Recently the Postal Service has announced they will default on or about August 1st. The reason for the heads up and default warning is, they owe 5.5 Billion Dollars to the Postal Employee’s Pension Fund. While this is a lot of Money, it pales in comparison when you consider the State of Illinois owes its public employees unions approximately 87 billion, and approximately 96 billion for California. Obviously, these are not the only ones with Pension Fund liability. Over the course of the last two weeks, we have seen a spate of Municipalities file for bankruptcy. San Bernardino, Mammoth, Compton all cities in California, are either going to declare, or, are threatening to declare Bankruptcy. Why???? In just about all cases, the pensions and benefits for public employees consumes a major portion of their yearly budgets.
Okay, so the question then becomes, why are these states so far underwater when it comes to Pension Funds? The reason is quite simple. Just about all of these pensions funds are based upon an annual increase of between 7 and 8% a year. These double every 8 years or so. Let me ask you, do you think this is, or has been, realistic? Let me also say, yes…..These municipalities made a deal with the devil so to speak, when they entered into these brainless agreements with the employee unions, nevertheless, the sums are staggering and the the 64,000 dollar question is, are they going to pay, or, make these pension funds whole?
I would suggest these Pension funds will not be made whole as that which you can not pay…won’t be paid. There may be exceptions but look at the cities going Bankrupt right now. They can’t pay and if you think they are going to raise taxes to cover this, I would suggest you are on dream street as the general working public has to put money in a 401 K program to even have a retirement. The fact of the matter is, the public employees were lied to. If you do the math, there was no way this was going to be sustainable and we have now reached the point that cities are going broke because they can’t make it based upon the old formula.
So what is the solution to this? Well I think the public employee’s will need to adjust to different formula that is sustainable based on contributions from the employee just like companies in the private sector do. Do I think the public unions will go along with this? Absolutely not. Just look at Wisconsin when Governor Walker asked the public employees to pay a small percentage of their retirement. The unions went nuts and the recall was on. Be that as it may, I go back to my previous statement . That which can not be paid… won’t be…..