The looming tax increase

The closer you look, the smaller it gets

This has nothing to do with Democrats or Republicans or who is president.

Today’s Wall Street Journal shows that the effect of the financial crisis on states and municipalities (and taxpayers) is only starting to be felt. As state pension funds cut investment return forecasts (to reduce the need to take excess portfolio risks), the difference must be made up by taxpayers.

At Calpers, about 75% of payouts come from the pension fund’s investments, with the remaining 25% tied to contributions from California governments and employees. According to Pew, a hypothetical $100 billion pension fund that achieved a 7.75% return rate for 10 years would have about $211 billion. With a 6% rate, the same fund would grow to $179 billion—a difference of $32 billion.

That $32 billion will come on the backs of California taxpayers.

Note to IL residents: If Calpers is cutting from 7.75% to as low as 6%, consider that IL is still at 8.6% on an $8.7 billion asset pool.  If IL cut to 6%, that’s about a $4bn addition to an existing $45bn unfunded pension liability gap.

We’ve made promises to workers that we can’t afford to keep.  The Pew Center on the States reports that the total gap is about $1 trillion ($1,000,000,000,000).  Those promises were made to people that are critical to our survival,both literally and figuratively (e.g., firemen, policemen, teachers), who are relatively low on the pay scale and who aren’t eligible for social security.  It’s not as simple as cutting the payouts to the recipients.  The whole social contract needs to be rethought.

As being known as something of a cynic, I was disappointed in myself that I was continue to be surprised and disappointed by the lack of vision and the unwillingness of our elected officials to tackle the tough problems we face, preferring instead to focus on those less difficult issues that will offend no one and help keep them in office.  In the meantime, the problems created from when we were seemingly awash in money and nothing bad would ever happen to us, continue to get worse and the hole gets deeper.

The first rule of being in a hole is “stop digging”.  As a nation, our elected officials always seem to have shovels in their hands. (And that’s not a crack at the very necessary stimulus plan.)

One Response to The looming tax increase

  1. 1Dental says:

    Really interesting. Not sure exactly how to stop our elected officials from digging, but it does seem to me like, more than ever, people are motivated to make their voice heard and drive officials to do what they really want.

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