Reader Stuart Jenner last week expressed concern about the unfunded public-pension liabilities plaguing state and local governments, and how these are not even discussed in the present debate about federal debt and deficits. There also are so-called unfunded mandates in which federal departments and agencies lay responsibility for policies and programs on state and local governments, and the private sector, without providing any money to pay for them. (These will be examined in a future article).
Wherever you turn, there is more red ink than you suspect.
The big federal numbers usually cited — that is, $14 trillion in current long-term debt, with $1 trillion-plus deficits coming in each of the next 10 years — are the subject of the current congressional Gang of Twelve debt-reduction exercise, to be completed by Thanksgiving. (If the bipartian congressional group cannot reach agreement on long-term proposals, then arbitrary cuts will kick in, equally divided between Defense and non-entitlement spending — and what a nightmare that would be).
Differing economic-growth projections have federal debt ranging between 62 and 82 percent of our Gross Domestic Product (GDP) in 10 years. The flatter the growth, the greater the percentage of GDP required for debt service. And the greater the amount required for debt service, the greater the brake on growth: a dismal Catch 22.
Gov. Chris Gregoire and our state Legislature are trying to grapple with unfunded liabilities on several fronts, changing formulae establishing benefit levels; addressing "double dipping" in which public employees simultaneously receive pensions and paychecks; and horse-trading with public-employee and teachers union leaders not known for self sacrifice. Our own unfunded public-pension liabilities are large — especially for those pensions established with generous formulae in strong-growth years — but they are not of the scale faced in many other states.
California Gov. Jerry Brown publicly conceded last week that unfunded pension liabilities for his state's 2.6 million current and retired public employees could amount to $1 trillion. Only last year, a Stanford University Institute for Public Policy Research study had shaken state legislators with its estimate that those liabilities could amount to $500 billion.
A study last year by pension-fund sponsors estimated, after adjusting for a more realistic discount rate, that there were $2.5 trillion in such unfunded state- and local-level liabilities. If last week's California estimate is correct, the national number is now much higher. Most American states have total unfunded liabilities exceeding 15 percent of their states' GDP; a few top 35 percent. Yet, because 49 of the 50 states are legally required to "balance" their official budgets, most voters and taxpayers (and many public officials) are unaware of these huge looming obligations. They underlie some of the contentious battles now taking place in Wisconsin, Ohio, Indiana, and several other states — classic confrontations about public obligations and priorities.
Fed Chair Ben Bernanke, at last Friday's Jackson Hole, Wyoming meeting of financial leaders, made clear that the Fed has done about as much as it presently can to facilitate short-term growth without setting off long-term inflation (although another "quantitative easing" — that is, massive Fed purchases of Treasury bonds — can be expected if growth does not soon pick up). Adjusted data last week showed that second-quarter U.S. growth was only 1 percent, after first-quarter growth of 0.4 percent. Bernanke said it was time for the Congress to stop its confrontations and get to constructive work.
The congressional Gang of Twelve faces the daunting task of devising a long-term-debt-reduction package which will, at the same time, provide some short-term juice to the economy. President Obama this week will present us with his own fresh set of proposals to do the same. They will need to be more specific than the general proposals he made in earlier discussions with House Speaker John Boehner during negotations to lift the federal debt limit.
Some big questions facing Obama and congressional leaders:
•Will they address the big gorillas in the budget room? That is, will they present proposals to bring financial stability to Social Security and Medicare? Contrary to mythology, working-age taxpayers do not pay into retirement accounts from which they draw benefits on retirement. Instead, current wage earners finance the benefits of current retirees. The coming tidal wave of Boomer-generation retirees cannot be financed at current levels by present wage earners.
But modest changes in the retirement age, COLA adjustments, benefit levels, and eligibility could put these entitlement programs in long-term order quite quickly — without changing the rules for anyone now over 55. However,, to do this, Democrats would have to abandon their cynical posture that they are "protecting Social Security and Medicare" from heartless would-be GOP cutters; Republicans would have to back off plans for radical changes or partial privatization. Responsible, incremental changes could save the day. The incremental changes have been well known to policy analysts for more than 25 years, ever since this looming demographic shift became apparent. Elected officials have simply kept postponing the day of reckoning.
•Will they have the guts to take on maginal Defense spending? We are not talking here about the general desire of peace lovers to cut Pentagon money and of hawks to Make America Stronger. Defense Secretaries in both the George W. Bush and Obama presidencies have wanted to undertake basic Pentagon reforms leading to major cost savings but have been sidetracked by the demands attached to interventions in Iraq, Afghanistan, and Libya. The ends of these interventions are at least theoretically in sight.
The only way to save big Pentagon money is to eliminate projected major weapons systems in their entirety. That means overriding the various services' claims that common systems cannot meet their needs. It also means that a first-principles strategic review must take place in which all present and prospective national-security missions are examined and appropriate weapons systems and force levels budgeted to meet them. A hard-nosed, realistic review will bring screams from the services and from major contractors, including Boeing. Obama and relevant congressional leaders must be willing to stand up to them.
•Will they take on the "tax reform" to which they give bipartisan lip service? The economy would benefit from fewer tax brackets and lower rates at all income levels, as happened in the reforms sponsored and passed by Sen. Bill Bradley in the mid-1980s. But, in order to get there, all kinds of present "tax expenditures" — subsidies, loopholes, and benefits favoring specific sectors, companies, and economic activities — would have to be dumped. (The same goodies are provided at Washington-state level to Boeing, Microsoft, and other local powerhouses which profess their love for free enterprise as a concept but simultaneously demand the bounties of state subsidies in the conduct of their own businesses).
If Obama and the Congress are really serious about reforms, which, at the same time, would return many billions of dollars to the federal revenue base, they will reduce current tax breaks associated with health care and home-mortgage deductions, as well as deductions for interest paid and for purposes deemed useful at one time or another, including those devoted to home energy conservation.
There is no reason, for instance, that mortgage interest above a certain level should be claimed as a deduction. Many countries, including Canada, have no mortgage-interest deduction whatever. There's a present crazy focus on whether taxpayers making "over $200,000 a year" or "over $250,000 a year," depending on Obama's most recent formulation, should be taxed more heavily. Instead, the focus should be on making rates for everyone lower, removing loopholes and deductions, and thus fostering growth both in the economy and in the federal tax base. Loopholes and deductions, in any case, confuse the issue of who is rich and who not. Without them, tax evasion would immediately become more difficult for the wealthy in particular. Real reform would make current debate about raising or cutting taxes irrelevant.
•Will they make changes in government organization which make good sense but which are opposed by entrenched interests? LBJ, enjoying a huge congressional majority, attempted and failed to merge the Commerce and Labor Departments into a single economics ministry. Later the Post Office Department was removed but never truly privatized. Will Fannie Mae and Freddie Mac be abolished and their assets liquidated? They contributed greatly to the 2008 financial collapse and, with taxpayer backing, have hindered efficient functioning of the housing market over many years. This undertaking will consume a lot of time but should be started now in order to demonstrate White House and congressional seriousness.
Will the Gang of Twelve, including our own Sen. Patty Murray, be successful in framing an acceptable bipartisan package later this fall? Much wil depend on the seriousness of Obama's proposals in a few days. If they amount to partisan boilerplate, lack specificity, or continue his blame-Congress-and-everyone-else themes of the past 60 days, it will make congressional negotiators' work more difficult. But if he steps up as national leader and presents serious proposals with a sense of purpose, the Gang of Twelve will operate within a more promising context.
The Gang of Twelve has its own internal problems to solve. Some of its members, including Murray, are best known as fierce partisans. But it you apply the It Took Nixon to Go to China analogy — that is, if you believe that fierce partisans in fact have the best chance of bringing their fellow partisans to consensus solutions — then this could be a group to get something done. None, it is clear, will want to embrace the alternative of arbitrary spending cuts imposed externally.
But back to the matter raised by Stuart Jenner, the unfunded public-pension liability issue. It is perhaps illustrative of how our system works. In good times our elected officials made pension commitments that, in later times, they could not keep. But they had made those commitments to organized groups who at the same time provided them with political support and money and, so, it was easier to avoid dealing with by postponing the hard decisions to a later judgment day.
Social Security and Medicare began as far more modest programs than they are today. Various "reforms" over the years always were accompanied by sweetening expansions of coverage which added to their overall costs. Now there are too few working to pay for the many retired. As with the public pensions, there are powerful organized groups which resist necessary changes. Given our huge overall public debt overhang, the problem must be dealt with — Medicare first, since it in far more fragile financial condition that Social Security.
It's not just Congress on the spot. Europe, too, is dealing with similar previous commitments which cannot now be financed. The 2008 financial crisis here spread quickly and has exposed the vulnerability of our financial systems, economies, and public budgets.
Locally, everything we do now — including such big ventures as the deep-bore tunnel, Sound Transit light rail, and other pending capital projects — must be begin with the question: What level of debt will be incurred for what level of public benefit?
These are questions that we should have been asking all along. Now we have no option but to do it. Message to political candidates: Don't run for office unless, if elected, you are prepared to say no as well as yes.
