The financial meltdown and Great Recession is teaching an expensive lesson: When big institutions face financial crises, governments are all too eager to bail them out.
Wall Street? The federal government stepped in with the Troubled Asset Relief Program. General Motors? Uncle Sam again. Greece, Spain and Portugal? Germany will keep them going.
Now, a new crisis is coming to light. State-run pension systems across the country are grossly underfunded.
State pension systems are trillions of dollars short of the promises made to current employees. Those pension systems – and the states that run them – could be the next group begging for a federal bailout.
If that happens, Washington taxpayers will foot a big part of that bill.
For years, politicians in states such as Illinois and California have failed to fully fund pension systems that pay for their state and local government worker retirements. Those unpaid bills are adding up. Already, the conservative estimate of $2.5 trillion in shortfalls represents more than one-sixth of the entire U.S. economy.
As politicians slowly come to grips with the problem they’ve created, some are already looking to the federal government for a bailout.
Taxpayers can’t afford and don’t want another bailout. And Washington taxpayers would be particularly hard hit.
Washington’s pension funds are 95 percent funded, fourth best in the United States, according to the Pew Research Foundation. The Illinois system is 45 percent funded, California’s 78 percent funded.
Bailouts reward failure. Bailing out irresponsible states would send the message that fiscal discipline doesn’t matter; someone else can always be forced to pay the bills.
The opposite also is true: Bailouts punish success. States that are working hard to become economically competitive by reining in spending and fixing their problems won’t benefit from a bailout. Responsible states will be stuck paying for their profligate counterparts.
Is it really good to tell state politicians and voters that if they act responsibly, they’ll end up on the hook for others who don’t?
The Illinois Policy Institute, a nonpartisan think tank in Chicago, has developed a model that shows the impact of a federal bailout of state pension debt. A federal bailout of state pensions would require higher federal taxes and lower federal spending. States with the biggest pension shortfalls – such as Illinois – would benefit tremendously, while most states would suffer.
Washington’s pension system, for example, has fared much better than Illinois’. But if a federal bailout were enacted, Washington would be among the states hardest hit. The Evergreen State would pay a price as high as $17 billion, the sum of higher taxes levied on Washington residents and severe cuts in services and federal support.
There’s no denying that states’ pension funds are in trouble. But what they need are state-based reforms – not a bailout.
A bailout would make states like Washington pay for mistakes made in California and Illinois. That’s not only bad economics – it’s just plain wrong.