May 14, 2015
Alan Sloan and Cezary Podkul have a piece in ProPublica that tries to explain the origins of the serious pension shortfalls in Chicago, Illinois, and several other state and local governments. The basic story is that governments went many years without making required contributions, which eventually leads to a serious shortfall.
However, there is another part of this story which is worth adding. In the late 1990s, most pensions were viewed as very well funded. This was due to the extraordinary run-up in stock prices. Many state and local governments drastically cut back their contributions to their pensions since they saw little need. The stock market was doing it for them.
The problem was that the bubble burst (which bubbles do). When the bubble burst over the period 2000–2002, it made pensions appear much less well funded. However, the bursting also led to a recession which worsened the budget situation of governments across the country. State and local governments suddenly had to make much larger pension contributions at a time when they faced large deficits. Not surprisingly, many chose to instead stick their heads in the sand and pray that the bubble would reinflate.
It is worth including this history because it points to the sort of problems created by asset bubbles like the stock and housing bubbles. The conventional wisdom at the time, espoused by folks like Alan Greenspan and the Clinton administration, was that bubbles were no big deal. Greenspan argued the best thing to do was just let bubbles run their course and then pick up the pieces. The pension problems now being faced by state and local governments across the country are among the pieces.
Comments