Friday, September 03, 2010

California's Unsustainable Pension Burden

To get some idea of what sort of stealth government deficits are looming, it's worth reading California governor Arnold Schwarzenegger's August 27th Wall Street Journal editorial.

Arnold presented a bar chart showing California's past and projected annual retirement costs for public employees rising from roughly $5B in 2007, to $10B in 2013, and more than 20B by 2018.

Reading the list of actions by the state's government favoring public pension gives you a headache.

Meanwhile, the governor presents another graphic showing private sector job losses in the state totally 1.2MM since 2008, while public sector jobs have only barely budged, losing perhaps 10K.

It's difficult to understand how US equity markets can be expected to soar while lurking public sector deficits and excessive spending provide an offsetting drain on economic resources.

If California, once the prized growth engine of the US economy, has fallen into this unsustainable situation, how many other states are in similar straits? Where will the resources come from to provide for these unpaid public sector pension promises?

Federalizing them won't cure anything. It will only encourage more unaffordable pension promises.

It's articles like Arnold's which makes me sceptical that recent equity market rises are also sustainable for more than a few weeks at a time.

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