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The War Between Public Pensioners and Tax Donkeys

Summary:
The migration is only beginning, but that’s only half the story. You know it’s serious when the newspaper of record finally reports it: A ,000 Monthly Pension: Why States and Cities Are Short on Cash (New York Times). It’s a long article but the summary is brief: corrupt politicos promised the moon to public employees, and now the fiscal chickens of insolvency are coming home to roost. Public pension obligations are rising so fast that even repeated tax increases can’t keep up. This is setting up a second front in the war between entitled Baby Boomers and younger taxpayers who pay most of the federal and local taxes. Public pensioners are a subset of the entitled Baby Boomers, but their pensions can’t be paid with borrowed money like

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The migration is only beginning, but that’s only half the story.

You know it’s serious when the newspaper of record finally reports it: A $76,000 Monthly Pension: Why States and Cities Are Short on Cash (New York Times).

It’s a long article but the summary is brief: corrupt politicos promised the moon to public employees, and now the fiscal chickens of insolvency are coming home to roost.

Public pension obligations are rising so fast that even repeated tax increases can’t keep up.

This is setting up a second front in the war between entitled Baby Boomers and younger taxpayers who pay most of the federal and local taxes. Public pensioners are a subset of the entitled Baby Boomers, but their pensions can’t be paid with borrowed money like Social Security and Medicare; public pension obligations come out of local and state taxes, and as those obligations soar then public services must be slashed and taxes jacked up by annual double-digit increases.

So there is a war brewing between public pensioners and the Tax Donkeys: the Unprotected who pay local property taxes on their homes, state and local taxes on their incomes, sales taxes on their purchases, junk fees on local government services, and so on.

Corrupt politicos created the war by over-promising benefits to public employees and ignoring fiscal realities. By the time the bill comes due, the politicos who rubber-stamped the unaffordable promises are themselves gorging at the public-pension retiree trough.

Not every public employee is receiving gold-plated pensions and benefits, of course, but that doesn’t negate the reality that nationally, public pensions are increasing faster than government revenues and the returns earned by the pension programs.

If the stock and bond markets suffer multi-year declines, even modest declines, the pension war will move from skirmishes to open political combat.The 2008-09 Global Financial Meltdown was a taste of the reality facing public pension programs: once annual returns slip from +7% annually to -7% annually, the pension plans are soon insolvent.

Like virtually all wars, there are asymmetries between the two combatants: in the war between public pensioners and the Tax Donkeys, the pensioners can’t switch pension programs, but the Tax Donkeys can move to lower-tax states.

Allow me to summarize for those who aren’t too squeamish: a lot of cities and counties are going to go broke, slashing services and jacking up taxes, all to no avail. The promises made by corrupt politicos cannot possibly be kept, despite constant assurances to the contrary, and those expecting services and taxes to remain untouched will be shocked by the massive cuts in services and the equally massive tax increases that will be imposed in a misguided effort to “save” politically powerful constituencies and fiefdoms.

These dynamics will power a Great Migration of the Tax Donkeys from failing cities, counties and states to more frugal, well-managed and small business-friendly locales. I’ve sketched out the migration in this graphic: the move by those who can from incompetently managed and/or corrupt cities/counties/states to more innovative, open, frugal and better managed locales.

Unlike Communist regimes which strictly control who has permission to transfer residency, Americans are still free to move about the nation. This creates a very Darwinian competition between sclerotic, corrupt, overpriced one-party-dictatorship states whose hubris-soaked political class is convinced the insane housing prices, tech unicorns, abundant services, and a high-brow culture ruled by an artsy elite are irresistible to everyone, and locales that are low-cost, responsive to the Tax Donkey class, welcoming to new small businesses, employers and talent, unbeholden to a politically-correct dictatorship and conservatively managed, i.e. not headed for insolvency, are no match for their elitist fiefdoms.

Not everyone can move. Many people find it essentially impossible to move due to family roots and obligations, kids in school, and numerous other compelling reasons.

Many people who are able to move are the Tax Donkeys who are paying the most taxes: self-employed entrepreneurs, mobile creatives, those with scarce skills and those who earn substantial incomes from royalties, patents and other forms of capital.

Charles Hugh Smith
Charles Hugh Smith is an American writer and blogger. He is the chief writer for the site "Of Two Minds". Started in 2005, this site has been listed No. 7 in CNBC's top alternative financial sites. His commentary is featured on a number of sites including: Zerohedge.com., The American Conservative and Peak Prosperity. He graduated from the University of Hawaii, Manoa in Honolulu. Charles Hugh Smith currently resides in Berkeley, California and Hilo, Hawaii.

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