Breaking Bad: Public Pensions and the Loss of that Old-Time Fiscal Religion

Abstract

The Keynesian Revolution ushered in a new milieu of government deficit spending that overturned a historical tradition of balanced budgets. The historical tradition, the so-called “old-time fiscal religion,” maintained that balanced budgets ensured that those receiving the benefits of government services were also the individuals paying the taxes to cover those benefits. This provided an important taxpayer constraint on government spending. By overturning this old-time fiscal religion, the Keynesian revolution led to massive increases in government deficit spending. Keynesianism provided the intellectual support to push the costs of current government programs onto future generations. While most U.S. states have balanced budget provisions, and thus would seem to avoid this Keynesian tendency towards debt accumulation followed at the national level, the ability for states to underfund pension liabilities for state employees has broken the old-time fiscal religion even at the state level. Defined benefit pension plans, combined with the lack of transparency and misleading actuarial assumptions, have enabled state legislators and taxpayers to push the costs of future obligations made to current employees onto future taxpayers. Akin to the rise in deficit spending at the federal level, breaking the old-time fiscal religion at the state level has led to rising unfunded liability expenditures. Transitioning public pensions from defined benefit to defined contribution models would help redeem the old-time fiscal religion going forward, restoring taxpayer constraint on the growth of state and local government.