By Arnold Kling
$1 trillion. That’s the gap at the end of fiscal year 2008 between the $2.35 trillion states had set aside to pay for employees’ retirement benefits and the $3.35 trillion price tag of those promises.
…To a significant degree, the $1 trillion reflects states’ own policy choices and lack of discipline
• failing to make annual payments for pension systems at the levels recommended by their own actuaries;
• expanding benefits and offering cost-of-living increases without fully considering their long-term price tag or determining how to pay for them; and
• providing retiree health care without adequately funding it.
In explaining that the states are unable to spend more during a recession, Paul Krugman coined the phrase “fifty Herbert Hoovers.” May I suggest that “fifty Bernie Madoffs” would be the way to describe their pension decisions. Of course, unlike Bernie Madoff, the states wiill almost certainly be bailed out by the Federal government. Which itself is the 51st Bernie Madoff, making promises to future recipients of Social Security and Medicare that it has no ability to keep.