The debt crisis at the state and federal level is going to create many unforeseen problems. One such problem that is coming to light is the early retirement of public sector workers who fear their benefits will be restructured in the years ahead. Some people will say this is beneficial because these workers will be replaced with younger workers with less generous benefits. However, the problem isn’t the structure of future benefits; the problem is the structure of benefits already promised. The bill is coming due and pensions just are not funded to deal with what it shaping up to be a mad dash to retire in the public sector.
People will act in their self-interest when push comes to shove. Public sector workers may say they are working for the betterment of society, but if their pensions are threatened, many will retire early. Don’t get me wrong- I am not blaming public sector workers for behaving this way; I’m just pointing out what human nature suggests is going to happen. In Wisconsin, retirement applications are up 73% from last year. In New Jersey, the 4 major pension funds saw a 60% rise in retirees. Although you can predict who will retire based on demographics, you can’t predict how legislation or an ongoing budget crisis will affect people’s actions. One of the problems of wages that are either cut or frozen is that employees who retirement benefits are based on their salary are incentivized to retire. This is a reality that the government is just not prepared for.
Big Changes Ahead
People tend to think think that events unfold in an orderly fashion. However, this is not the case. A negative feedback loop is likely to develop where budget problems force public sector workers to retire early, which further constrains budgets, which leads to even more early retirements. This creates a situation where a lot of skilled work is sitting on the sidelines while government expenses expand. This is exactly the kind of crisis that brought down the major auto companies in America. You simply cannot accrue expenses at a faster rate than you grow revenue without a day of reckoning eventually arriving.
States will be forced to raise taxes into an economic downturn, which is going to lead to disastrous results. I expect domestic migration trends, especially in the Boomer demographic, to reflect levels of taxation at the state level. States with onerous tax rates will be scratching their heads at why their revenues are coming in lower than projected. Real estate prices will also reflect levels of taxation. We need to get creative to solve this crisis. States need to restructure pensions and get back in touch with reality. Tax rates need to be held steady so that employers can actually plan for the future with confidence. Debt needs to be issued to states interest free. There is a way that we can gradually claw our way out of this crisis. However, at the rate we’re going, a big crisis is probably going to come out of nowhere.