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Saturday, December 10, 2005

Pensions and prospects for the boomers.

I didn't realize I was breaking news in my Thursday post until Friday's Seattle PI came out. The top of page one: "State pension fund billions in red." Subhead: "Gregoire vows to put money into system, 'stand by obligations.'" I fully expect today's paper to tell us, "Eleventh planet found at the edge of the solar system."

Now if we could only get them to "discover" the fraud in the Ohio elections.

As I pointed out on Thursday, in spite of new revenue forecasts, there is no big surplus for Olympia to spend, largely because lawmakers have to cover the accounting gimmicks they've used to balance the budgets of the last four years. The chief account that's been gimmicked is pensions.

At least it's a good thing the mainstream press is publicizing the problem, right? Here it is on the front page of the PI.

Unfortunately, as the media spotlight moves to illuminate this event in the long-term budget squeeze, other crimes pass into the dark. The PI article, for example, puts the onus for pension problems on the stock market bubble, which made funding them easy in the 1990s and hard afterward. Forgotten in the shadows is the loss of the motor vehicle excise tax, 7% of state revenue. This is the real reason we needed to raid pensions in the first place. Were that 7% still in the budget, there would not only be fewer Hummers on the road, there would be no need for accounting gymnastics in Olympia. This selective memory by the media amounts to distortion, a fun house mirror, remembering things we couldn't control and forgetting things we could. It hides the mechanical procession of cause and effect, which we need if we're going to learn from our mistakes.

(You wonder how many state, county and city employees would have voted for the anti-tax initiatives if it meant putting their pensions in trouble. Timmy didn't mention that when he promised government would find the money somewhere.)

This is the model, the recipe, for the demise of social security. True, the trust funds aren't literally left even partly empty as the state pension accounts were, but this is more a difference between being able to run deficits and print bonds (the feds) and having to balance your budget (the state). By being able to run the astronomical deficits, the federal situation is, in fact, far worse.

Imagine with me and economists like Paul Krugman, if you will, the day we have to start paying out to cover the social security retirement benefits for the boomers. Those government bonds that fill the trust fund accounts now need to be honored. Thus there arises the need to raise taxes. Uh-oh, taxes are evil. We may have a problem. Now imagine the economic climate has gone cold. Raise taxes or opt out on pension obligations? Now factor in the possibility that rest of the world has gotten tired of loaning us money. Maybe it wants, say, 10% or 15% interest instead of 5%. It does not require Nostradamus to see an amount far exceeding the current level of the entire federal budget going out in just debt service and social security payments.

This is the true danger to social security, not those concoctions drawn up at the behest of our beloved W to justify his privatization schemes.

That is, to be perfectly clear, social security is well a run and solvent program, but it depends on the integrity of "the full faith and credit of the federal government." Will taxpayers in twenty years be as generous as we imagine? Will they say, "Sure, we recognize our obligation, our intergenerational contract. Even though you were not willing to balance your budgets, even though you shifted your tax burden to us by your borrowing, we are going to go ahead and bite the bullet for you?"

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