Not oceanography, silly—public finances:
The Northern Mariana Islands, a U.S. commonwealth, lie 5,000 miles off the coast of California, but they sent a shock wave across the Pacific last month when their public pension fund declared Chapter 11 bankruptcy. Legal experts say this is the first time a retirement fund has declared bankruptcy and could establish a precedent.
Cities that can’t pay their bills because of soaring pension costs can file for bankruptcy under the Chapter 9 municipal code as Vallejo, California did in 2008. If a municipal pension fund runs out of money, the city can use Chapter 9 to restructure its retirement obligations and other debts. See Prichard, Alabama and Central Falls, Rhode Island.
But Chapter 9 wasn’t an option for the Marianas because the islands are a commonwealth, not municipality. With its pension fund set to run dry in 2014, Chapter 11 seemed to be the only recourse since retirees wouldn’t accept a cut in benefits.
The Mariana case isn’t very different from broken-down cities like Central Falls and Detroit. In the 1980s and ’90s the Marianas used a tax windfall from a surge in foreign investment to boost public workers’ compensation. Government workers earn nearly three times as much as their private counterparts and can retire at age 60 with an annuity equal to 75% of their final salary. Their grandchildren are eligible for survivor benefits.
Their grandchildren are eligible for survivor benefits.
If that isn’t a perfect symbol of public services run amok. All of us, I believe, want to leave our children secure, able to take care of themselves and their families. Maybe we even have enough to carry that on another generation or two—see superstar athletes and performers and titans of business and industry. But a grade 13 clerk in the Department of Public Records leaving his retirement benefits to his grandchildren—to be paid for by someone else’s grandchild? They’re kidding, right?
Actuaries warned a decade ago that the retirement system was unsustainable, but lawmakers delayed reforms and skipped their pension bills. In 2006 they shifted new workers to defined-contribution plans, but immediate savings were sparse since more workers were retiring than being hired. The growing retiree-to-worker ratio has sent the pension fund into a death spiral.
Chapter 11 would ensure that retirees get pension checks in a couple of years. However, benefits will likely have to be cut by more than half. Such was the case in Prichard and Central Falls. All of this is a lesson that public employees have much more to lose than gain from thwarting pension reforms.
Of course they do—anyone can see that. Anyone who hasn’t come to expect a check, that is. But then, even they can do the math—they just expect someone else to carry the one (i.e. themselves).
To my knowledge, the point was first made by Mark Steyn: so-called “generous” benefits are anything but. They are paid for by someone else (making that person, at least in part, a slave to the beneficiary), and they are unsustainable. Your “generous” benefits are generous to you alone. Your kids won’t see them, and sure as hell your grandkids won’t. What European socialists (not to be redundant) call “austerity” is actually just minding the GAAP (Generally Accepted Accounting Principles). If Reverend Wright will allow me: Europe’s chickens (and America’s, soon enough) are coming home to roost.