I have been detailing concerns about meeting the pension and health care obligations of the city and county of San Diego. Although these challenges arise at the level of our local government, the problem appears to be national in scope, as a sampling of stories from PensionWatch makes clear.
Los Angeles County’s retiree health care shortfall may be as high as $14 billion:
Los Angeles County officials on Monday proposed a $21.2 billion budget for next year that pours money into public safety and health care and sets aside $400 million to help pay retirees’ soaring medical costs.
Chief Administrative Officer David Janssen said early estimates put the county’s retiree health care deficit as high as $14 billion, some $5 billion more than previous estimates. Officials plan to release official estimates next month and are working with employee unions to develop strategies to address long-range costs.
Contra Costa County has no plan for $2.6 billion health benefit shortfall:
Contra Costa County plans to spend no money this coming fiscal year on its skyrocketing future retiree health care bills, further increasing an obligation that now stands at $2.6 billion….
“We can’t just throw money at it, because that has to come out of other programs,” said board Chairwoman Mary Piepho, a supervisor from Discovery Bay. “Which pegs do you use to plug the holes? We need more information on how to solve this and we’ll have a plan within the next six months.”
Nashville $3.2 billion short on health benefit promises:
Metro eventually will have to pay $3.2 billion for retiree health benefits– money it hasn’t set aside– unless it changes the way it pays benefits, according to insurance industry statistics reports….
The $3.2 billion estimate is 60 percent more than a $2 billion projection the city was working with before the new report came in.
New Jersey pension shortfall at $25 billion:
[S]tate officials detailed how years of accounting shifts and a lack of funding helped create an estimated $25 billion deficit for public workers’ pensions…
Actuaries have recommended a $2.3 billion payment this year, equal to 7 percent of the entire state budget and twice what Gov. Corzine has recommended….
Accounting changes in the early 1990s and a $2.75 billion borrowing plan in 1997, along with a surging stock market, gave the state’s pension system excess funds for a time. With the system flush with cash, the state did not make annual payments and lawmakers increased retirement benefits. After stocks plummeted, state officials, who faced a budget constrained by the slumping economy, balked at the sharply increased contribution requirements. Since then, the state has paid only a small fraction of its annual obligations.
At the federal level, Exhibit A would be the extrapolation of the current promises for Medicare, which is a rolling freight train anybody can see:
If there were just one or two such stories, one might regard it as a mistake here or a miscalculation there. But the phenomenon is too widespread to be dismissed as accidental. I am forced to conclude that a pervasive feature of modern American politics is for elected officials to lavish benefits on their current power base, promising or in many cases legally obligating the government to make future payments that will prove to be extraordinarily costly to deliver. I conclude that the reason elected officials keep doing this is because that is what voters want.
I have not read Bryan Caplan’s new book, but I must say the cover does a nice job of conveying what the issue may be:
Technorati Tags:
pensions,
health care
The future is hard to predict. Listen to Peak Oilers and none of this will matter because we’ll be busy fighting off Mad Max mutants in a couple of years. Listen to Extropians and we’ll have perfect health and immortality by the 2020s. Between these extremes lies an incredibly wide range of more plausible possibilities. That’s why we discount the future (at least, one reason).
Taking on real harm today in order to benefit the world 50 years in the future is a very questionable policy decision IMO. We really have no way of knowing what the needs will be of that far future world. We see this for example in climate change economic models, which produce wildly varying results for the present value of future harm, varying from a few dollars per ton of carbon to over a hundred dollars. If making modest changes to your model assumptions produces great variation in the results, it means you can’t trust the model.
In the case of Medicare spending, the fundamental reason for the growth is the assumption that health care costs will rise 1% faster than GDP. That means that no matter how much the economy grows, it can never catch up with Medicare in this model. It is far from clear that this is a realistic assumption when extended over such a long period. Make a small change here and you will get very different results.
The real point of the Medicare graph IMO is to show that “something must change”. Most people assume that it is that future Medicare recipients will be cheated out of their promised benefits. It is more likely IMO that we will see policy changes in other parts of society which will address the problem; for example, restrictions on medical cost growth, perhaps in the context of national health insurance. Make that kind of policy change and this projection goes out the window.
In summary, the problem is not that people are sheep. The problem is that planners think they know the future and can predict its needs, while people in their common sense know that the future is fundamentally unpredictable in detail, and make decisions on that basis.
Separate the public employee pensions from Medicare. They’re two separate issues.
Regarding public employee pensions, my beef is that the dynamic is corrupt.
Public employees are unionized. They use that union power to influence the political process. Using union dues and members, they get out the vote, run ads, etc. for their preferred candidates (usually Democrats, by the way, but immaterial to my argument).
Those candidates, when elected with union support, are then able to bargain with those employees. The results are fetherbedding, low productivity, inflated salaries, early retirement ages, and those insane pension and retiree health care obligations.
My impression is that public employee unions have corrupted the entire democratic political process in this country. I think that they are undemocratic, and should be abolished. The contracts that they’ve negotiated should be voided. The pensions they have negotiated should be liquidated in a similar fashion to how United’s pensions were liquidated.
I know, I know, I’m dreaming here. That will never happen. Public employee unions are the most powerful special interest players in the political process.
Public employee unions are the chief reason that I’m not a Democrat. They totally control the Democrat party, even more than teachers and trial lawyers.
Ok, on Caplan’s cover –third row on the left, that’s me…an payin attention as ever.
Now, exit stage right is for the fleecing and not the lamb chops, right?
JDH wrote:
I am forced to conclude that a pervasive feature of modern American politics is for elected officials to lavish benefits on their current power base, promising or in many cases legally obligating the government to make future payments that will prove to be extraordinarily costly to deliver. I conclude that the reason elected officials keep doing this is because that is what voters want.
Alexis de Tocqueville wrote:
The American Republic will endure, until politicians realize they can bribe the people with their own money.
Just how modern is this politics?
The further we move away from a constitutional democratic republic the closer we move toward the post-republican society of which Tocqueville warned.
Prof. Hamilton,
I think you rightly raise the alarm. The only assuaging thought is that as we become more prosperous, it isn’t illogical to spend somewhat more on healthcare as goods/services needs are met & extending life & life quality becomes more important.
But you are right that this represents a failure on the part of our system of gov’t. Politicians using other people’s money to buy their re-elections
Just how modern is this politics?
LIVING FOR THE MOMENT
Hal’s comment was both hilarious and I fear, too complacent.
I am afraid that too many institutions in America have been mortgaged for short-term
exhilaration. The list is extensive…
to hide the scale of government deficit accumulation.
Reserve posturing to support the dollar.
take short term profits at the expense of future earnings and stability.
I’m in the opinion that human nature for the majority is to
take the “one in the hand” rather than the “two in the bush”. Success goes to the
minority who can anticipate the future and prepare for it.
Those sheep are not as dumb as they look. They’ve sniffed the Professor’s wallet and are on the move.
The answer to “What are we to do about entitlements?”
…is always, “Let’s have a look at your income statement and balance sheet.”
Which is perhaps why the Professor seems a little panicked.
Professor Hamilton,
Thank you. As usual a very thought provoking post. We have precisely the same problems in the UK, although here the pensions crisis is focussed more in the private than public sector.
For what it’s worth I think you’re absolutely correct in the diagnosis of the symptom being discretionary spending in pursuit of special interests; whether or not that’s the actual sickness I’m not so sure. I think it’s rooted more in anthroplogy than either economics or indeed politics.
Human beings have an innate tendency to form group with other humans who look/sound/think the same way they do – although the Founding Fathers created the Great Republic using ideas that were then at the white hot edge of modern political thought, they were all both ethnically and religiously homogenous; Caplan teaches at George Mason, where, certainly according to the blogs of its economics professors, there doesn’t seem to be any particular premium placed on diversity of economic thought, etc.
This human urge to organise is tribal, almost visceral; ‘the unions’ criticised by Buzzcut are just another expression of the same tribalism, albeit one which probably wouldn’t have come into being had the Industrial Revolution not happened. Although organised groups might produce very nasty ideas, they’re not particularly harmful until one group gains an ascendancy over another, either in the form of political or economic power – at that point they cause people to lose sight of basic principles, for example their common humanity (the Third Reich) or the rules of simple investing (the San Diego County Pension Fund).
The more organised groups there are the more fractured a society becomes, until they become impossible to reconcile ad the whole bang shoot falls to pieces. Tocqueville was a good creature of the post-Enlightenment era, and would probably have been horrified by the extent to which civil politics has beome dominated by special interest group pleading.
The challenge for a civil society is to promote the importance of independent thought, and to reaffirm that freedom of association does not automatically bind the citizen to their associates’ beliefs and actions.
And if anyone thinks capital isn’t tribal, they don’t read the business pages.
Hal
The global warming argument is false. In the case of GW, what is worrying is that the models *have not caught* the full costs of what is going on.
The challenge of GW is that things are potentially much worse than we think. If they are better than we think, then spending money on GW abatement is a bit like spending money on national defence, you are preparing for eventualities that never happen.
You create GDP from new activities (many of the obvious energy savings innovations are net present value > 0) and you lose some GDP. Net net you are not too worse off.
But if they are worse, then we are entering into territories where we don’t know that our civilisation would survive. Human extinction is unlikely but civilisation extinction is a recurrent and common pattern of human history– and indeed climate change is implicated in the fall of many previous societies.
2 degrees centigrade we can adjust to. And it’s almost certain that we will have to, given current CO2 levels and emission trends.
But 5 degrees centigrade? Or more?
Buried out there are ‘tipping points’ where the Earth’s ability to sequester carbon naturally is overcome. In particular the melting of the permafrost and the mass methane release which would result– the previous time CO2 concentrations rose over 1000ppm, 90% of the species on the planet died (the great Permian Extinction).
We don’t know where these points are, and even a very small percentage chance (less than 1% I would argue) necessitates that we take precautionary steps.
James
Doesn’t the theory of hyperbolic discounting explain much of this?
Humans are not consistent about their time discount preferences, and they are perenially too optimistic in their forecasts. Another way of putting this would be ‘better jam today, than jam tomorrow’.
In the private markets we overcome this (see predictions by Stephen Ross in today’s FT that corporate bond default rates will go from 1% to 3-4% to 10% over the next 3 years) by the mechanism of bankruptcy.
In government and public matters, we overcome this by retrospective changes in the terms of contractual agreements. It’s politically bloody, but it’s been done many times– either stealthily (via inflation) or directly (taxing Social Security benefits) or some combination of the above.
Jim,
the phenomenon of localities systematically underfunding generous pension promises would not surprise readers of Anthony Downs, An Economic Theory of Democracy. In that classic work (published in 1957), governmental actions reflect an equilibrium with vote maximizing politicians and rationally ignorant voters. There is no need to ditch rationality or appeal to nonstandard preferences. Simply note that a political candidate could win the votes of municiapl workers by promising generous pension benefits, but not lose the votes of rationally ignorant nonworkers.
At the municipal level, the most powerful groups are public safety, that is, police and fire. In California, most public safety employees have a 3% at 50 retirement plan, which have been institued fairly recently. For those not familiar with this particular gem of a retirement plan, 3 at 50 means the retiring cop or firefighter multiplies his years of service by 3% at age 50 times his highest annual income (spiked by massive overtime his last year of work) to come up with his annual retirement pay.
The public safety groups have managed to convert their political clout into financial clout by supporting politicians who support them. They contribute money and time to getting their guys elected. Next time you see some politician bragging about getting an endorsement from the local fire or police group, remember that support is bought and paid for with your money.
And lastly, and you’ll have to take my word on this, most police and firefighters are not Democrats. I’ve seen ’em close up.
People who see a “purpose” in our political system are projecting themselves. Our government was devised by a group of very smart men with very divergent opinions a very long time ago. No one could have accurately predicted our current society back then – and no one did. Predictions that reach beyond the nearest horizon are utterly worthless. This is why financial markets make such a small distinction between a thirty year time horizon and an infinite time horizon – they might as well be the same thing.
Considering how shakey PRIVATE pensions are, I think that the only difference in terms of excessive promisses between private and public pensions is the fact that private companies can default on their promises through bankrupcy.
Politics or no politics, public sector or private sector, pension funding shortages can be cured, however painfully, over time by closing defined benefit schemes to new entrants and frightening the existing participants into freezing or modifying their benefits. New hires are put into some form of defined contribution. Defined benefit is disappearing rapidly in the US and the UK.
This change of course requires negotiation but has been done widely and successfully already. It is a pity because defined benefit schemes are a social good but they are too tempting to raid to be entrusted to either private management or to politicians.
Incidentally a powerful argument for part privatising Social Security is that individual pots of money are harder for politicians to steal from. An annual statement is better than a politicians promise.
Erasmus,
More than one of the founding generation did predict that democracy would lead to the masses voting themselves goodies at the expense of the affluent minority, accelerating over time to kill the goose eventually. John Adams, esp.
Martin wrote:
The challenge for a civil society is to promote the importance of independent thought, and to reaffirm that freedom of association does not automatically bind the citizen to their associates’ beliefs and actions.
Martin,
It is not and never should be the role of the society – government – to promote thought. Civil society should simply prevent the supression of thought not promote it. Any time government promotes thought it engages in indoctrination. In the US consider public education, the Public Broadcasting System, the National Endowment for the Arts, and other organizations that use the power of the government to decide who has the right to speak or be heard.
> The future is hard to predict.
Hal is so right, and to see how right he is, all you have to do is look back 40 years (or whatever), read up (or recollect) on what people were worried about then, and imagine how much money would have been wasted had we taken those fears as seriously as we were being urged to.
You can iterate this process again and again. The public intellectuals of 1935 could not have imagined the prosperity of 1965; the PIs of 1965,
a considerable fraction of which were deeply worried about robots disemploying the entire work force, could not have imagined the employment rates of 1985; the PIs of 1985 could not have imagined the collapse of Communism or the internet.
While it makes sense to worry about worst cases, no one should doubt for a minute the immense uncertainties that accompany simple, straight-line, extrapolations.
Medicare will exceed spending limit by 2013:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aeouacZ.VpjE