American Consequences - November 2018

That is to say, to pensions. It’s easy for those on the other side of the table to promise ever fatter pension benefits. By the time the bills come due, the officials who made the commitment will be out of office and fishing the surf for pompano in sunny Florida... which pretty much describes the situation that Rahm Emanuel faced in Chicago. Previous administrations had made big pension promises without adequately funding them. An insufficient amount of money was put away for funding, and in the zero-interest regime that followed the Great Recession, it did not return anything close to enough. Thus, the $28 billion hole. Mayor Emanuel might find some solace in the fact that he is not alone. Pension liabilities are a threat to government solvency in many, many jurisdictions, including his own state of Illinois where the hole is about $140 billion

deep – about $11,000 for every man, woman, and child who has not yet fled the state. Meanwhile, Illinois keeps on digging. The people with the shovels like to console themselves with thoughts of 7% and 8% returns on what they’ve set aside. This is another of those fairy tales that people in the business of politics tell themselves. Joshua D. Rauh of the Hoover Institute has run the numbers: As of fiscal year 2015, the latest year for which complete accounts are available for all cities and states, governments reported unfunded liabilities of $1.378 trillion under recently implemented governmental accounting standards. However... using market valuation techniques the true unfunded liability owed to workers based on their current service and salaries is $3.846 trillion. These calculations reflect the fact that accrued pension promises are a form of government debt with strong rights. These unfunded liabilities represent an increase of $434 billion over 2014, as realized asset returns fell far short of their targets. Pensions are not short-term obligations. Public-sector employees routinely retire after 20 years on the job. Their retirements, during which time they will collect pensions, can easily last longer than that. And there will be more of them every year. Governments will be obliged to pay more and more for work that was done further back in history, though probably not quite matching the 150 years that the federal government found itself on the hook for in the case of Irene Triplett – the

One thing I have learned is that they do not build statues for people who restore fiscal stability,” he said. “But without sound, strong, stable finances, nothing else is possible.

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