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June 22, 2015

America’s Striking Resemblance to Greece

Will they default? Won’t they?

With Greece hot in the news, debt is on a lot of people’s minds. Large creditors all over the euro zone could be facing losses. Many countries are preparing themselves for the spillover effect as this situation develops.

But big investors aside, plenty of Greek citizens could get stiffed as well… specifically, those with pensions.

In relation to GDP, at 17.5% Greece spends more than any country in the euro zone fulfilling its pension obligations. With poverty and unemployment systemic issues in Greece, pensions are the sole source of income for many families.

America is no Greece, but we do have a debt problem of our own, and like Greece, much of it is thanks to pensions.

Just as many retirees rely on the government for their paycheck… the government relies on us, the taxpayers, for the funds necessary to write those checks.

That means — you have a lot more debt than you think.

The Government Accounting Standards Board (GASB) wants states to come clean about how much they really owe.

It’s doubtful it will even matter, since there’s almost no chance that better information would lead to prudent decision making. States will likely continue relying on other people to take care of their problems. By “other people,” I mean us.

The problems with state pensions are well known, and well-documented by us and other groups. Estimates show that governments must raise at least $500 billion to fund public pensions, with the problem growing as workers age and higher benefits accrue.

Years ago GASB (Government Accounting Standard Board) required states to include their unfunded pension liabilities in their main financial statements instead of simply as footnotes. States — as well as cities, counties, etc. — are now acknowledging the pension problem and taking at least halting steps to fix the issue. It won’t work, but at least it’s getting some attention.

If only it stopped there. Another growing concern lies with state retiree health care, listed as Other Post Employee Benefits (OPEBs). This issue typically gets pushed aside, but the problem is just as big, with underfunding estimated at a similar $500 billion.

The GASB just ruled that states must treat these obligations the same as pensions. They can’t just shove them in the footnotes like they used to!

You might think this would settle the issue. It doesn’t. State officials brush aside retiree health care costs because they claim they can change the benefits with the stroke of a pen. Pension obligations, on the other hand, are often protected in state constitutions.

This reasoning is dangerously wrong-headed.

It is true that OPEBs are not constitutionally protected like pensions, but that doesn’t mean they will be easy to change.

Many state employees are unionized. These are not casual bystanders who will look on as one of their main benefits gets stripped away or reduced. They will fight tooth and nail, threatening to oust any politician that dares to support cutting benefits.

This fact is not lost on politicians, who might have a different trick up their sleeves.

An easy way to reduce the costs associated with OPEBs is to direct retirees to the new health exchanges.

One of the main costs associated with OPEBs is health insurance for workers that retire before they are eligible for Medicare, age 65.

Instead of carrying these former workers on their insurance rolls, states could direct the retirees to enter the new health exchanges. Given their status as retirees and likely income level at or below the median for all households, these people should qualify for subsidies when they purchase health care coverage.

This would move some of the responsibility for funding the costs of health care from the individual cities, states, and counties to the federal government.

Voila! States, cities, and counties have just found another source of support… us!

But just as with other things, this works well when one group does it, but not so much when everyone follows suit.

If all OPEB providers took this approach, the eventual outcome would hardly change. American citizens would still have to pay the cost of care for retirees.

However, the path of the payments would change dramatically. Much less would flow through cities, states, and counties, making them appear financially healthier than they are today.

Those costs would shift to the U.S. government, which tack them onto a growing list of unsustainable payments that we keep pretending will somehow all work out.

While I’ve no doubt that government will find some way to reduce many of these long-term, unpayable obligations in some form or fashion, it also seems certain that raising taxes will be part of the solution.

This is all the more reason to lower your taxable footprint.

Courtesy Rodney Johnson, Economy and Markets

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.
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