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Ground Zero for the state-pension meltdown is Springfield, Ill., and D-Day comes around 2018: Thats when the state that nurtured the political career of Barack Obama is expected to be the first state to run out of money to cover its retirees pension checks. Eight years and thats assuming an 8 percent average return on its investments. (You making 8 percent a year lately?) Under the same projections, Illinois will be joined in 2019 by Connecticut, New Jersey, and Indiana. If investment returns are 6 percent, then 31 U.S. states will run out of pension-fund money by 2025, according to Rauhs projections.
States arent going to be able to make up those pension shortfalls out of general tax revenue, at least not at current levels of taxation. In Ohio, for instance, the benefit payments in 2031 would total 55 percent of projected 2031 tax revenues. For most states, pension payments will total more than a quarter of all tax revenues in the years after they run out of money. Most of those pensions cannot be modified: Illinois, for instance, has a constitutional provision that prevents reducing them. Unless there is a radical restructuring of these programs, and soon, states will either have to subsidize their pension systems with onerous new taxes or seek a bailout from Washington.
So how much would the states have to book to fully fund those liabilities? Drop in another $3 trillion. Properly accounting for these obligations, that takes us up to a total of $19.5 trillion in governmental liabilities. Bad, right? You know how the doctor looks at you in that recurring nightmare, when the test results come back and he has to tell you not to bother buying any green bananas? Imagine that look on Tim Geithners face right now, because we still have to account for the biggest crater in the national ledger: entitlement liabilities.
The debt numbers start to get really hairy when you add in liabilities under Social Security and Medicare in other words, when you account for the present value of those future payments in the same way that businesses have to account for the obligations they incur. Start with the entitlements and those numbers get run-for-the-hills ugly in a hurry: a combined $106 trillion in liabilities for Social Security and Medicare, or more than five times the total federal, state, and local debt weve totaled up so far. In real terms, what that means is that wed need $106 trillion in real, investable capital, earning 6 percent a year, on hand, today, to meet the obligations we have under those entitlement programs. For perspective, thats about twice the total private net worth of the United States. (A little more, in fact.)
Suffice it to say, were a bit short of that $106 trillion. In fact, were exactly $106 trillion short, since the total value of the Social Security trust fund is less than the value of the change youve got rattling around behind your couch cushions, its precise worth being: $0.00. Because the trust fund (which is not a trust fund) is by law invested (meaning, not invested) in Treasury bonds, there is no national nest egg to fund these entitlements. As Bruce Bartlett explained in Forbes, The trust fund does not have any actual resources with which to pay Social Security benefits. Its as if you wrote an IOU to yourself; no matter how large the IOU is it doesnt increase your net worth. . . . Consequently, whether there is $2.4 trillion in the Social Security trust fund or $240 trillion has no bearing on the federal governments ability to pay benefits that have been promised. Seeing no political incentives to reduce benefits, Bartlett calculates that an 81 percent tax increase will be necessary to pay those obligations. Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.
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