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California, U.S. must stop dreaming and face fiscal reality

By   /   Friday, January 20th, 2017  /   1 Comment

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Maybe it’s time to get real.

The idealized view of America that brought about the populist revolution in the November election is not going to come back.

Going back to 1970s or 1980s work rules would mean shackling millions of workers to jobs that offered little mobility, bare-bones pensions without inflation protection and uncertain prospects for affordable health care in retirement.

Moreover, the concept that we could easily go back to the heady days of Kennedy or Reagan-era tax cuts and spending is also a bit of a mirage. It may be possible to reform corporate taxes in a way that repatriates billions of dollars and simplify the tax code, but the days of easy fixes no longer exist.

Two developments during the past few weeks underscore how the best path forward is for California and the United States to stop dreaming and face fiscal reality.

First, California. The Jan. 10 decision by the state’s largest pension funds, CalPERS and CalSTRS, to drop their assumption about investment gains from 7.5 percent to 7 percent over three years is a welcome sign of clarity.

The reduction in assumed returns will send future pension obligations soaring by billions of dollars but it also is reasonable given that returns have been and will continue to be dampened by low interest rates and poor bond market returns.

What CalPERS and CalSTRS do will trickle down to cities and counties forcing them to recalculate contributions from both taxpayers and employees.

Although the reduction is nominally small, it is a big philosophical step. California is beginning to wake up to the fact that it can no longer kick its pension problems down the road.

There is a lot of difficult negotiating ahead and California will face deeper problems if there is another stock market crash. But facing up to pension problems is key if local governments are going to be able to provide roads, policing and infrastructure improvements in the future.

Now for the United States. On Jan. 17, the Government Accountability Office released its first-ever report on the nation’s fiscal health. The report underscores the fact that this is not a Kennedy or Reagan era scenario for fiscal policy.

The U.S. debt held by the public (not the Federal Reserve or Social Security trust funds) is now 77 percent of GDP and rising at a couple of percentage points per year.
Since the end of World War II, the average debt level has been below 50 percent — giving the Kennedy and Reagan administrations plenty of room to cut taxes and temporarily run bigger deficits. Today’s budget makers are hampered by the fact that Social Security and Medicare are beginning to deplete the surpluses built up over the years and the GAO warns that “the longer action is delayed the greater and more drastic the changes will have to be.”

On the current trajectory, the U.S. will face debts as high as the World War II peak of 106 percent of GDP “within 15 to 25 years,” the report said. One thing holding down deficits is the fact that interest paid on the debt is historically low but that era will be ending as the Federal Reserve normalizes interest rates.
The GAO report concludes that administrative actions to reduce payment errors, collect taxes on time and eliminate duplication and waste could reduce budget outlays by perhaps $500 billion or more per year.

But the reality is that the Trump administration will have to find ways to deal with entitlements if it truly wants to put the nation on a sound fiscal path. America’s pension system for workers in the private sector — the combination of Social Security, Medicare and IRA or 401(k) plans — has some advantages. The programs are portable, inflation-adjusted and, at least so far, guaranteed.

President Trump has said he wants to keep that guarantee intact. Eventually, just about everybody who looks at entitlements comes back to some form of the Bowles-Simpson proposals floated in the early days of the Obama administration and then rejected by Congress.

When it comes to California and the nation, clarity about the cost of retirement plans and entitlements must inform every major policy decision about the future.
CalPERS, CalSTRS and the GAO have made some important contributions to the debate about fiscal reform. Whether we will get real solutions remains to be seen.

• Reach Editor Henry Dubroff at [email protected]

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1 Comment

  1. lester katz says:

    So this is progress by your estimation. Calpers used absurd ROR assumptions for years. Sold as part of the
    fantasy that California could actually afford to pay the benefits that were promised by idiot, yes idiot politicians.

    I could go on and on but the benefits reaped on public workers in this state are criminal. Ever heard of “air time”.
    Who could ever think of such a concept and get this through. Of course, when these extra benefits can be paid
    for by 7.5% growth, who should be concerned?

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