I know that pensions are out of the news right now and that defund is the defining issue of the moment. However, I think it is appropriate to revisit these issues from time to time.
Let’s consider somebody (Bill) moving from New York State to Illinois. The best estimate of New York’s unfunded pension obligations that I can find per capita is $814 while Illinois has $6,505. I often hear how governments should not renege on their obligations to their previous employees, however we should remember that governments are very particular things – they are the representation of the collection of citizens in any given location. So the question would be:
When Bill moves from New York to Illinois does he gain a moral obligation of $5,690 for each member of his family? If he moves from Illinois to New York does he shed an equal obligation?
In my opinion moral financial obligations are not the type of thing that can be shed simply by moving. For example, my credit card debt does not disappear when I move. Even debts tied to location (mortgages) do not disappear when I move but only when I pay the debt. So one of the following must be true of me as a state resident:
1) I am morally obligated to pay an exit tax when I leave Illinois ($26,020 for a family of four)
2) I take the obligation with me and Illinois should have a claim on my wealth even after I move
3) There is no moral obligation of citizens to pay back debts incurred by their government
I personally think 3 best represents reality. There are prudence arguments to be made (governments can operate best when they have an ability to issue bonds), however I don’t think that a city can bind a moral financial obligation on its future residents any more than a Board of Directors can bind a moral financial obligation on its workers. Take as another example Detroit with $11B of debt and 700k residents. If every person but one leaves is the last man standing left with a personal $11B tab? If we say no then we should admit that if there is not a single person in a city who is morally obligated to pay back the debt then the city does not have a moral obligation.
Why do I post this? Detroit, Stockton, Valejo, and other cities have been driven into bankruptcy over pension obligations. However more than that there is coming a barrage of unfunded liabilities in local and state pensions, Social Security and Medicare/Medicaid about which we will be told that we have a moral obligation to pay. Don’t buy this. I know there will be many here who this will anger, but I never promised to send the first 15% of my paycheck to FICA. That is not a promise I made and I don’t think I have a moral obligation to keep a promise my parent’s generation made to themselves on my behalf.
At some point in the very near future the impossibility of paying growing obligations with revenue from a shrinking tax base will meet reality. We need to prepare conservative responses to the crisis that will occur. We need to accept the reality that Social Security checks cannot be paid via printing presses for ever (Federal Reserve purchasing Treasury Bonds and declaring to the world what the interest rate will be while using quantitative easing to service the bonds and the revenue raised by the Treasury from the bond sales they make going to pay back the Social Security Trust Fund). We also need to accept that there will be a large cohort of underemployed and unemployed 20-30 year olds who will object to paying current retirees before meeting family obligations. When the obligation per worker doubles we need to decide whether we are going to require workers to pay the first 30% of their earnings and then after that pay the rest of their taxes and tell them that they are morally obliged to this setup.