An ad hitting Illinois’ airwaves begs taxpayers to not let politicians cut public employee pensions. Accompanied by mournful piano notes, public servants lament the possibility of lost retirements described as “modest.” The ad tells us that most of these employees are ineligible for Social Security, and that the problem with public employee pensions is caused by politicians not making promised payments. Backed by a group of labor unions, the ad should arouse anger in taxpayers who will be forced to pay for unaffordable benefits coerced by unions in collusion with irresponsible state legislators.
Taxpayers are in big trouble. They are on the hook for state pensions that have less than $2 trillion stashed away to pay for benefits of over $5 trillion.1 When the gap needs to be made up, it will not be financed by higher contributions from those who benefit. We saw how that idea worked out in Wisconsin. Instead, the shortfall will be made up by higher taxes, reduced public services, or both.2
When it comes to fiscal irresponsibility, Illinois is the state we look to for guidance. At 43% the Illinois State Employees’ Retirement System had the lowest funded ratio of any pension plan in a Congressional Budget Office report on pension underfunding. The Illinois Teachers’ Retirement System also received a nod for being 48% funded.3 This will be no surprise to state residents paying higher income taxes while listening to their legislators stump for the Illinois DREAM Act. It should be a big surprise and bigger concern to taxpayers in other states, who will have the opportunity to share in the cost when the time comes to bail out state pensions.
During the Republican weekly address, Martha Roby (R-AL) mentioned that “The big spenders have been put on notice and are on retreat.”4 She went on to say that:
Republicans have made clear that there will be no increase in the national debt limit, unless it is accompanied by significant spending reforms that truly change the culture of spending in Washington.5
The GOP has known all along that it will agree to raise the debt ceiling. There is little choice. In exchange for the concession, assurances will be made about spending cuts, but talking and doing are two different things. After last month’s billions in cuts turned out to be millions, we can be assured that “significant spending reforms” are still a pipe dream. Decisions will be deferred, cuts will become impossible, and the Washington dog and pony show will go on as usual.
State budget issues will further minimize Republican opportunities to cut federal spending. This is where public employee pensions come in. President Obama and congressional Democrats have been generous with the federal dole, making it easier for states to behave like irresponsible children who know that Uncle Sam will step in when things go bad. Will Republicans do better?
With the GOP in control of the House we have a chance to passively reform state pensions with an abject refusal to fund bailouts. State level attempts to cut benefits or increase contributions will inevitably fail after receiving the same reception from unions and the courts that we saw in Wisconsin. Financial pain is an effective attitude-changer. When state coffers run dry and budgets collapse under the weight of state pension obligations, even recall-happy Wisconsin voters might see the light. In the meantime, the GOP could produce a spot of their own, perhaps showing taxpayers burning their furniture on Christmas to keep warm. It will be criticized as a gross exaggeration, but $3 trillion is a lot of money. When we have paid that off, we can go back to worrying about the federal budget.