Who’ll Pay for an Underwater Pension Mortgage?

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Although some Internet sifting didn’t reveal their state-by-state list, leaving Rhode Island’s standing as an unknown, Rob Arnott and Lisa Meulbroek’s warning in the Wall Street Journal is worth consideration:

Most cities, counties and states have committed taxpayers to significant future unfunded spending. This mostly takes the form of pension and postretirement health-care obligations for public employees, a burden that averages $75,000 per household but exceeds $100,000 per household in some states. Many states protect public pensions in their constitutions, meaning they cannot be renegotiated. Future pension obligations simply must be paid, either through higher taxes or cuts to public services.

As I’ve noted repeatedly, government investment boards get away with unrealistic investment assumptions because their financial advisors and actuaries accept that the ability to increase taxes allows for higher risk, and Arnott and Meulbroek note that this power ultimately flows to one tax in particular:

State taxes are collected on four economic activities: consumption (sales tax), labor and investment (income tax) and real-estate ownership (property tax). The affluent can escape sales and income taxes by moving to a new state—but real estate stays behind. Property values must ultimately support the obligations that politicians have promised, even if those obligations aren’t properly funded, because real estate is the only source of state and local revenue that can’t pick up and move elsewhere. Whether or not unfunded obligations are paid with property taxes, it’s the property that backs the obligations in the end.

Thus, the authors say, the pension debt is like another mortgage on our homes.  (For Millennials with big education debt, it’s arguably a third mortgage.)

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In some states, perhaps the resolution will weigh more in the direction of justice — hitting the honey pots of the politicians and labor unions that inflated this suffocating balloon.  In states like Rhode Island, though, we’d best come to grips with the reality that, more and more, we’re working for the benefit of the government, not the other way around.  What we owe on our government bill already far exceeds the value we derive, and that’s only going to get worse.