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The Day After Tomorrow: The Political Economy of Public Employee Retirement Benefits

The Day After Tomorrow: The Political Economy of Public Employee Retirement Benefits. D. Roderick Kiewiet California Institute of Technology June 5, 2012 Institutions in Context: Dictatorship and Democracy University of Tampere. Some Recent News Items. 162,400 government jobs cut in 2011

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The Day After Tomorrow: The Political Economy of Public Employee Retirement Benefits

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  1. The Day After Tomorrow: The Political Economy of Public Employee Retirement Benefits D. Roderick Kiewiet California Institute of Technology June 5, 2012 Institutions in Context: Dictatorship and Democracy University of Tampere

  2. Some Recent News Items • 162,400 government jobs cut in 2011 • City of Highland Park, Michigan removed 1000 of its 1200 street lights • Caltech sells $350 million of 100-year taxable bonds at 4.7% • State and local government unfunded pension liabilities increase by 50% last year alone

  3. State and Local Government:Revenues and Expenditures

  4. Employee Pensions and State and Local Government Finances • Unfunded liabilities are large and growing rapidly. ( $1.5 trillion) Virtually all OPPEB’s such as medical care, are unfunded. • “Stimulus” transfers from the federal government have ended. • State and local governments have very little ability to raise additional tax revenue. • State and local government pension funds have been increasingly “gambling for redemption” by investing in riskier assets. • Many cities now allocate one third of their budget to retirement contributions. By the end of the decade this share will rise to over one half.

  5. Employee Pensions and State and Local Government Finances(continued) • Public employees’ contributions to their retirement funds are increasing rapidly. • State and local governments have reduced their work force and will continue to do so. • Debt service currently accounts for half of Nevada’s entire budget and 40% of Michigan’s. • Medicaid costs, which already account for more than 20% of state spending will continue to grow much faster than state revenues

  6. Pension Underfunding: How Did We Get Here? • Wagner’s Law • Niskanen’s Law • Demographics • Morgan’s Law • Ledyard’s Law

  7. Social Security and Medicare Costs as a Percentage of GDP

  8. OA SI, DI, and HI Trust Fund Ratios(Assets as a percentage of annual cost)

  9. Ratio of Covered Workers to Beneficiaries 1950-2050 1950 16:5 1960 5:1 1970 3:7 1980 3:2 1990 3:4 2000 3:4 2010 2:9 2020 2:5 2030 2:2 2040 2:1 2050 2:1

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