Even in the midst of the turmoil in the Middle East and the horrific scenes of the earthquake and tsunami in Japan, the ferocious political battle raging in Wisconsin between Governor Scott Walker and the public sector unions has riveted the attention of America over the past several weeks. Stemming as it does from a conflict between the virtues of fiscal responsibility and keeping promises to citizens, what is happening is Wisconsin can be seen as a preview of what is going to be happening all over the country in the coming years.
When it comes to state pension funds, misguided leaders and a distracted electorate have created an unholy mess. For decades, individual state governments have been maintaining large pension funds for teachers, police officers, state agency employees, and other groups, financed by contributions from the employee themselves and from the state governments, and also earning revenue from supposedly conservative and reliable investments. Unfortunately, the planners seemed to have made best-case-scenario assumptions regarding the return on these investments, and hence failed to put enough enough state money or require sufficient employee contributions to keep these fund solvent.
Because of this, a large number of these state pension funds will be running out of money in the coming years and afterwards be unable to pay the recipients the benefits they have been promised. The pension funds of Oklahoma, Louisiana, Illinois, New Jersey, Connecticut, Arkansas, and West Virginia are scheduled to run out of money before the decade is over. Thirty other states will have exhausted their pension funds before 2030, just nineteen years from now. We are careening towards a catastrophe.
To give a single example of the crisis, take a look at Ohio. According to Dr. Joshua Rauh, Professor of Finance at Northwestern University, "Ohio collected $26.4 billion in tax revenues in 2008. If their pension funds run dry in 2023, they will face $19.1 billion of benefit payments owed in 2024 out of the general revenues. That's over 72% of 2008 tax revenue." Crunch the numbers as you like, there is clearly no way that this can work.
The case of Ohio, needless to say, is hardly unique. Short-sighted leaders have been making promises to state employees that simply cannot be kept. They did this either out of ignorance or because they did not care about what would happen, knowing that they would long since have left office by the time the day of reckoning arrived. The people believed the promises, making the usually fatal mistake of trusting their elected leaders without bothering to do the math for themselves.
The scenes in Wisconsin have been quite dramatic and surprising. We have seen protesters literally take over the Wisconsin State Capitol building, and both the Democratic and Republican parties use obscure parliamentary tricks in efforts to outwit one another. We even saw a deputy attorney general of Illinois publicly call for the use of "live ammunition" and "deadly force" against the Wisconsin protesters. There was no actual violence, but it would not have been particularly surprising if there had been. Next time, things may take a turn for the worse.
Because there will certainly be a next time. The protests and political turmoil we have seen in Wisconsin are going to be repeated all over the country as citizens realize that the state pension funds are insolvent and that the promises which have been made to them by elected officials are castles built on sand. Solving these difficult problems will require a good blend of courage, compromise, and common sense, exactly those virtues which seem to be utterly lacking in both our elected officials and the population at large these days.
It's going to be a bumpy ride.