Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

America’s $2 Trillion Public Pension Crisis

Communities all over the United States are threatened by a $1.91 trillion pension shortfall that is both widely ignored and poorly understood. If not addressed, this crisis will lead to massive cuts in public services, government insolvencies and possibly massive tax increases.

The problem is very easy to understand; state and local governments had accumulated $4.798 trillion in pension obligations by the end of 2014, but they had only $3.7 trillion in assets to cover them; creating a $1.91 trillion shortfall, the Hoover Institution reported. The crisis is occurring because state and local governments are both morally and legally obligated to cover those pensions but they lack the money.

California Owes $1 Trillion in Pension Obligations

The crisis is made worse by the poor return some pension funds get from the stock market. The nation’s largest pension scheme; the California Public Employees’ Retirement System (CalPERS) had a return of .61%  for the fiscal year that ended on June 30, 2016, The Los Angeles Times reported. Since the S&P 500 had an average return of 5.76% every year since 1956, that is pretty bad.

That’s awful news for the people of California who owed $1.43 trillion in pension obligations in 2015, the Kersten Institute at Stanford University estimated. That worked out to $110,000 for every household in the Golden State, up from $77,700 in 2014.

If CalPERS investments cannot cover those obligations, state and local government will have to make up the difference by raiding the public treasury or raising taxes. What’s truly frightening is that California is not the state with the worst pension burden, Alaska is; every household on the Final Frontier owes $110,538 in pension obligations. What’s worse is this is occurring at a time when plummeting oil revenues are forcing drastic budget cuts in Alaska – leaving the state without money to cover pensions.

Why nobody wants to talk about the Public Pension Crisis

Nobody wants to break promises to people who spent their lives in service to our communities. No politician wants to be seen criticizing police or firefighters or school teachers.

The prospect of cutting basic government services; which is what might be required in some jurisdictions, is something no elected official wants to mention. After all who wants to tell the voters that the public library in their neighborhood has to close so some retired city employee can cover the payments on his boat?

Neither political party wants to approach the issue because it invites conflict with powerful unions. The Democrats depend heavily on support from the National Education Association (NEA) and the American Federal of Teachers. President-Elect Trump’s stunning victory depended partially on support from police unions.

A final problem is that elimination of the pension system (the heart of the problem) would necessitate significant pay raises for public-sector workers. Many governments have gotten away paying far lower salaries than the private sector by promising huge benefits such as guaranteed pensions.

If those pensions were to disappear governments would have to double or triple salaries to fill jobs which would necessitate immediate tax increases. Salaries have to be paid every month; pensions don’t have to be paid for years or even decades. It is easier for politicians to promise a future pension than an immediate salary increase.

How the Pension Crisis Hurts Communities

The pension crisis hurts communities in several ways. The most obvious is to necessitate immediate cuts in government spending.

This often leads to deferred maintenance which passes expenses onto the future. For example cities don’t buy new fire trucks or schools don’t fix the roof. That solves the problem now, but creates a crisis next year when the 25-year old fire truck breaks down and the school roof starts leaking.

Another is that jobs are unfilled or eliminated. The school district in Eire, Pennsylvania, has had to eliminate 20% of its staff to cover some pension obligations.

A more bothersome problem is that government workers; fearing pensions might vanish, will start retiring as soon as possible in order to get a few bucks. This nightmare is occurring in San Jose, California where 485 police officers have quit since 2012, yet the city may lack the money to hold an academy to train their replacements.

San Jose has been forced to reassign detectives to patrol duty and assign officers to 10 hour shifts just to answer 911 calls, The Mercury News reported. Some officers now sleep in RVs in the police station parking lot in order to cover their shifts.

To make matters worse pensions effectively transfer tax dollars out of the community. If a Newark, New Jersey, police officer drawing a $2,000 a month pension retires to Florida, that money leaves with him. The officer’s spending; including the sales and property taxes he pays, ends up in Florida. Newark is faced with a smaller tax base and high pension obligations.

The crisis creates a greater dilemma because declines in government services can drive people out of communities; which further reduces the tax base. Fewer police might lead to more crime, worse schools cause families with children to move, and lack of amenities like libraries and parks can lower property values and taxes.

Some Potential Solutions for the Public Pension Crisis

The ultimate nightmare of the public pension crisis would be governments suddenly stop paying pensions. Under that scenario some retirees would go from a comfortable retirement with a boat and a second house on the lake to sleeping on their children’s couch.

This might happen because there is federal backup for government pensions as there is with private pensions. When a private company defaults on pension obligations the federal Pension Benefit Guaranty Corporation (PBGC) will at least provide some money. Disturbingly the PBGC does not cover public-sector pensions. To make the situation worse, some government workers might receive little or no Social Security because they paid next to nothing into that program.

So what can be done about this nightmare before it devastates our communities? There are some solutions but most of them will be painful and unpopular. These potential solutions include:

  • Cut pension benefits. This is unpopular and potentially illegal. Illinois State Supreme Court unanimously struck down a state law cutting pension benefits in December 2016, The Chicago Tribune reported. The court ruled that pension benefits are a contractual agreement guaranteed by the Constitution so they cannot be diminished. Unless the US Supreme Court overturns this ruling it might apply nationwide. A dilemma that governments face here is that judges are public employees who might be fearful for their own pensions.

  • Eliminate pensions for existing and future government workers and require government workers to take responsibility for their own retirement. This would not solve the problem of tens of millions of people who already have such pensions. Such a course of action would probably require the busting of government employees’ unions something that might be politically impossible. It would also necessitate far higher salaries for government employees, requiring higher taxes or spending cuts elsewhere. Note this would be better for local economies, because the salaries would be more likely spent in the community in the immediate future.


  • Create alternatives to pension systems such as Individual Retirement Accounts (IRAs) for government workers. Attempts to do this in California have led to mass retirements on the part of government workers. One interesting alternative; which would be unpopular with the investment industry would be to purchase annuities for government workers, which is done for some workers in the United Kingdom. Annuities can provide a guaranteed income, but since they are fixed insurance prdoucts they are unpopular with brokers and stock analysts.


  • Expand Social Security to cover government workers, perhaps have a guaranteed Social Security payment (say $2,000 or $3,000 a month) for some classes of government worker – such as police, firefighters or teachers after they turn 70. This would be easy to set up administratively because the apparatus (the Social Security Administration) already exists, but difficult fiscally. Since current revenues will not be able to cover the costs of existing Social Security benefits after 2034, this will require tax increases. One potential solution is to expand the 14.88% Social Security tax rate from the first $118,500 of individual income to cover all individual income as US Senator Bernie Sanders (I-Vermont) proposed. Another would be new revenue sources; such as a national sales tax or a levy on investments. Politicians don’t want to go there because none of these measures would be very popular.
The Mountain Valley High School basketball team had to relocate its 6 p.m. Thursday night game against Dirigo High School to Dixfield after several roof leaks bloomed throughout the day. The Mountain Valley High School staff was forced to bring in dozens of buckets and place them throughout the school to prevent the water from reaching the floor.
  • Set up some sort of federal pension system to back up or replace state and local government pensions. Perhaps expand the PBGC to cover state and local government pensions. This would be expensive, and politically unpopular. It also raises some serious political and philosophical dilemmas. For example it would weaken federalism by increasing Congress’s control over local governments. It would also reduce employees’ accountability to elected officials and voters, which threatens democracy.

All of these solutions would create discord and pain but we will have to face to this challenge if we want livable communities. If we do not face it the pension crisis will tear our communities apart and make some of them unlivable.