As I’ve written in a variety of posts on a variety of subjects, the generations now in charge, in the public sector, private sector and their own lives, have endeavored to “live richly” by securitizing any future anyone might have in this country, and cashing it in. A future they thought would be far off, and that they would not be around to see. But with the recession, credit crisis and collapse in asset values, the future is coming sooner than they expected, and one can almost sense the panic. Today I read a fantastic quote, in a blog post about New Jersey’s public employee pension system, that completely captures the moment. It could have been about NY's pensions, the MTA and the Ravitch Commission, the state and local government budget crises in New York and throughout the nation, Wall Street, private equity, hedge funds, many other businesses, many people's personal finances, etc. “There is a scene in Mel Brooks' The Producers where Gene Wilder realizes the jig is up and starts intoning 'no way out' while clutching his blankie since, being a reasonably learned accountant, he grasps the situation. Zero Mostel however, whose schemes got them into their mess, still thinks there are outs. That's how an unbiased pension actuary would feel looking at the state of the New Jersey pension plan. It's effectively dead but we still have the Zeroes who got us into this mess running around selling more hopes and dreams.”
I’ll get back to New Jersey’s pensions in a minute, but first I’d like to call attention to an outrage I heard on my bicycle radio, tuned to Bloomberg News, this morning on the way to work. According to the story posted later on the firm’s website “BlackRock Inc.’s Peter Fisher said the U.S. Treasury should consider selling 100-year bonds to ease the federal government’s borrowing costs as it faces a budget deficit expected to top $1 trillion.” None of the money would be paid back for the first 50 years, just interest, after which the money would start being paid back and the cost would soar. “If you issued a 100-year bond and had principal and interest pay down smoothly over the last 50 years, you create a great borrowing device for the Treasury that would let us move this hump of borrowing over the generational retirement that’s coming up.” What wasn’t in the web article, but was enough to almost knock me off the bicycle, was this statement. “We'd have to figure out how to pay for it later,” he said. We in 50 years Fischer will be gone, but my children will be ages 66 and 64, which would be a wonderful time for the country to go bankrupt.
I asked someone. Yes, I’m told, he’s a Republican.
Along with the realization of how painful paying back all those federal, state, and local debts, and all the debts from various bailouts, is going to be, you have the panic felt by older people as the value of their stocks, bonds and houses shrinks. The plan was to pay younger people less through multi-tier contracts, eliminating their pensions, outsourcing their work, and hiring them as independent contractors without health insurance, and tax them more by (for example) exempting retirement income from state and local income taxes. And then somehow insist that they pay sky-high prices for the stocks, bonds, and houses older generations need to sell to live in the way they have promised themselves.
Suddenly, younger generations are not cooperating by paying more than they can afford for those assets. Perhaps because savers, most of whom live outside the United States, are no longer willing to lend Americans money they could never afford to pay back in order to allow that to happen. As first it was assumed that the United States could just be sold out from under future Americans to wealthy foreigners willing to pay more, whether companies or (in places like New York) condominiums. But with the recession spreading globally, and foreigners taking losses on what they have already purchased, that doesn’t seem likely to work.
So what do you hear over and over again? The government needs to bail out today’s stockholders, and today’s homeowners, by borrowing money that younger generations would have to pay back, in order to make them pay more for houses and (to the extent they are in a position to buy any) investments.
Let’s get back to the public pensions. I was referred to the three part series on New Jersey’s pensions, in a Star-Ledger blog, by a new public employee pension news aggregator, “Pension Tsunami.” Reading through the unfolding disaster elsewhere, it’s almost enough to make a New Yorker think the grass really is browner on the other side of the fence (or Hudson), if only barely. The three posts are an “autopsy” post showing the New Jersey pension system is dead, a CSI post, naming those who killed it, and the funeral post, how it should be buried. I hope, but do not expect, the Ravitch report to be similarly organized, and point out who has benefited from the future destruction of our transit system and, therefore, economy.
Based on reasonable assumptions, according to the reasonable statements made by the posts’ author, New Jersey only has enough money in its pension funds to pay 20% of promised benefits. With Governor Corzine’s proposed pension contribution holiday, the pension funds could be empty by 2012. Admittedly the assumptions are a little pessimistic. In a reverse of the fraud perpetrated by New York’s public employee unions, assuming a high rate of return of 8% from the peak of the stock market bubble in 2000 in order to claim pension enhancements were “free,” the author assumes just a 4% return from today’s more sane (though not yet down to normal) valuations. But it doesn’t matter how great the rate of return is if you have no money, and with money flowing out rapidly to pay current benefits, it will be gone.
In the CSI post, the author fingers New Jersey’s Governors, particularly Christie Whitman, who intentionally under-funded the pension plans to keep taxes low and be popular. There were no employer contributions to the pension funds for years. Why didn’t anyone object? "The unions were expected to watch out for their employees. The main reason for the lack of federal oversight is the belief that there was already a countervailing force in strong public employee unions. The fly in this ointment was that unions consistently traded off promises for more benefits in exchange for taxpayers NOT having to fund those benefits. This might have been just a strategy since, if the real costs of those benefit enhancements were to be paid by current taxpayers, they might never have been provided.”
The author, however, misses another culprit — New Jersey’s taxpayers. Unlike New York City’s taxpayers, who have been overcharged forever and are innocent of nearly all culpability in New York’s pension disaster, New Jersey’s taxpayers had modest taxes until recently. Yes property taxes were high as a share of income, but other taxes were not, particularly given the high level of services there. Think of Jersey’s low sales taxes overall, low gasoline taxes, and 0% tax on clothing. Low taxes lured lots of companies and affluent people out of New York City to New Jersey. Meanwhile, most government workers in New Jersey pay 5.5% of their pay into pensions and cops and firemen pay 8.5%. New Jersey taxpayers demanded something for nothing, dumping Republicans and Democrats in turn if they failed to deliver, and through pension raids and debts they got it, at least for a while.
Since the author doesn’t blame New Jersey taxpayers, he doesn’t recommend subjecting them to the horror New York City residents have had to endure, beginning with the city’s first pension disaster following the rich Lindsay pensions of the 1960s. High taxes — still much higher than New Jersey. Lousy public services — worse than in most parts of New Jersey. Lower pay and benefits for more recently hired public employees who, because the unions are powerful here, were basically allowed to not provide much to the people of New York in exchange.
As New York City’s public services have struggled to recover from that era, which they never really have, its workforce has absolutely hated the public sector managers who broke the “fair and square” deal by trying to force them to actually do the jobs they were hired for, whether David Gunn at New York City Transit, Bill Bratton at the NYPD, or Joel Klein in the public schools. Even with higher pay, many public servants (particularly those hired long ago with certain assumptions about not working and now nearing retirement) on our side of the river insists their rights are violated if they are hassled to provide the kind of quality services at fair prices to citizens that they themselves presumably demand from those citizens when they spend their own money. And by the way, New York’s cops and firefighters pay zero into the pension funds. Most public employees hired since 1995 pay 5.85% for the first ten years, but most hired before that are now paying zero.
In New Jersey, however, “there remains only one ineluctable solution to the New Jersey state pension morass. The plan must be dissolved with remaining assets distributed as equitably as possible. The only question is the timing and how much will be left to divide up after the ghost of pre-funding pensions in this state has been laid.” After the state goes bankrupt “there would be no more monthly checks; no more using pension promises to bargain down salaries; and no more inflating the rolls with connected politicos to repay favors surreptitiously…It is long past due that set funding rules be instituted for public plans since politicians, in New Jersey anyway, have proven beyond any doubt that, without such rules, they can't be trusted with a trust fund.”
So the workers would lose their pensions, since there wasn’t enough money set aside to pay for them. They would get a share of whatever money is left, and live off that and Social Security, slightly better than what most Americans are facing. More than two years ago, I wrote a post forecasting that 20 years in the future public employee pensions would not be paid. The future is arriving somewhat faster than I expected too.
But there is still time for one more score. While New Jersey looks to stop contributing to its pension funds to keep taxes from rising, Crain’s New York Business reports that New York Governor Paterson is considering, and the unions and legislature are probably all in favor of, allowing New York State’s public employees to retire even earlier without contributing an extra dime. This would “save money” assuming New Yorkers would live without whatever public services they provided. Perhaps, having their “'no way out' while clutching his blankie” moment, members of the legislature are planning to enrich their pensions and then leave the state — mid-term, so their successor can be appointed in a special election, of course. “Republican and Democratic legislators confirmed there is discussion of an early retirement incentive for state employees, but no proposal yet. They say Mr. Paterson may propose one in his budget Dec. 16, a measure that could help longtime Republican Senate staffers ease out of state service by Jan. 1, when the Democrats are expected take the majority.”
In this topsy-turvey situation, perhaps I was too quick to criticize Governor Corzine. When be responsible when the future is doomed anyway? The future has been sold more than once. All that remains is an institutional collapse, whether we pay more or less, now when those responsible are around to feel it, or later when they are gone.