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When You're in a Hole, Keep Digging

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Mike Shedlock writes,

New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes.

Considering that the pension fund needs $118 billion to be fully funded, $60 billion in the hole is kind of a lot. I love the way that the solution is to not put any more money into the pension plan until 2012. No doubt, the Obama Administration's "economic recovery package" will bring Federal tax money to the rescue. I am convinced that those of us who save for our own retirement are going to be taxed to pay for other people's defined-benefit plans. For some reason, this crime bothers me even more than most other government crimes.

Coming soon: a "Medicare payment holiday," in which the solution to the trillions of dollars of unfunded liabilities in Medicare is to divert payroll taxes elsewhere.

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CATEGORIES: Fiscal Policy

COMMENTS (10 to date)
El Presidente writes:

I would advocate a funding contingency mechanism that REQUIRES states to levy a certain proportion of their revenues through property tax in order to be eligible for federal formula monies. That would set a new competitive equilibrium among them and give them all room to tax responsibly, rather than leaning so heavily on cyclical revenues like sales and income taxes.

This would solve a lot of our troubles in California. It would shift the tax burden in such a way as to minimize the financing cost we incur to obtain operating revenues because of the low lows of revenue we experience during contractions. The highs never make quite enough money to pay back what we have to borrow to maintain services in downturns. Thus we have a perpetual structural deficit which slowly erodes public assets and quality of public services. It's just good fiscal management to reserve interest financing for long lived assets such as infrastrucure or durable goods while financing operating expenses through regular revenues. Sinking funds could work too, but I prefer a lean budget so as to minimize the efficiency loss from state governments holding surplus and the propensity to use those state funds for subsidies to supporters with diminished democratic accountability.

This is one more reason why I will never become president of anything besides my back yard (I'm sure you can make a list of the others).

Dan Weber writes:

A talking head on NPR was saying how economic relief needs to be delivered to where it's "needed."

It looks like New Jersey is trying really really really hard to be "in need."

Bob Hawkins writes:

Moral hazard, good and hard.

Troy Camplin writes:

Check this out:

frye writes:

Fry: If I stopped to think ahead, I wouldn't be Emperor. And I wouldn't even be here in the year 3000. It's just like the story of the grasshopper and the octopus. All year long the grasshopper kept burying acorns for winter, while the octopus mooched off his girlfriend and watched TV. Then the winter came, and the grasshopper died, and the octopus ate all his acorns and also he got a racecar. Is any of this getting through to you?

Gottask writes:


With all due respect, I would suggest that anyone with medium to high levels of insight/understanding into the economy and political system should have foreseen/assumed this (a bursting economic bubble & government backstop of defined & public employee pension plans) several years ago and prepared accordingly (ie by leaving the US physically or financially, setting aside additional personal funds, and/or lobbying the government to create anti-backstop laws).

Anyone who did not do the above should feel personally responsible for their own action or inaction.

Sorry, but this is one of the two times out of a hundred that I do not agree with you . ..

JKB writes:

"I am convinced that those of us who save for our own retirement are going to be taxed to pay for other people's defined-benefit plans."

Got to share the wealth. Just because you planned and sacrificed doesn't mean that those who partied and spent should do with out. It the had to do without that would mean personal accountability and such a concept would be bad for their self-esteem not to mention rock the very foundation of the Woodstock way of life.

But you're right in that those who saved are to be taxed. I've been debating on whether to just spend it all now before the Pessimist in Chief confiscates it all. At least that way, I'd get some benefit from my past earnings I foolishly saved.

Ella writes:

Fry: Are you Bilbo the Great?

As for Arnold's point, this is my fear. "I am convinced that those of us who save for our own retirement are going to be taxed to pay for other people's defined-benefit plans." That really comes down to three potential evils, right? Capital levies, nationalizing retirement accounts, and tax increases. Is there anything else that can go wrong? I'm trying to figure out how to save myself.

And, like JKB, I've knocked a few purchases off my wishlist because there's no reason to wait. I have never understood so well the expression "Eat, drink, and be merry, for tomorrow we die."

But that'll help the pension situation anyway. Always a silver lining.

Ella writes:

One thing, how does all of this affect the inflation rate? I'd read some hopeful arguments in favor of deflation, but this screams hyper-inflation.

Dr. T writes:

Gottask, you are being naive. There are a number of ways the government will financially harm those of us who saved for retirement. The easiest will be to heavily tax non-Social Security retirement income. The second easiest will be to apply a means test for Social Security and Medicare: wealthy folks and middle class folks with large pension plans will be ineligible for either program despite decades of payroll deductions. The third way will be to implement a wealth tax (an idea recently touted by Obama) with retirement monies included in the calculations of total wealth. I'm sure government bureaucrats can come up with additional ways to siphon money from our retirement funds while distributing money to failed government and corporate pension plans.

When my wife and I started retirement planning in 1989, we assumed that we would receive no Social Security or Medicare benefits. We believed that both programs would go broke before our retirements (in 2022), and that they would apply means testing for eligibility. I still believe this.

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