The Next President Will Raise Your Taxes

 

There are three kinds of bad news: 1) bad news that’s about to happen; 2) good news that’s really bad news; and 3) bad news that’s out there in distance, where you can probably ignore it. Here’s a snippet of the 2nd kind of bad news, from the Pew Trust:

Primarily because of market gains, the state pension funding gap dropped in 2014, the first decline in reported pension debt since 2000. Lower investment returns in 2015, however, indicate that pension debt will increase when valuations for that year are complete.

But let’s talk about the third kind of bad news right now: state pension funds and their fairy-tale-like connection to reality. Thanks to new accounting rules, we’ve now got a pretty accurate snapshot of what we’re all facing:

The gap between the pension benefits that state governments have promised workers and the funding to pay for them remains significant. Many states have enacted reforms in recent years to help shrink that divide, but they also have benefited from strong investment returns.

Over the long term, however, these returns are uncertain. In addition, many states have not made contributions that would reduce plan debt under expected returns. New tools, such as net amortization, stress testing, and sensitivity analysis, provide policymakers with additional information to better evaluate the effectiveness of their policies and ensure that plans can achieve full funding over time—and that pension promises can be kept.

And also:

When combined with the shortfalls in local pension systems, this estimate reaches more than $1.5 trillion for fiscal 2015 and will likely remain close to historically high levels as a percentage of U.S. gross domestic product (GDP). The lesson here is that state and local policymakers cannot count solely on investment returns to close the pension funding gap over the long term; they also need to follow funding policies that put them on track to pay down pension debt.

“Funding policies” is shorthand for several things, but one of them is surely “tax increases.” And who will pay these increased taxes? Well, here’s a graph of the states that are in trouble and those that aren’t — and it’s hard to read, of course, but the trendline is clear: more states are carrying unfunded liabilities than aren’t, and it’s going to be awfully attractive for the next president (Clinton, Trump, Johnson, Stein, McMullin, Sharpton, Kardashian, whoever…) to want to bail out some of those seriously in-trouble states, which just happen to have juicy Electoral College votes. States like California, Illinois, New York, Pennsylvania, Texas, Virginia, New Jersey…. a lot of places poor in pension solvency but rich in electoral power.

Here’s the Bad News:

Figure5

Maybe there’s a fourth kind of bad news? The kind that isn’t really news at all?

There are 21 comments.

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  1. Israel P. Inactive
    Israel P.
    @IsraelP

    The next president? By executive order? And Congress is OK with that?

    • #1
  2. BD Member
    BD
    @

    Ok, but no matter how many articles Reform Conservatives write for the New York Times saying tax rates don’t matter, they do, and economic growth will be hurt by raising them.

    • #2
  3. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    I know a couple of guys in their mid-50s, one a former cop, the other a former court clerk, who are fully retired, with I believe a full pension. We can’t afford that, not with the fall in the birth rate since the mid 1970s which is now hitting us. If anything, it looks like the retirement age for social security has to rise to 70 for all of us.

    • #3
  4. Douglas Inactive
    Douglas
    @Douglas

    I’m not surprised by California, Illinois, New Jersey, etc, being in the hole. I AM surprised… very much so… that New York isn’t, and that West Virginia… you know, the state blue staters love to mock as backwards, toothless, cousin’-kissin’, etc… is in the best shape here.

    I predicted a California bailout a long time ago. They’ll brazenly do to themselves what New York City did in the mid 70’s, only this time, there won’t be a Gerald Ford to tell them “No”.

    • #4
  5. Guerin Inactive
    Guerin
    @Guerin

    Not disagreeing with the premise, but New York is the 2nd best state on that list in terms of its relative position, so it’s not likely to be an electorally rich state needing a bailout for some time.  For all its faults, Albany is not involved in the payment of the pension contributions, that responsibility is foisted off onto local officials who by and large don’t have much recourse when they get the pension bills other than to figure out how to pay them and get their budgets to balance.

    • #5
  6. Eeyore Member
    Eeyore
    @Eeyore

    I read somewhere on the Interwebz that retired public employee health care is the nation’s largest “unfunded mandate” by far.

    My brother is a retired State employee. While still working, he had heart surgery. He said he stopped even looking at the bills he received when they went over $100,000. When all was said and done, however, his total out-of-pocket came to just under $3000.

    And this was some years before the phrase “unfunded mandate” was something considered worthy of much discussion outside the dismal science.

    • #6
  7. Fake John/Jane Galt Coolidge
    Fake John/Jane Galt
    @FakeJohnJaneGalt

    Marion Evans:I know a couple of guys in their mid-50s, one a former cop, the other a former court clerk, who are fully retired, with I believe a full pension. We can’t afford that, not with the fall in the birth rate since the mid 1970s which is now hitting us. If anything, it looks like the retirement age for social security has to rise to 70 for all of us.

    I have a friend who’s father is 96 this year.  He retired on a state pension before he was 50.  He has now been on the pension longer than he ever worked and over half his life.  Go figure.  His son just retired this year at 60 on another state pension (different states) if he lives to the same age as his father, grand father and great grand father he will be on the governments retirement 35+ years.  I don’t fault them for what they have done but for the life of me can’t figure out how the math works without busting the state bank.

    • #7
  8. Annefy Member
    Annefy
    @Annefy

    It’s a big deal here in Calif. I’ve heard of some small towns facing bankruptcy just because a couple of firemen retire. El Segundo was a town I read about.

    I an 57 and have been to a lot of retirement parties of cops, firemen and teachers.

    We had a candidate for city council who made the mistake of bringing up “unfunded” liabilities to me on a call. I asked him his plan for our little town. In order they were 1) blah. 2) blah. 3) raise taxes.

    I explained that meant my husband would have to work until 75 so others can retire in their 50s. “They work really hard” was his reply.

    I explained that he had no idea how hard my husband worked and I would make it my life’s calling to make sure he wasn’t elected.

    He was a fireman getting donations from unions all over the state. I think unions are getting their guys in the inside to protect their interests. He had a huge war chest for a little town like ours.

    He lost, by the way.

    • #8
  9. James Gawron Inactive
    James Gawron
    @JamesGawron

    Rob,

    Public Employee Unions weren’t legal until 1960. Roosevelt thought the conflict of interest was so great that he couldn’t allow them to be made legal. Roosevelt was right.

    Regards,

    Jim

    • #9
  10. James Lileks Contributor
    James Lileks
    @jameslileks

    You know, Rob, it’s typical of you neocons to say oh I support the police, but when it comes down to making sure they don’t have to eat cat food after they retire, you’re all, muh liberty! Don’t raise my taxes! If you really supported the police you’d pay your fair share to make sure they were okay, and also pay your fair share to support the dispatchers, and the motor pool manager, and the mechanics who service the cars, and the HR manager, and the nineteen HR employees who handle payroll and PTO, and the HR diversity coordinator, and the HR benefits compliance facilitator, and the janitorial staff, and the janitorial manager, and the janitorial assistant manager, and the groundskeepers, and the Facilities Manager who handles compliance with the EPA regs and who just spent a week away from his family at a conference about lo-impact pesticides on civic-managed lawns, to say nothing of everyone down in Accounting and Legal.

    They work hard. Why do you want them to starve? Why do you hate cops?

    • #10
  11. DJS Inactive
    DJS
    @DJS

    It seems to me that it is likely that most government employees vote for democrats and therefore strongly support income equality. Since government employees tend to get paid more than in the private sector and since their pensions are lavish compared to the private sector, I’m sure that they would all be willing to take a 25% to 35% reduction in retirement income in order to create more income equality with those of us who are paying for their pensions.

    • #11
  12. Jerome Danner Inactive
    Jerome Danner
    @JeromeDanner

    Thank you for the information.  I don’t think I would ever have thought of the states being “poor in pension solvency but rich in electoral power” as you put it.

    • #12
  13. Casey Member
    Casey
    @Casey

    Annefy: I explained that meant my husband would have to work until 75 so others can retire in their 50s. “They work really hard” was his reply.

    Note to councilpersons: Don’t Call Ricochet Members

    • #13
  14. BD Member
    BD
    @

    “Mr. Reagan will raise taxes, and so will I.  He won’t tell you.  I just did.”

    • #14
  15. Sabrdance Member
    Sabrdance
    @Sabrdance

    1.) I’m not sure that “positive amortization” in a single year is a particularly good measure of anything.  The question is not whether the states went more or less in debt, but how much the debts are.  New York may be putting aside more money in 2014 than other states -but New York’s pension system is still a wreck -and one year doesn’t change that.  And no, amortization is not a constant in state pensions.  States will go through cycles of funding and not funding.

    2.) While it is not 1836, I would bet that in the event several states went bankrupt (strictly speaking California already is, no one’s admitting it), the opposition of the other states to bailing out the bankrupt would be sufficient to stop it.  Congress doesn’t care about electoral votes (and also, its much easier just to deny the problem, cf: California and Illinois).

    3.) “Funding Policies” does not mean “tax increases.”  Mostly it means forcing workers to contribute more to their own pensions.  Here in Kentucky we put a billion dollars towards funding pensions last year, and we mostly did it by cutting other benefits for state workers.

    • #15
  16. EJHill Podcaster
    EJHill
    @EJHill

    My father died at age 52. He paid 27 years into his company pension fund and my mother got bupkus.

    I did get a Social Security benefit for a couple years as a minor child but not nearly what he paid into it. (Which is a prime example of why SS really is insurance.)

    • #16
  17. Marion Evans Inactive
    Marion Evans
    @MarionEvans

    Fake John/Jane Galt:

    Marion Evans:I know a couple of guys in their mid-50s, one a former cop, the other a former court clerk, who are fully retired, with I believe a full pension. We can’t afford that, not with the fall in the birth rate since the mid 1970s which is now hitting us. If anything, it looks like the retirement age for social security has to rise to 70 for all of us.

    I have a friend who’s father is 96 this year. He retired on a state pension before he was 50. He has now been on the pension longer than he ever worked and over half his life. Go figure. His son just retired this year at 60 on another state pension (different states) if he lives to the same age as his father, grand father and great grand father he will be on the governments retirement 35+ years. I don’t fault them for what they have done but for the life of me can’t figure out how the math works without busting the state bank.

    Have to move from defined-benefit to defined-contribution plans. And set an age of 60+. It will be a battle with the unions but probably unavoidable. If GM goes bankrupt, all the pension plans are re-rewritten. Well, the state is bankrupt.

    • #17
  18. Douglas Inactive
    Douglas
    @Douglas

    BD:“Mr. Reagan will raise taxes, and so will I. He won’t tell you. I just did.”

    Ah, good times, good times.

    • #18
  19. Cunctator Member
    Cunctator
    @

    I like to golf during the day.  The people that I golf with in their mid-50s are invariably retired teachers.  Have people calculated what the lifetime earnings of a pensionable person retiring age 55 compared with someone earning the same wage but retiring at age 65?  Including taxes paid etc?

    • #19
  20. FreeWifiDuringSermon Inactive
    FreeWifiDuringSermon
    @FreeWifiDuringSermon

    James Lileks: oh I support the police, but when it comes down to making sure they don’t have to eat cat food after they retire, you’re all, muh liberty! Don’t raise my taxes!

    @jameslileks have you seen the cat food lately? It looks pretty good mostly.

    • #20
  21. Eeyore Member
    Eeyore
    @Eeyore

    FreeWifiDuringSermon:

    James Lileks: oh I support the police, but when it comes down to making sure they don’t have to eat cat food after they retire, you’re all, muh liberty! Don’t raise my taxes!

    @jameslileks have you seen the cat food lately? It looks pretty good mostly.

    Today at work, someone accidentally smushed a can of cat food. It’s lingering, intense, cadaverous odor was remarked upon by many.

    • #21

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