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.
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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