Comment by AnthonyMouse | Hacker News Reader

Comment by AnthonyMouse | Hacker News Reader

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> OTOH, how to fund pensions properly is a solved problem.

There is another fine way to handle it, which is to use a defined contribution plan rather than a defined benefit plan.

The problem for a lot of states is that it's already too late for any of that. It isn't that we don't know how to do it right, it's that they've been doing it wrong for 50 years and now the account has insufficient funds to cash the checks.

The states essentially borrowed billions of dollars from their pensions without any available future revenue source from which to pay that amount of money back.

So now they have two problems. The first is that if they don't want to be having this problem indefinitely they have to start contributing more than they have to the retirement funds of the current government employees, which means raising taxes or cutting spending (or, similar but different, reducing the number of government employees). And the second is that they have to either pay the shortfall for the existing pensions out of current revenues, which means raising taxes or cutting spending again, or they're filing for bankruptcy.

But nobody ever likes any of those options.

It’s not that simple at all.

Sovereign entities like state governments have the option of simply not paying creditors. Bonds get renegotiated, pensioners get scrip instead of cash.

Ultimately, these impossible obligations that US government subdivisions have will be paid for via inflation. The US has the unique ability to tax wealth globally via the dollar.

Cities go bankrupt, states and territories do not. Pension obligations are generally state obligations.

> Sovereign entities like state governments have the option of simply not paying creditors. Bonds get renegotiated, pensioners get scrip instead of cash.

This is a description of bankruptcy.

> Ultimately, these impossible obligations that US government subdivisions have will be paid for via inflation. The US has the unique ability to tax wealth globally via the dollar.

The states aren't subdivisions of the federal government. The federal government could bail them out, but it's going to be busy with its own debts (see also social security and medicare, to say nothing of the outstanding treasury bonds).

Bankruptcy is a court controlled process and creditors can seize assets in the process. With a sovereign, the conversation is very different.

The feds will ultimately need to bailout the states and the markets know it at some level.

>The US has the unique ability to tax wealth globally via the dollar

Cool thought, and sounds pretty good as someone who lives in the US. Guess there are certain perks to being the world superpower.

This works fine but you can only do it if there are large foreign reserves of your currency. Now, since foreign reserves of USD are massive, we can print a lot of money (relatively) before it becomes a problem, but it isn't like this exempts you from market effects. The reason foreign reserves of USD are so high in the first place is that we usually do this very little.

The US also has to keep the USD a just-safer investment than other world currencies, held by other governments with their own issues. As long as USD is the safest investment, the US will never default. Don't outswim the shark, just the slowest swimmer and all that.

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