unsoundness here as well, where something may be considered so if the risks become unacceptable to engineers, but the degree of danger here escalates as they continue to be used in an unsafe manner.
This just isn’t about bridges though, as public infrastructure is much more far reaching. This is a massive problem and not one that we can just turn our eyes away from forever, or perhaps not much longer.
Funding Pensions Adequately Will Require Sacrifices We Can’t Even Afford to Make
The upshot of all this is that states are left in a real conundrum, because they now have to decide which of these problems they want to address more, the pension plan crisis or the infrastructure crisis, and we do not even have the means of resolving either. To make matters worse, these pension deficits are based upon the market returns that we’ve been accustomed to, and most expect this to decline over the coming years.
This will mean even greater pension shortfalls and require even more spending cuts, and infrastructure spending is usually the first to go, since it can be set aside more easily than most other government expenditures. If we already have a crumbling infrastructure and we spend even less on it, it will simply crumble faster.
It’s also noteworthy that every time we cut government spending for any reason, especially infrastructure spending, we stimulate the economy less, which has a slowing effect upon the economy. There are several reasons behind declining growth, but this is a big one.
As our debt piles up, this eventually ends up limiting our spending ability and we’re already seeing some of this happen now. We spent our way out of the last recession but our capacity to do so is shrinking, and this is also affecting our everyway ability for governments to contribute to the economy.
We can at least get by for now with ignoring a lot of this piling debt, but things like pension plans and infrastructure neglect have more immediate practical consequences, and these wheels are really starting to squeak now. The relatively generous pension offers that states made to their employees in the past is now coming home to roost, involving much bigger chickens than we can presently deal with.
Politicians are naturally eager to mortgage the future when they can, and these pension allotments are just one example of how we have abused this power. Unlike many of these mortgage payments, this one will be coming due in the foreseeable future. Infrastructure shortfalls are definitely coming due, and well past due right now actually, and are actually the squeakier wheel that is demanding real attention.
New York is considering adding toll revenue to help, but not surprisingly, the majority of New Yorkers, the ones that get to vote on it, are against it. Perhaps it will take the road system getting much worse for them to realize that the money to fix this has to come from somewhere, and their pockets need to be on the list. It’s a very short list, and this may not only be the best way, it may be the only realistic way.
This won’t really fix the problem, only help it a bit, and this still leaves the pension shortfall mess unaddressed. If we project these things ahead, things get much scarier. We may even already be well beyond good solutions, but we still need to try.
Editor, MarketReview.com
Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.
Contact Monica: monica@marketreview.com
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