My colleague at The Heartland Institute, Eli Lehrer wrote a rather controversial op-ed for the Weekly Standard recently arguing that “Pensions Aren’t the Problem.” Eli’s piece makes some good points in regards to the public pension debate and has, if nothing else, brought more attention to this important issue. The biggest flaw in his argument is that he fails to acknowledge that if states have any chance of fundamentally fixing their state’s budgets long term, then they must address their pension systems in the short term.
Ignoring this rapidly growing and unsustainable taxpayer liability, and refusing to restructure pensions while states are struggling to balance their budgets, would be a missed opportunity for long-term fiscal health. Eli’s pragmatic approach to solving state budget deficits may seem like good politics and might encourage healthy debate, but in the end it is bad for taxpayers. The facts are clear, this is conservatively a trillion-dollar problem facing states, and these unfunded pension liabilities will continue to worsen as budget deficits grow and legislators fail to restrain current and future expenditures.
Take for instance my home state of Illinois, the poster child for pension problems. The state’s unfunded pension liabilities are a staggering $77.8 billion. Let’s assume for the sake of argument that for the next five years Illinois cuts spending, including state-worker pay, to balance the budget while making necessary pension payments. Keep in mind, however, that Illinois chose to instead increase taxes on Internet purchases, businesses, and incomes by $6.8 billion just this year, instead of taking any of these “pragmatic” steps. Also keep in mind that the total payment next year to Illinois, according to a nonpartisan legislative support agency, is estimated at more than $4.8 billion.
Five years from now, Illinois’ pension problems will have become even worse because more state workers will have been brought into the system, more workers will have started collecting pensions, and the existing pension debt will have been untouched. Next year alone, Illinois will have to pay $800 million in debt payments. This means that the state will have to cut at least this much elsewhere just to make up for ignoring pension reform. Call me pessimistic, but with a state so averse to cutting spending and so eager to raise taxes, this approach is actually more unreasonable than getting meaningful pension reforms.
At least with pensions there is widespread agreement on both the right and the left that something needs to be done. It’s just a matter of what. The magnitude of the threat that many state’s pension systems pose to the future of their state’s budgets, as well as state workers, are unpalatable.
Choosing short term spending cuts over long-term reforms only serve to put the state’s pension systems that much closer to the time they will ultimately go bankrupt. In reality, this approach is no more politically viable than enacting pension reform, and is more likely to lead to tax hikes down the line. If states are serious about getting their fiscal house back in order now, and for future generations, they need to consider reforms including — capping per-year pension payouts, raising the retirement age, change pension payout formulas, requiring workers to make higher contributions, and new employees should be put into defined-contribution pension systems.
Without an overhaul of the current, unsustainable pension system as well as controlling other spending taxpayers will be faced with substantially higher taxes in order to bail out legislators and special interests for their imprudent promises. Reforming pensions or cutting short term spending obligations is not a either or for state they are must have tos.