It's the Unfunded Liabilities

Let’s evaluate the budget situation in Wisconsin. This year the state budget shortfall is about 137 million dollars. The state has a cumulative debt of about 3.6 billion dollars. But what’s worse, the Badger state has a deficit equal to 18 billion dollars in terms of unfunded liabilities. For some reason, liberals fail to understand that the worst number in the Wisconsin budget is the unfunded liabilities – not the current debt or the projected debt for the upcoming year. When it comes to a fiscal understanding of accounting – progressives are very short sighted. Unfunded liabilities are exactly that, money that is guaranteed to workers that is not currently paid for in future budgets.

Yes, union workers in Wisconsin agreed to a pay cut. But for anyone who has owned a business or worked in the real world understands that a worker’s salary is not an unfunded liability. An unfunded liability is what a worker will earn when he or she is not working - vacation, sick pay, personal time off, and retirement pension and healthcare benefits. Therefore, pay cuts and pay freezes really do very little to affect the billions in unfunded liabilities. The effect of a pay cut on a pension can vary depending on the pension formula. Many pension formulas average the pay of the last 5 years of service for any employee. Hence, salary averaging negates the effects a pay cut can have on a pension. Thus, much more is needed than just a pay cut to combat unfunded liabilities. State governments need to cut into the liability deficit and the only way to do that is to cut pensions and other worker benefits. This is business 101. It is for this reason when the President proposed a pay freeze, for all federal employees, it did very little to effect the overall debt and it did nothing to combat the unfunded liabilities faced by the federal government.

And for those of us who think public workers are being mistreated - here are some statistics about the pay gap between public and private sector workers. According to a USA Today article (published last year) the average public sector worker is paid about 123 thousand dollars (including benefits) and the average private sector worker receives about 61 thousand dollars (including benefits). Public workers average nearly 40 dollars per hour (including $13.40 an hour for benefits) while public sector workers earned about 27 dollars an hour (including 8 dollars per hour in benefits). And what's worse is that public workers work 52% longer in terms of years to retirement and they are 27% more productive (look at the Post Office vs. UPS or Fed EX, or Fannie vs. AIG, or NASA vs. Lockheed, and so forth).

One reason for these gaps in benefit payments is because public workers 403b is generally a retirement system while private workers 401k is a contribution system. A private worker will receive, for retirement, what he or she contributes (plus any corporate matching and gains) to the 401k account (not a penny more). Meanwhile, a public retirement system works more like an insurance policy, and with increases in life expectancies the average public sector worker is receiving well over 100 thousand more dollars in retirement benefits than what they paid into the system.

For the same reason federal social security and Medicare systems need to be reformed. With baby boomers hitting retirement, the unfunded liabilities for these systems is going to sky rocket. Today, it is estimated that the unfunded liabilities for social security and Medicare stands at 40 trillion dollars by the year 2040!