After President Joe Biden signed an eye-popping $1.9-trillion COVID-19 relief bill, Americans have begun receiving their stimulus checks of as much as $1,400 apiece. However, the law means not only a small boost in most Americans’ incomes, but a hefty boost to the nation’s $3.1 trillion deficit — and to its almost inconceivable $28 trillion debt.
We understand the impetus behind the legislation, given that government-mandated coronavirus shutdowns diminished many Americans’ livelihoods. But the law also is a grab bag of giveaways — many of which are unrelated to the COVID-19 economic lockdowns. For instance, Democrats took unprecedented steps to bolster underfunded private pension plans.
As news reports point out, the stimulus package earmarks $86 billion to bail out a variety of private-sector union pension plans that have long struggled to pay the retirement packages for millions of U.S. workers. Such plans are supposed to be self-sustaining, but decades of union mismanagement have placed them on an unsustainable path.
“Using taxpayer dollars to bail out pension plans is almost unheard of,” reports The New York Times. “Previous proposals to rescue the dying multiemployer plans called for the Treasury to make them 30-year loans, not send them no-strings-attached cash.”
The existing Pension Benefit Guaranty Corp. has served as a “backstop” for crumbling pension funds, the article notes, but it “acts like an insurer” and “does not get taxpayer dollars.”
Not only is this uncharted territory, but the bailout plan will result in what economists refer to as “moral hazard.” It’s the concept, as Investopedia defines it, “that a party protected from risk in some way will act differently than if they didn’t have that protection.” By having taxpayers protect unions from the results of poor management, it discourages them from embracing reforms.
The legislation includes another indirect pension bailout, which pertains to state and local pension plans for public employees. Republicans have pointed to California’s underfunded public-pension systems to argue against the measure, given that it includes $350 billion in aid for state and local governments, including $42 billion for California.
“California promised these things, New Jersey promised these things, then they don’t want to pay for it,” Sen. Rick Scott, R-Florida, told the Sacramento Bee. The Bee included a rebuttal from a state finance department spokesman: “The bill now before Congress has nothing to do with pensions, and everything to do with providing needed relief.”
Yes and no. The federal bailout for local and state governments is not a direct cash infusion for any pension fund and forbids governments from using the money that way. California, however, faces massive unfunded pension liabilities, which — depending on the modeling used — range from $160 billion to $1 trillion.
The prime reason some state and local governments need a bailout is because they are drowning in pension red ink. Money is fungible. If local governments overspend on pensions, they will run out of cash for other things. If federal taxpayers help them pay for some other expenses, they indirectly are helping them sustain their bad pension decisions.
Governments need to address the pension problem, but Congress and the administration should have done so in separate legislation that imposed conditions on the funds. Instead, we’ll see growing deficits and debt — and demands for more bailouts in the future.