Tag: pensions

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Accountability local leaders moral hazard porkbarrel politics responsibility tax policy too much government

Panic in the Prairie State

Illinois, pensions, politicians, taxes, tax, theft, shake down

When your state has the lowest credit rating in the union, the highest population decline rate, and spends nearly a quarter of its annual budget on an out-​of-​control government-​employee pension system, what do you do?

Raise taxes, of course!

That’s the advice of experts in Illinois, anyway.

You can see why they panic: The unfunded portion of Illinois’s public employee pension system amounts to $11,000 per person in the state. Something extraordinary must be done.

Yet, as Pat Hughes at the Illinois Opportunity Project insists, taxpayers need relief — not a statewide 1 percent property tax increase.

Besides, it is not as if tax hikes could solve the problem. “It was just last year that politicians raised the state income tax by 32 percent in a desperate attempt to balance the budget,” Hughes explains. “Despite over $5 billion in new taxes, the state was back in deficit spending in less than a year.” 

Hughes mentions a number of tax limitation measures in the works. More power to them. 

But what’s needed even more? Spending limitation measures.

No government can be trusted to offer anything but defined-​contribution pensions — and no government, at any level, should ever manage a pension system. Politicians can’t help themselves. They just cannot resist the temptation to buy off the government-​worker constituency by promising more in the future than financially feasible (or just plain old politically possible) to pay for now. 

Other people’s money is theirs to spend. And a future financial bind? Some other politician’s problem. 

This is Common Sense. I’m Paul Jacob.

 

N.B. Congratulations to the Illinois Policy Institute for its Liberty Center, which won its case against forced unionization, Janus v. American Federation, on June 27. Commentary about this Supreme Court case appeared on this site in early May, “Post Blindfold.”

 

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by Paul Jacob video

Video: Our Pension Problem

Around the country, politicians and government employees have committed future taxpayers to pay for pensions that should have been funded at time of employee service. Things must change. The problem is huge. 

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responsibility

Stop Digging

If you find yourself in a hole, stop digging.

When it comes to pension systems, the State of Illinois appears shovel in hand, digging to the bottom. The state’s five public employee retirement systems face a combined unfunded liability of $100 billion dollars; they have only 40 percent of what they need to pay the benefits politicians negotiated with public employee unions — the lowest funding level of any state.

The Daily Herald, a suburban Chicago-​area paper, calls a spade a spade: “The shortfall is due largely to decades of legislators skipping or shorting the state’s pension payments — a practice that allowed them to spend that money elsewhere.”

Today, Illinois’ legislators will trudge into Springfield for an expected vote to fix the broken system.

“This deal was made by Speaker Madigan and other politicians behind closed doors,” charges Illinois Policy Institute CEO John Tillman, who fears it makes matters worse.

The bizarre attempt at a fix allows the Legislature to be sued before the Illinois Supreme Court if it fails to make its required ongoing contributions into the pension fund.

The legislation also contains a guarantee clause prioritizing pension payouts before most other state spending. As Tillman says, “Not caring for the poor. Not public safety. Not education.”

And a much ballyhooed option for employees to switch to a 401(k)-style plan turns out to allow only 5 percent of employees to so choose, blocking the rest.

Pay what was promised, but stop digging! Move new workers to 401(k) style plans they can own, with employer contributions handed over every pay period.

This is Common Sense. I’m Paul Jacob.

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national politics & policies too much government

Cliff Dwellers

When you hear talk about “the fiscal cliff,” ask, “Which one?”

This coming January, if Congress and the president fail to take action, every American who pays income taxes will pay more. Also set to increase? Payroll taxes, which every worker pays.

But even if we can avoid falling off those cliffs, another threatens.

It has been identified by finance professors Robert Novy-​Marx at the University of Rochester and Joshua Rauh at the Stanford Graduate School of Business, who summarized their recent research paper, “The Revenue Demands of Public Employee Pension Promises.”

The bottom-​line? Looking at the pension commitments state and local governments have already made to public employees, the professors “found that, on average, a tax increase of $1,385 per U.S. household per year would be required, starting immediately and growing with the size of the public sector.”

That’s only the average. “New York taxpayers would need to contribute more than $2,250 per household per year over the next 30 years,” according to their analysis. “In Oregon, the amount is $2,140; in Ohio, it is $2,051; in New Jersey, $2,000.”

Politicians have promised lavish pension benefits. And then not funded them. Plus, employees often outrageously game the system, spiking their benefits to the tune of millions over decades of retirement — like the Illinois teacher’s union lobbyist did by teaching a single day in the classroom.

If we don’t get the problem under control, this cliff keeps getting higher, making, as the professors put it, “the $1,385 per-​household increase required today seem cheap.”

This is Common Sense. I’m Paul Jacob.

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folly responsibility

The Stockton Bust

Stockton, California, had seen a flurry of new home projects right up till the mortgage market crash. But, boy, did that come to a screeching halt. The crash led to foreclosures, which led to lower revenues from property taxes for the city. And though the city tried some spending cuts, they haven’t been enough. The Stockton City Council just voted, six to one, to seek federal bankruptcy protection.

Reasons for the bankruptcy, however, are not confined to reduced revenues. Add “soaring pension costs” and “contractual obligations” to the list of disaster factors.Stockton Bankruptcy - an illustrative image, not a photojournalistic artifact

And it’s pensions and medical insurance that make up the elephant’s share of “contractually obligated” must-​pays. We’ll see if official bankruptcy will allow the city to get out from under that mess. The Chapter 9 plan includes dropping medical benefits for currently fully-​covered retirees.

Who’s to blame? Politicians who negotiate really cushy deals for their (our) employees. The contracts obligate future taxpayers to pay out huge pensions for future retirees, rather than being funded (through insurance and investment) at the time of salary disbursement. The problem is that politicians love to make promises others must keep. Specifically, in this case, they contract defined benefit pensions not defined contribution pensions.

It makes no sense to do this, of course. It encourages irresponsibility, and is (to use a buzzword that should be used often against its usual purveyors) unsustainable. As proven by the Stockton bankruptcy.

Stockton is, so far, the largest American city to go belly up. We can expect further such busts, since the cause of Stockton’s problems — under-​funded pensions coupled with full-​coverage, gold-​plated, lifelong health insurance for government retirees — remain endemic throughout the country.

This is Common Sense. I’m Paul Jacob.

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free trade & free markets tax policy

An Attack on Private Pensions

We all know that America’s socialized pension system is, barring major reforms, doomed to undergo major default. But Americans should be nervous about their private pension funds and accounts, too. 

Over at PensionTsunami​.com, the folks at California Public Policy Center have their ears to the ground, listening for rumblings of the next market collapses, a huge bubble bursting in multiple forms of pension systems. A link from that site led me to a Bloomberg article, about Ireland’s bizarro response to that country’s downturn.

And the ominous portent it presents.

You see, Ireland’s politicians are so convinced that they have to “do something,” something big, to jumpstart the economy out of its current depression, that they’ve decided to levy a tax against pensions — a special tax designed to raise 470 million euros a year for four years, to pay for a massive new jobs program.

Forget that government jobs programs rarely do much good. Forget that it’s not government investment which accounts for market progress, but private investment, and that people will invest when they feel secure enough about the future to do so.

Forget that robbing people of their savings for the future tends to make investors less secure, less likely to invest — and thus put the economy in a bigger, longer-​run fix.

Remember, instead, that to a politician nothing is sacred, nothing is out of bounds for a tax or control. 

And that this kind of dangerous public thievery could happen here.

This is Common Sense. I’m Paul Jacob.