Across the country, states are experiencing a pension crisis that could leave them defaulting on millions of dollars in retirement benefits. Fiscal irresponsibility enabled by the federal government has allowed pensions to go underfunded by anywhere from $1.5 trillion to $5 trillion dollars, now individual states are experiencing the strain of making unrealistic promises in defined benefit plans.
A state’s ability to fund their pension plans is determined based on net amortization, or the measure of whether funding policies in place in state and local governments are sufficient to reduce pension debt in the near term.
Despite being underfunded in teacher’s retirement systems an estimated $71.4 billion alone, the state continues to make promises for high teacher salaries and pension promises. Between 2010 and 2014, the Northwest Herald reports this causes 89 percent of new dollars spent on education to go to retirement costs. Rather than assisting teachers with resources and materials in the classroom, states are struggling to meet unrealistic pension promises.
One reason states might be ignoring the consequences of defaulting on these payments is simple, perhaps they believe the federal government will save them.
Currently, under Section 14(2)(b)(1) of the Federal Reserve Act the Fed can purchase municipal bonds from state and local governments for periods of 6 months. If a state is unable to make payments to state pensions for example, this would allow the Fed to essentially take the debt from the state governments and bail them out of their situation.
Essentially, states are not bound to fiscal responsibility because they have the printing press of the Federal Reserve to save them from default.
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The state and local government pension crisis places strain on everyday public employees who were falsely promised extravagant retirements, in the meantime bankrupting entire cities. Babin’s legislation prevents the federal government from enabling this blatantly abusive practice, putting states on alert that they had better get their acts together and save themselves.
Read more: CRN
Image credit: www.illinoispolicyinstitute.org.