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May 23, 2018

Don’t Let the Government Bankrupt You Too

I’ve spent the last few weeks diving deeper into the pension mess in the U.S. and I’ve come to a conclusion. We’re in deep trouble.

Some things are obvious. Puerto Rico, which I didn’t write about because it’s on display for the world to see, will NOT fix its pensions.

In exchange for a stay of execution from creditors, the commonwealth agreed to hand over financial management to an oversight board.

The board rejected the Puerto Rican government’s budget, and then laid out how bondholders could be trimmed, other creditors could be shortchanged, pension benefits could be cut, and work rules revised.

“Great!” the governor said, “except we won’t cut pensions or change work rules.”

Essentially, he’s all for telling creditors they won’t get their money, but he won’t do anything that weighs on his constituents. At least, he says he won’t.

In the end, he won’t have a choice. Pensions will be cut, taxes will go up, and services will dwindle.

That story will be repeated, although not in such a big and ugly way as Puerto Rico, around the U.S. over the next 15 years.

And it should all start about 2024. That’s when Detroit – yes, that Detroit, which already went through bankruptcy once – will have to face an ugly set of facts.

It’s easy to point to states with pension problems (cough, Illinois and New Jersey, cough), but the issues don’t stop there.

Cities, counties, school districts – any level of government entity that levies a tax, most likely has a pension. And many of them have legacy pension problems, where they promised awesome benefits but then didn’t put the money away to fund them.

There’s no free lunch.

We essentially spent years not paying the taxes necessary to fund the benefits that are now coming due.

As taxpayers, we’ll have to make up the difference, and it will cost us.

Courtesy of Rodney Johnson at Economy & Markets (article archive here)

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

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