Deadbeat Governments

by James Surowiecki, The Financial Page of the New Yorker

131223_r24438_p233IT is the season for taking retirement benefits away from public workers. In Detroit, an emergency manager has steered the city into bankruptcy, in part to avoid its pension obligations. In Illinois, the legislature just passed a bill cutting pensions and raising the retirement age for state workers, in the hope of saving a hundred and sixty billion dollars in pension costs over the next thirty years. And these moves are only the most dramatic instances of a broader trend: between 2009 and 2012, forty-five states passed some kind of pension reform. Pensions are supposed to be dull and reliable. But they’re now the locus of bruising political battles. (…)

The reason is simple: though plenty of states and cities have managed to maintain healthy pension funds, in many places pension costs are eating up huge chunks of the budget. New Jersey’s and California’s pension funds are both in deep holes. San Diego now spends more than twenty per cent of its operating budget on pensions; San Jose spends a quarter of its budget on them. Illinois needs to come up with nearly a hundred billion dollars just to pay off obligations it is already committed to. (…)

How did states and cities get into this jam? By following Mark Twain’s famous dictum: Never put off till tomorrow what you can do the day after tomorrow. In principle, providing for pensions isn’t difficult: (…) Governments also got in the habit of promising workers higher pensions in the future so that they would accept lower wages in the present.

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Center for Retirement Research

Boston College

Organization dedicated to the research and dissemination of retirement policy issues as well as to widening access to related data sources.