In May, at a conference on “New Retirement Realities: Pensions at a Crossroads,” Northwestern University Professor Joshua Rauh predicted that within a decade, a number of states will be unable to meet their promised pension and benefit obligations.
This would put pressure on the federal government to bail out these states. Massachusetts, however, has already turned to the federal government for additional funds to fill the gaps in its budget for 2011, but our request failed to pass the U.S. Senate in June 2010. It is therefore unlikely that the feds will bail out any other states.
One cause of this fiscal crisis regarding underfunded retirement liability is that the financial market values have gone down in recent years, so the value of any funds held for pensions has substantially decreased. Another problem is that the size of government from the municipalities to the states to the federal government keeps growing even with the recent economic problems.
The Bureau of Labor Statistics (BLS) shows information about federal, state and municipal employment. At the federal level, excluding the U.S. Postal Service, the legislative branch of the federal government has 1 percent of the jobs, the judicial branch has 2 percent and the executive branch has 97 percent. The BLS estimates that by 2018, the jobs in the federal government will increase in all but one job category by 6 percent to 20 percent, with the largest increase for claims adjustors, examiners, investigators, tax examiners, collectors, revenue agents, buyers and purchasing agents.
At the state and municipal levels, excluding education and health care, the BLS estimates that jobs will increase by 3 to 19 percent in various job categories by 2018, with the largest increase for firefighters. So the problem for paying out pensions and other benefits exists at all levels of government, and the numbers is getting worse.
Another facet of this retirement liability situation is that, according to the BLS, health and life insurance, along with pensions, are more common in state and municipal governments than in the private sector. It must be noted that since the Economic Recovery Tax Act of 1981, many people working in the private sector have contributed to their own pensions with Individual Retirement Accounts. These IRAs (401(k) plans for private businesses) often get matching funds from employers for a percentage of the employees’ contributions, and the employees get tax incentives to participate since the contributions are paid in pretax dollars.
The income taxes on these contributions along with the earnings will be paid when the funds are withdrawn. There are IRA plans for nonprofit organizations (403(b) plans) and governments (457 plans). We have to consider that government revenue comes from income taxes, corporate taxes, property taxes, inheritance taxes, capital gains taxes, sales taxes and other taxes and fees too numerous to list, particularly here in the commonwealth.
We know that people leave Massachusetts to live in states with lower taxes, such as New Hampshire and Florida. In 2007, the unemployment rate was 4.2 percent, but since 2009, it has been hovering near 10 percent.
Some even believe the actual rate is closer to 20 percent because some job-seekers have given up looking. This has resulted in lower-than-expected tax revenues at the state and federal levels, which means lower-than-expected funds for the various levels of government and for the ever increasing public sector retirement liabilities. Of course, government does not make money; it only spends it. Money is made in the private sector with services and products that people want to buy. Profits from these private businesses are used to expand their businesses and provide more jobs. More jobs mean more tax revenue. The private sector is what makes the economy grow.
The unfortunate fiscal reality is more serious than the issues of underfunded retirement liabilities in various levels of government. With more people losing their private-sector jobs, with others being dependent on government for unemployment benefits and other types of assistance, and the increasing number of government employees, it is unlikely that government employees will receive the retirement benefits they have previously been promised.
At some point, we have to recognize that the private sector cannot fund the public sector when the private sector suffers from high unemployment and despite this, the public sector continues to expand. It is time for all of our citizens to work together to look at the bigger picture and realize that we are all in this together. Raising taxes to support a growing government and increasing benefits for public employees at the expense of the struggling private sector is unsustainable. Each side needs the other, and we must respect both sides and come together to resolve this dilemma. It will not be easy, but it must be done.
Barbara T. Bush is a candidate for state Senate for the Middlesex, Suffolk and Essex District.