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Another Problem Inflation Would Help June 13, 2010

Posted by federalist in Economic Policy, Finance, Pensions.

Public pension liabilities are the millstone dragging governments into the depths of a sea of red ink, deficits, and even bankruptcy. In a sad twist on this mixed metaphor, it is the pensioners who have managed to tie the millstone to the necks of the “little ones” — the younger generations working to pay increasing taxes to fund exorbitant pension benefits that were promised but never funded.

A few governments have discovered that they might be able to relieve a bit of the weight by reducing “cost-of-living adjustments” (COLA) — especially when those have historically had little or no relation to actual changes in the cost of living. For example, the WSJ notes that Colorado’s pension system had been granting a fixed 3.5% COLA every year to beneficiaries. If the COLA for defined-benefit pensions can be reduced below the rate of inflation, then inflation would gradually erode the real cost of the crushing unfunded pensions.

Of course, only the federal government has the power to inflate the dollar. But faced with a deluge states and municipalities sinking into insolvency under the weight of pension obligations, this would be yet another motive to nudge inflation higher.

(Predictably, pension beneficiaries are using every possible legal maneuver to prevent this. If only they had been so attentive when their unions and politicians were crafting extravagant future benefits to be borne by future generations.)



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