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The budget woes facing U.S. states may not be as overwhelming as the troubles in Greece. But in a new paper, Northwestern University economist Joshua Rauh says at least seven states are heading toward crushing crises — of the magnitude that would require U.S. bailouts in the next decade — from one cause: state pension liabilities.
In some state constitutions, promised pension benefits to state and local government workers take a higher priority than general obligation bonds. Rauh, with the University of Chicago’s Robert Novy-Marx, previously estimated that state pension liabilities stood at $3 trillion at the end of 2008 compared to $1 trillion in other forms of debt.
Even if pension funds received 8% annual returns, many large states would run so short — without any overhaul today — that raising state taxes to make up for it would be insufficient, he says. Illinois, for instance, would run out of money in its three primary pension funds by 2018. In the years after, the payments owed to existing state workers would be $14 billion, or more than half of the total revenue Illinois projects in 2010.
Other state pension funds expected to dry up by 2020: Louisiana, New Jersey, Connecticut, Indiana, Oklahoma and Hawaii. By 2030, 31 states could be in similar trouble, Rauh said in a report released Wednesday. He says the ultimate cost of a federal rescue could top $1 trillion. “This scenario could happen sooner if taxpayers flee to other states with lower taxes and higher services, if contributions are deferred or not made, or if returns are lower than expected,” said Rauh, an associate professor of finance at Northwestern’s Kellogg School of Management.
His prescription: Allow states to issue tax-subsidized pension funding bonds — similar to the Build America Bonds programs — for the next 15 years if they agree to major reforms. States would need to close defined-benefit pension plans and offer new hires a defined-contribution plans as well as guaranteed access to Social Security (which only a quarter of all public workers contribute to now). The net cost to the federal government, he estimates, would be about $75 billion.
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how could anybody trust somebody with a login name workcomp (wc) millionaire unless you abuse the system. When the $ bubble pops along with the gov debt bubble, we will look a lot like Greece. This will make the 73-81 recession look like the boom we just experienced from the real estate bubble. Cut all of this out now and take back all of the pensions.
So they want to take even more taxpayer money to pay off the SEIU and the rest of their union buddies. Gee didnt see this coming. Anything to keep the people dependent. The only problem is, sooner or later the private sector wont have any money left. Then what will all you liberal union leeches do? Borrow it from China some more? You guys live in a fairy tale world that doesnt exist. Wake up and smell the revolution coming!
Average lifespan is much longer now than when these pensions were first put in place. Raise the age when benefits can be tapped by just a couple years (and not all at once) and this problem gets much easier to handle.
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Low paying?? Govt service pays SIGNIFICANTLY HIGHER than the private sector, even without including benefits. Add benefits into it, and the difference goes through the roof. Get your brain out of 1950 and do some research.
No bailout. The politicians who bought the votes of the SEIU with their pension promises should have their states pay the freight. I agree, the government should just contribute to a 401(k) on a pay as you go basis. No funded for ever pensions that you start to draw at an early age.
Real Time Economics offers exclusive news, analysis and commentary on the economy, Federal Reserve policy and economics. The Wall Street Journal’s Phil Izzo and Sudeep Reddy are the lead writers, with contributions from other Journal reporters and editors. Send news items, comments and questions to realtimeeconomics@wsj.com.
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