When I go over my personal budget, I have to make sacrifices. Perhaps I don’t eat out as often, or I turn my thermostat down, or even limit my purchasing of non-necessity items. We all do this because we know we can’t live in the red for long with out collection agencies and banks taking our possessions away. Yet, for federal and state governments, over spending and not balancing their checkbooks is a way of life. We all know about the federal deficit, but one thing that has gone unnoticed that could sink the federal budget more than the banking meltdown of late ’08 is the state budget deficits stemming from overreaching state employee pension and benefits programs.
Nationwide, it’s estimated that state and local governments are short on paying future claims to the tune of $1-3 trillion! If current trends continue (which, of course they won’t) and if we assume an 8% return on investment rate for the pension funds (which we can’t) states will begin running out of money by 2018, with Illinois being the first, and 20 by 2025. Of course, government being what it is, we can expect states to spend too much in boom cycles, and well, spend too much in bust cycles too, so 2018 might actually be 2013 unless politicians radically change there ways.
Let’s look at California, the world’s 5th largest economy. They currently have a deficit of $28 billion. 80% of all CA spending goes towards pensions and benefits. The liberals that have controlled CA since prohibition are all about raising taxes to compensate. The fact of the matter is they cannot raise taxes high enough to make up the difference, and if they try too hard to do so, they will see even greater flight by white-collar workers from the Golden State. The only people immigrating to CA are illegal's from south of the border, and they don’t pay any taxes anyway.
Even the once and new Democrat governor, Jerry Brown, has said that the budget will be full of drastic cuts. Of course, any time a politician speaks truth about financial issues, the same unions hacks stand up and yell about how that no one better cut their pensions and benefits because they DESERVE them.
New Jersey Governor Chris Christie is all over YouTube confronting such announcements with the hard truth that nothing is guaranteed, state union employees must be willing to sacrifice in order to make sure other necessary government activities can remain functional.
I feel for the state and federal employee. I really do. What was once taken for granted, is now uncertain. State government employees generally have no desire to share in this pain, but who likes hearing that promises made to them are void? Some say they gave up higher wages for a cushy pension, others simply believe the state should live up to the promises that they made, and some believe simply that they are entitled to the pension for having served faithfully. And you know what? They are right. It is their money and they should get it. Unfortunately, years of mismanagement by both parties- failures to properly save the money that was designated for retirement, instead spending it on other projects- has doomed the nest eggs of millions.
The solution is easy but painful- state employee must accept cuts and the raising of the retirement age, this includes current retirees. The pension plans must be revised so that retirees are not earning more than what they did when they were employed, which is the case for many formerly high raking officials and politicians. After all, you’re supposed to need less when you retire, not more. For state governments, they must be held accountable. Other public projects are going to have to suffer and be shut down until this crisis passes.
But all governments need to learn from the debt fiasco of the past several years. Remember back during the 2000 Presidential debates? Bush and Gore kept talking about a lockbox for social security so the government would not spend money already guaranteed for others. Yet Bush failed to enact a lockbox after he failed to pass partially privatizing social security. He was derelict in his duty to the current and future seniors… but no more so than Clinton, Reagan, Carter, Nixon, Johnson, etc were. For some reason politicians of both stripes fail basic accounting.
We also need to start setting realistic expectations for how much interest such pension plans can draw. Most states assume 8-10% a year return. 8-10% a year is a phenomenal return, and can’t be done consistently without taking big risks. However, when dealing with the retirement of millions of Americans, you have to be smart and conservative. Politicians need to start looking for a more realistic and safer 3-5% return and budget accordingly.
Now, I am a private businessman, responsible for my own retirement. I know I have to save in order to have that money when I am no longer working. I know that I can’t turn around and spend it to buy a new TV or car just because that money is sitting there seemingly unused at the time. It’s called discipline and foresight. Is it too much to ask that the state and federal governments take the same responsibility? If the people we elect are too foolish to grasp this concept, then laws must be enacted to protect them and their descendants from making the same shortsighted mistakes. We must require that all incoming taxes designated for social security, Medicare, retirement, etc go specifically to that fund and are locked away from being used for anything but those specific programs. This isn’t rocket science.