State Pension Underfunding

While the majority of state governments are effectively bankrupt, those who have are drawing state pensions or will qualify for one should pause and consider whether the money for their payments will continue to be available. Most municipal pension funds rely on accounting tricks to stay afloat, as a recent, well-written New York Times piece noted. The actuaries who put together these financial houses of cards are resorting to increasingly risky, unsupportable assumptions in order to justify current payouts. What's obvious is at these accounting schemes will collapse, as the American mortgage market did a couple of years ago.

What's also painfully evident is that most Americans are in denial over the extent of the nation's financial woes. The current dialogue unrealistically focuses on the "recovery" in our midst, while passing over strong evidence to the contrary, such as the implications of the inability or unwillingness of small businesses to create any new jobs to replace the millions lost since the fall of Bear Stearns. The proposed lifting of the "temporary" Bush tax cuts for the most prosperous two percent of American households has generated protests from those who firmly believe the massive transfer of wealth from the have-somethings and have-nots to the have-a-lots is sound public policy. No one, regardless of political ideology, has realistically proposed how this country will pay for its startlingly high fiscal deficits. A Chinese government official this summer characterized the United States as a financially bankrupt nation. Considering the People's Republic of China is arguably the largest single holder of US Treasury debt, shouldn't that statement have raised profound questions about the American economy's "recovery"?

I once suggested to a public employee that a day will come when municipal entities will approach pensioners a crisis-generated, take-it-or-leave-it deal: a cut of forty cents on the dollar on all current and subsequent pension payments. I understand pensions are legally sacrosanct, but that was also the status of holders of senior General Motors debt during the firm's federally-engineered bankruptcy. Nearly all states are broke; the largest state, California, has issued IOUs for vendor payments in the past year. If nations can effectively declare bankruptcy via debt restructuring, loan forgiveness, and other tactics, so can provincial entities such as American states.

Until Americans get past their unwillingness to acknowledge its descent from the financial heights, there can be little progress toward rebuilding our fragile economic system. The political crisis swirling around pension payments is merely a symptom of a larger ailment. Today's capitalist "heroes" are deal makers and financiers rather than manufacturing visionaries (with the notable exception of Silicon Valley) and resource discoverers. The principal problem with the Wall Street crowd is that they don't make anything. They simply deploy capital. While that's a necessary condition to sustain the vitality of our country's economy, it is a far from sufficient one. The notion that Asian economic powers will continue to financially support our nation's debt is the national equivalent of playing with fire. And the last thing we need is an American Nero playing music while all around him -- or her -- burns.