A tsunami of bankruptcy faces the federal government as the baby boomer generation retires unless Social Security, Medicare and Medicaid are fundamentally reformed soon. State and local governments face an equally devastating financial wave of their own and for many of the same reasons.
The Governmental Accounting Standards Board is forcing state and local governments to come clean about the costs of the health and pension benefits promised to teachers, police and fire personnel, dog catchers, welfare administrators, game wardens, health inspectors and the hundreds of other varieties of public employees. Credible estimates of those liabilities must start being reflected in financial statements no later than 2008. Standard & Poor’s, a bond rating agency, estimates that these formerly hidden costs could top $500 billion nationwide; JP Morgan’s projections go as high as $1.3 trillion.
“This is a very, very serious challenge,” Ronald Snell, director of state services for the Colorado-based National Conference of State Legislatures, told The Examiner. “We don’t have a clear sense of what the numbers are going to be, but they are going to be in the billions. Governments are being forced to recognize the obligation that already exists. It’s a problem of immense magnitude.”
How immense? Maryland, one of the first states to hire an actuary to estimate its current employees’ future health care costs, was stunned to discover that the state is liable for $20 billion in retiree health care benefits as current employees retire during the next 30 years.
Virginia Comptroller David Von Moll provided The Examiner with a preliminary list of the commonwealth’s current annual unfunded liabilities: $2 billion, or roughly $60 billion over 30 years.
Generous defined-benefit packages — the government promises a fixed pension amount — have long been used to recruit government workers, but state and local officials hid the long-term costs of these perks from taxpayers. The new GASB standards require officials to admit the costs and put aside sufficient funds to cover them. Not doing so risks a jurisdiction’s ability to borrow money or float bonds.
Some states have tried to fix their unfunded liabilities. Alaska is one of two states to adopt a 401(k) defined-contribution retirement program for new hires, but the measure faces a court challenge by public employee unions. The individual employee decides how much to save towards retirement under a defined-contribution plan. The unions killed similar proposals in California, Massachusetts, Rhode Island and South Carolina.
Unless perks for the nation’s 24.5 million public employees are trimmed in some way, taxes will go up to cover the staggering future costs. But higher taxes will make it that much harder for private sector workers to save for their own retirements, leaving millions with dangerously tattered safety nets just as Social Security and Medicare hit the wall.
