In many Western economies the term “pensions crisis” has entered popular discourse, attributed to a variety of causes including an ageing population, under-funding, apathy towards saving on the part of the public, and poor financial returns. Perhaps more surprisingly, in recent years many emerging markets, including several of the BRIC countries such as Brazil and Russia, have been pulled into this debate.
A common theme of the discourse is that the crisis won’t affect the reader until some indeterminate (but distant) point in the future, and a sense of powerlessness – both individually and amongst politicians – to deal with matters. Public misunderstanding of the relative sizes of Government spends on pensions compared to “welfare” benefits (mainly those related to unemployment and disability) probably contribute to a lack of pressure on politicians to take action. A recent poll in the United Kingdom for the TUC reported a huge over-estimate by public on the amount spent on welfare as a proportion of total Government expenditures, and by implication, a significant under-estimate of pension expenditure.
In the USA, however, the debate has taken on a more urgent nature, and one which may provide lessons towards creating the political consensus necessary to take difficult decisions around pension funding and entitlement. This is because the “crisis” is currently centred on the ability of state- and city-level governments to meet their pension obligations to employees. The stakes are raised dramatically by the legal framework in which US State and Local Government operates. Many states are constitutionally barred from running budget deficits, and local authorities are able to declare bankruptcy, with potentially disastrous effects for their current and former employees. The latter threat has been dramatised to the US public by the City of Scranton, Pennsylvania, which is literally running out of cash. Previously famous only as the fictional home of the US version of sitcom “The Office”, Scranton has gained new notoriety for having to sack all its firemen, and employing a mayor who works for the minimum wage.
But while cities declaring bankruptcy make the headlines, the real crisis is arguably at state level, notably California and Illinois, due to the huge sums of money involved. Both states have seen their governors struggle to assemble the coalition needed for reform across the two political parties, and amongst many outside groups such as trades unions. In each case, a key part of the strategy has been to appeal directly to the electorate, to try and create pressure for the necessary compromises. In Illinois, State Governor Pat Quinn has even taken to YouTube in the company of an animated snake (the titular Squeezy) to try and dramatise the problem.
So far, it’s too early to say whether these tactics are working. In California, on the back of sales tax hike, the state’s finances have moved back into surplus for the first time in many years. Sadly, as the Economist reports this week, the situation in Illinois remains as intractable as ever. The obvious difference between the states is that in California, Governor Jerry Brown was able to combine his appeal to the public with the ability to use a referendum to allow them to directly vote on the necessary tax rises. Perhaps that’s the wider lesson: when given the relevant information and the power to take direct action, the public can be convinced of the need to tackle seemingly intractable problems such as a pension crisis.