Thursday, March 14, 2013

Detroit's as Harbinger of National Problems

Detroit's pension debacle - a storyline we'll see at every level of government for the next 25 years or more.

One point that's rarely made in these pieces is that deferring costs, i.e. levying them on those who aren't even receiving the benefits, leads to migration and thus even fewer people to tax.  So for instance the tax revenue that Detroit collected in the 70's, 80's and 90's went to services, schools, roads, etc., while the funding shortfall -- the deficit -- accrued as unfunded pension and healthcare liabilities (which would have to be paid in the future).  As time went on and the pensions started becoming due, current citizens not only faced higher tax rates, they also lived with diminished services since now the tax collection wasn't enough to pay for current needs.  Since current taxpayers want benefits from their taxes, e.g. safe, well-lit neighbourhoods,  they begin to migrate to places where taxes are still used for current expenses.  Once this process starts, it's almost impossible to stop, since fewer and fewer people are left have to shoulder the burden accrued by previous generations.  I predict that some time in the next decade, people will explicitly be looking at unfunded liabilities of both their own region and prospective regions to which to move.  That's when the reality that the only way out of this mess will be massive government bankruptcies and a concomitant repudiation of a lot of the unfunded promises  will finally strike home.

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