Last week I wrote a long post about America’s coming retirement crisis. Part of the article examined the alarming status of many public sector pension funds, and I quoted from a Business Insider piece reporting that 11 state pension funds that are projected to run out of money within the next decade or so and that the public may be on the hook legally to fulfill those obligations.
Pension obligations are not the only looming bills. For example, public entities in New York have promised future retirees some $200 billion in health care benefits and have failed to set aside a penny to pay for it, according to a study released by the Empire Center for New York State Policy summarized by Mary Williams Walsh in the New York Times (link here):
The cities, counties and authorities of New York have promised more than $200 billion worth of health benefits to their retirees while setting aside almost nothing, putting the public work force on a collision course with the taxpayers who are expected to foot the bill.
…The daunting size of the health care obligation raises the possibility that localities will be forced at some point to choose between paying their retirees’ medical costs and paying the investors who hold their bonds. Government officials aim to satisfy both groups, and have even made painful cuts in local services when necessary to keep up with both sets of payments.
In other words, many states have not stored away enough money to cover what they have promised to public sector retirees. Here are among the possible consequences:
1. Raise taxes to meet public retiree obligations. This may mean that individuals who are struggling to save and provide for their own retirement needs may be hit with a higher tax bill.
2. Cut state services to meet public retiree obligations. In other words, the general public will receive less in state services — including education, public safety, and social services — and there will be fewer public jobs available for the next generation of workers.
3. Reduce public retiree obligations. This may be achieved by forcing givebacks (and, where necessary, amending state constitutions that require states to pay pensions owed). Of course, generating sufficient political will to do so will be accompanied by the media demonization of public workers, including teachers, firefighters, and other essential personnel, who bargained in good faith for these benefits when the economic picture was rosier. The state and local officials who agreed to these benefits and who have been raiding public pension funds to pay for other expenses likely will not be so vilified.
Obligations to current and future public employee retirees are going to be a huge political and economic issue in the years to come, and the picture is getting uglier by the moment. Will public officials act now to soften the inevitable conflicts? I doubt it: When faced with an array of unpleasant choices that can be bequeathed to one’s successors, the natural political reaction is to put the concern on the shelf. It will require bold, even career-endangering leadership to soften the impact of what is to come.