Debtroit: Coming to a city near you
Townhall – Paul Jacob – 7/21/2013
The City of Detroit owes to creditors
$18 billion that it cannot pay back. Most of the debt is owed to those who
provided loans to the city by buying its bonds; next in line are the nearly
30,000 retired and still working city employees owed billions collectively in
future pension benefits, which are woefully underfunded.
What is more scary, because
it is more relevant to most of us, is that our own cities are currently
embracing the same stupid policies and employing politicians making the same
unfunded promises.
Last week, Moody’s Investor
Services downgraded the bond ratings of two major cities, neither named Detroit.
Chicago
Cincinnati
Research by Professors
Robert Novy-Marx at the University of Rochester and Joshua Rauh at the Stanford
Graduate School of Business looked at the pension commitments state and local
governments had already made and then calculated how much your taxes would have
to go up to pay for those unfunded promises. The professors found that, “ON AVERAGE, A TAX INCREASE OF $1,385 PER
U.S.
HOUSEHOLD PER YEAR WOULD BE REQUIRED, STARTING IMMEDIATELY AND GROWING WITH THE
SIZE OF THE PUBLIC SECTOR.”
We can blame the politically
powerful public employee unions for pushing for unsustainable benefits.
On the other hand, we can
blame our elected officials for agreeing to benefit packages they weren’t
honestly willing to pay for. But then, we elected those officials.
The solution is obvious: Don’t
allow our governments to make promises they cannot keep. While the law requires
that those workers who have earned pension benefits receive those benefits, no
law says we have to continue an unsustainable system that could lead to
bankruptcy.
Move new government workers
to the same retirement system used by most American workers: a
defined-contribution 401k-style program.
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