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Pension Shortfalls: A Bipartisan Opportunity?

February 1, 2013 by Ike Brannon
In year four of a tepid economic expansion, the budget woes facing the typical state can seem unrelenting. Demands on social services show no signs of abating, while revenue has yet to return to its pre-recession levels, leading state governments to construct annual budgets that are balanced by increasingly complex (and dishonest) accounting tricks. Nowhere is this more true than in Illinois. The Prairie State is one of a number of states whose government has felt compelled to raise taxes to help bridge the budget gap. Maryland increased tax rates on upper-income earners and small businesses earlier this year. Illinois, which is constitutionally bound to a proportional income tax, increased tax rates by 60% on everyone, rich and middle-class alike. The difference between Maryland and Illinois, however, is that Maryland has the defense contracting industry and a horde of government mandarins residing in its D.C. suburbs who seem willing and able to support its profligacy, leaving it more room to make policy mistakes. The citizenry of Illinois is not that pliant. Illinois’ shortfall cannot be erased merely by a few years of robust growth: It has an unfunded public pension liability unmatched in the country that’s been compounded by a government that’s spent lavishly to buy votes for over a decade. Illinois is just about out of options, other than actually fixing the problem, that is. The state’s recent tax increases may have papered over its short-term deficit, but they created a longer-term problem that is just now becoming apparent. The problem is that the “temporary” tax increases (they’re to expire in 2015) look to many like merely a down-payment for what has to occur down the road if the state continues to ignore its spending issues. As a result, businesses (and skilled workers) have been voting with their feet and relocating elsewhere. The governor has responded to this exodus by doling out special tax breaks to a variety of major businesses that threaten to move, but smaller businesses have no leverage, and those are typically the engines of job growth in most states. Some of these corporate welfare payments seem almost comical: Sears may be an iconic name, but no one thinks that it’s going to be creating any new jobs in the state in the future. The ironic thing about the enormous state pension shortfall is that it might be what ultimately drives liberals and conservatives to work together. While Republicans want to reign in the pension shortfall to ensure that taxes don’t go up again, the enormous unfunded pension liability frightens liberals because it threatens to crowd out their projects as well. Want more state intervention for low-income preschool children? Worthy, but unaffordable. More robust health care options for low-income residents? Can’t be done on the current dime. Improved roads or mass transit? The money isn’t coming from D.C., and there’s none in the state’s till. If liberalism in Illinois is to mean anything other than satiating public-employee unions, the state’s spending must be brought under control. The baby steps taken thus far — such as increasing the retirement age for state employees hired after 2009 — have been politically easy but do not come close to addressing the enormity of the pension shortfall. Some day soon an Illinois government is going to have to change the pension benefit structure for current state workers, or the bond markets are going to impose a day of reckoning that will make fixing the state’s fiscal woes a lot more difficult.

Author

Ike Brannon
Ike Brannon

Ike Brannon served as an Economic Growth Fellow of the George W. Bush Institute from 2012 to 2015. He has a Ph.D. in economics from Indiana University and a B.A. in math, Spanish, and economics from Augustana College. View his full bio

Full Bio