By Lois A. Scott.
Eight years ago, our country was in the grips of the worst economic recession since the Great Depression. The major financial markets lost more than 30 percent of their value as the federal government fought to protect jobs and stabilize our economy. Most economists now agree that the actions taken in the aftermath of that financial and economic whirlwind enabled the U.S. to bring unemployment in line and recover more quickly than our trading partners.
But the aftershocks of that time continue.
As the federal government provided temporary funding to hire public sector workers, state and local budgets grew to levels that could not be sustained once those federal dollars phased out. In addition, public pension plan assets plummeted, with many losing 30 percent to 40 percent of their total value. The unfunded liabilities of the plans exploded, putting even greater pressure on governmental budgets. It is difficult to see how investment returns can ever make up the lost ground. State and local governments got hit with a double whammy – operating deficits along with a pension funding crisis. Add in the deficit in repairing our nation’s infrastructure and our governments have hit a trifecta.
It’s no secret that governments throughout our country are struggling to figure out how to fix these financial problems. Attempts are made to reduce pension expenses by moving to a 401(k) style pension, reducing COLA’s, capping benefits, buying out pensions, etc. Pension and budget reforms are studied, debated and sometimes legislated and litigated. New revenues are chased and taxes raised.
Along the way, we have learned a simple truth: we are all in this together and must all share the burden of addressing the problems, including our public pension plans. Research shows that no single-handed approach (i.e. whether it’s raising taxes, cutting services or increasing workers’ contributions) can work. Rather the answer may be “All of the Above.” Policymakers will need to consider a combination of options – including new revenue – if they are to repair state and local finances and protect their economies. Increasing revenue as part of a multi-faceted approach to pension reform can help restore financial strength to our governments and lead to increased economic activity over the long term.
Someday, the economists will agree that aligning revenues and expenses is the only path forward.
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Lois A. Scott, former Chief Financial Officer for the City of Chicago, is a board member of the Retirement Security Initiative.