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It's the growing problem that no politicians want to talk about: unfunded pension liabilities. Business Insider ran an article last year which focused on the many upcoming challenges facing U.S. retirement funds. However, the pension problem is especially scary. From the article:

"The unfunded liabilities of the various federal employee pensions systems, covering civilian and military employee benefits, amount to about $3.5 trillion, or 20% of US GDP," a release from Moody's said Wednesday.

"Additionally, Moody's estimates that unfunded state and local government pension plan liabilities are of the same magnitude, bringing the total shortfall to 40% of GDP."

Now, federal pensions are relatively safe -- if there's a significant economic downturn the Fed can always print more money to keep those plans afloat. However, the states and local governments aren't so lucky. That collective $3.5 trillion can't simply be printed out of thin air -- it'll have to come from somewhere.

If a long-term solution isn't achieved, millions of people may suddenly find themselves without the monthly pension check their retirement had been counting on. It's a crisis in the making.

Illinois is in perhaps the worst shape, and recently the issue of unfunded pensions has been getting some badly-needed press. In fact, the Chicago Tribune has dedicated an entire investigative series to the story.

However, if meaningful reform isn't instituted nationwide, Illinois will simply become the canary in the coal mine.

What reasonable steps can state and local governments take to address the issue? Cutting current plans is a start, but there is a ton of ground to be made up.

  • Dump the liabilities on federal government, and expect it to inflationary-print-or-borrow that money as they do now. I wouldn't expect any reform that would negatively affect AARP to succeed in USA. – user4012 Jun 29 '17 at 12:53
  • Whoa whoa whoa the fed can just print money? No. No they can't. Please, just no. – lazarusL Jun 29 '17 at 14:27
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    @lazarusL - "can?", Absolutely, yes (sometimes in indirect way, such as asset transactions, issuance of debt, etc...). "Should?", that's a different question. – user4012 Jun 29 '17 at 17:12
  • @user4012 You're right, technically they can. They really really shouldn't, the amount of shouldn't is high enough that we really shouldn't talk about it as a possibility :P – lazarusL Jun 29 '17 at 17:21
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    Given that the Fed didn't bail out Detroit, Illinois' odds aren't good. The most likely outcome is that they simply default. Won't matter what the courts say: they can't pay pensioners money that doesn't exist. – Matt Thompson Jul 27 '17 at 3:03
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At this point there are no reasonable steps to take. There are only right steps and wrong steps.

With those levels of debt the only right thing is to basically go bankrupt, let the courts decide on order of the liabilities to pay off first. Then you reduce jobs in all levels of administration, cut salaries and especially pensions - both the paid and promised, and - last but not least - crash-deregulate businesses to increase tax base by allowing people to start earning money.

It is very interesting that the people who paid themselves such lavish salaries and promised sumptuous pensions to others now want to raid taxpayers for MORE money. In other words - to take wrong steps. And if they will take that path the real crash is inevitable, because even more people will decide it's not worth to work one's butt off just to get ripped on more taxes. Food stamps will simply balloon. Which will mean just one thing...

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    "Cut salaries" may sound like a nice idea, but the labor market is a free market. Government doesn't set wages, supply and demand does. You'll lose the employees who can get better wages elsewhere - and those are the ones you don't want to lose. Better to reduce the number of employees instead, by removing those persons you can do without. (But that's hard in government) – MSalters Jul 12 '17 at 14:15
  • @MSalters - Taking into account that public sector is generally overpaid (by quite a big margin overall) and usually least effective in terms of work/manhour I do not agree. reduction in public sector workforce is always better, true. From my experience the number of people working in any kind of agency can be safely cut in half immediately without impacting a thing. Also - everything is hard in government - honest work first of all... – user10424 Jul 13 '17 at 8:06
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    @AcePL "public sector is generally overpaid" and "least effective in terms of work/manhour" speaking as a government employee, citation needed. I'm a software developer for a state gov and make 2/3~3/4 of what I'd pull in the private sector. Nor do I consider myself or my coworkers any less efficient than when I was in the private sector. Speaking as a rational human being, "number of people working in any kind of agency can be safely cut in half immediately without impacting a thing" needs a citation too. – Jared Smith Jan 25 at 13:59
  • @JaredSmith - I live in a third distinct country now. If pattern repeats, then it's a good sample. Public sector is not only pay, but bonus package (health cover, paid holidays, paid sick leave etc). I know for a fact that gov. employee is basically untouchable (especially unionized) and can be fired with great difficulty (i.e. proven crime). I know a local gov employee in my home country who is now almost 3.5 years on maternity leave(s) (with total 0.5 years in between extra). No one misses her at work... – user10424 Jan 28 at 9:38
  • @AcePL the plural of anecdote is not data. Either or neither of us may actually be correct. – Jared Smith Jan 28 at 11:58
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Depends on the state. Illinois, for instance, is very limited in what it can do because of how its supreme court interprets the Illinois constitution

The Illinois Supreme Court on Friday unanimously ruled unconstitutional a landmark state pension law that aimed to scale back government worker benefits to erase a massive $105 billion retirement system debt, sending lawmakers and the new governor back to the negotiating table to try to solve the pressing financial issue.

At issue was a December 2013 state law signed by then-Democratic Gov. Pat Quinn that stopped automatic, compounded yearly cost-of-living increases for retirees, extended retirement ages for current state workers and limited the amount of salary used to calculate pension benefits.

Employee unions sued, arguing that the state constitution holds that pension benefits amount to a contractual agreement and once they're bestowed, they cannot be "diminished or impaired." A circuit court judge in Springfield agreed with that assessment in November. State government appealed that decision to the Illinois Supreme Court, arguing that economic necessity forced curbing retirement benefits.

On Friday the justices rejected that argument, saying the law clearly violated what's known as the pension protection clause in the 1970 Illinois Constitution.

Similarly, California has the "California Rule"

Retirement benefits are the fastest-growing expense in many municipal budgets. In Los Angeles and other cities, they account for 20% or more of general fund spending. The burden has pushed some cities to the edge of bankruptcy.

Yet a string of court rulings, known collectively as “the California Rule,” has posed a formidable barrier to change. It prohibits cuts in pension benefits already granted or promised. Under the rule, pensions are considered binding contracts protected by the state Constitution.

The only practical way for these states to meet the gap is to raise taxes

On September 14, 2016, the Chicago City Council approved a tax on water and sewer usage in the City of Chicago in order to fund the City’s Municipal Employees’ Annuity and Benefit Fund (MEABF).

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Here is a comparison of the total US debt and how completely unrealistic it is to pay it all

Some of the things the government can do is to confiscate bank accounts like Greece and Cyprus did.

Greek Finance Ministry inspectors are about to start seeking out the owners of all local undeclared properties, while the law will be amended to allow for financial products and the content of safe deposit boxes to be confiscated electronically.

In this situation, depositors aren't being asked to cough up additional money to meet a tax liability. To the contrary, a portion of Cypriot deposits will be confiscated -- electronically, no less -- by the government because that's what euro zone finance ministers, the European Central Bank and International Monetary Fund demanded as a precondition for a 10 billion euro bailout.

The states may be bailed out by the PBGC (Pension Benefit Guarantee Corp.), a federal agency which normally bails out private company's private pension plans.

The Pension Benefit Guaranty Corp., or PBGC, is an independent U.S. government agency that protects retirement benefits in private-sector defined-benefit plans. The agency often comes to the rescue of underfunded or failed pension plans. The PBGC doesn't use tax dollars to bail out funds, but relies on insurance premiums paid by nearly 24,000 insured defined-benefit pension plans. Current projections say it will run out of money in eight to 10 years without major changes.

It says it doesn't use tax dollars, but Fannie Mae and Freddie Mac also said they didn't use tax dollars, and were bailed out anyways. Nothing will stop the government from acting in its own interest.

Once the burden is foisted upon the federal government, then it may just borrow and print the money to pay pensions, increasing inflation. The treasury could issue trillions in bonds, and the Federal Reserve will buy them by generating money out of thin air.

Another action would be to amend the state constitutions to allow reducing pension benefits post-facto.

Cities, if not states, may just end up stiffing their pension beneficiaries.

Detroit city employees and retirees face losing up to 34% of their promised pension benefits under the city's bankruptcy plan filed in court Friday.

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Pension plans can be shored by the Federal government, cuts to growth to current pensioners, increase in taxes, increase in pensioner contributions, and cuts to future pensions. For the many pensions that need reform, all of the above is the likely best answer, in fact the Federal government can tie aid to the other reforms.

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The problem is when pension money wasn't paid in the past and now it is coming due. There will be much the same problem with the private pension market as that money was also used for other things. By rights, they should start stripping wealthy from those who created the situation, but they won't. The only reasonable alternative is to tax the wealthy more.

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    Why is it wealthy people's fault that government agents lied and passed responsibility to their successors? – Chloe Jul 9 '17 at 20:32
  • Because most of those lies were at the behest of wealthy people who directly benefited. They should have to refund those monies. – DCook Jul 10 '17 at 12:47
  • Do you have a source for that claim? Documents? Recordings? Would that not be dereliction of duty for the government agent instead? Lots of people write to their representative and ask them to do things. Why are only wealthy people culpable? – Chloe Jul 10 '17 at 18:55

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