The coming pension storm is going to be every man for himself



Flickr
/ Gareth Williams


The coming pension and unfunded government liabilities storm is
so big that many of us simply can’t get out of
the way, at least not without great difficulty. This holds true
not just for the US but for almost all of the developed world.

I did a lot of thinking after we published
last week’s Thoughts from the
Frontline
 about the coming pension
tsunami
 (subscribe
here for free
)—especially as I was reading your comments—and
I wished I had made my warning even more alarming. 

So here I am, banging the same drum.

Getting back to the topic, we’re all trapped on small, vulnerable
islands. Multiple storms are coming, and evacuation is not an
option. All we can do is prepare and then ride them out.

And we all have some very important choices to make.

It will be every man for himself

Although I’m known far and wide as “the Muddle Through Guy,” the
state and local pension crisis is one that we can’t just muddle
through. It’s a solid wall that we’re going to run smack into.

Police
officers, firefighters, teachers and other public workers who
expect to receive the promised retirement benefits will be
bitterly turned down.
 And the taxpayers
will complain vigorously if their taxes are raised beyond all
reason.

Pleasing both those groups is not going to be possible in this
universe.

So what will happen?

It’s impossible to say, just as we don’t know in advance where a
hurricane will make landfall: We just know enough to say the
storm will be bad for whoever is caught in its path. But here’s
the twist: This financial storm won’t just strike those who live
on the economic margins; all of us supposedly well-protected
“inland” folk are vulnerable, too.

The damage won’t be random, but neither will it be orderly or
logical or just. It will be a mess.

Some who made terrible decisions will come out fine. Others who
did everything right will sustain severe
hits. The people
we ought to blame will be long out of
office.
 Lacking scapegoats, people will
invent some.

Worse, it will be a local mess.

Imagine local elections that pit police officers and teachers
against once-wealthy homeowners whose property values are
plummeting. All will want maximum protection for themselves, at
minimum risk and cost.

They can’t all win. Compromises will be the only
solution—but reaching
those unhappy compromises will be unbelievably ugly
. In the
next few paragraphs I will illustrate the enormity of the
situation with a few more details, some of which were supplied
this week by readers.

The problem is reaching a critical point

Let’s look at a few more hard facts. Pension costs already
consume more than 15% of some big-city budgets,
and they will
be a much larger percentage in the future
. That liability
crowds out development and infrastructure improvement, not to
mention basic services. It forces city leaders to raise taxes and
impose “fees.” Let me quote from the always
informative 13d
letter
 (their emphasis):

“Consider the City of Los Angeles, which Paul Hatfield,
writing for City Watch L.A., recently characterized as
being in a state of ‘virtual bankruptcy.’ After a period of
stability going back to 2010, violent crime grew 38% over the
two-year period ending in December 2016. Citywide robberies have
increased 14% since 2015. One possible reason for
this uptick: the city’s population has grown while its police
department has shrunk. 
As Hatfield explains:

“The LAPD ranks have fallen below the 10,000 achieved in
2013. But the city requires a force of 12,500 to perform
effectively… 


A key factor which limits how
much can be budgeted for police services is the city’s share of
pensions costs.


 They consume 20% of the
general fund budget, up from 5% in 2002… It is difficult to
increase the level of service while lugging that much
baggage.

“What about subway service in New York City? The
system is fraying under record ridership, and trains
are
 breaking down more frequently. There are now
more than 70,000 delays every month, up from about 28,000 per
month five years ago. The city’s soaring pension costs are a big
factor here as well. According to a Manhattan Institute report by
E.J. McMahon and Josh McGee issued in July, the city is
spending over 11% of its budget on pensions. This
means that since 2014, New York City has spent more on pensions
that it has building and repairing schools, parks, bridges and
subways, combined.”

There are many large, older cities where there are more police
and teachers on the pension payroll than are now working for the
city. That problem is compounding, as those workers will live
longer, and the pensioners typically have inflation and other
escalation clauses to keep their benefits going up.

Further, most cities do not account for increases in healthcare
costs (unfunded liabilities) that they will face in addition to
the pensions. Candidly, this is just another “a trillion here, a
trillion there” problem. Except for the fact that the trillion
dollars must be dug out of state and local budgets that total
only $2.5 trillion in aggregate.

Now, add in the
near certainty of a recession within the next five
years
  (and I really think sooner) and
the ongoing gridlock in national politics, plus the assorted
other challenges and crises we face. I won’t run down the full
list—you know it well.

I just have to
wonder, WTF are we going to
do?

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Read the original article on Mauldin Economics. Copyright 2017.

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