The entitlement crisis will hit all levels of government

For as long as I’ve been running this blog, I’ve been hammering away on the issue that mounting costs of entitlement spending will swamp the federal budget, forcing either massive tax hikes, benefit cuts, or enormous deficits. But the problem of our aging population is compounded by benefit spending on both the state and local level. From the NY Times, here’s a snapshot of the problem in Duluth, Minnesota – “The Next Retirement Time Bomb”:

Since 1983, the city of Duluth, Minn., has been promising free lifetime health care to all of its retired workers, their spouses and their children up to age 26. No one really knew how much it would cost. Three years ago, the city decided to find out.

It took an actuary about three months to identify all the past and current city workers who qualified for the benefits. She tallied their data by age, sex, previous insurance claims and other factors. Then she estimated how much it would cost to provide free lifetime care to such a group.

The total came to about $178 million, or more than double the city's operating budget. And the bill was growing.

"Then we knew we were looking down the barrel of a pretty high-caliber weapon," said Gary Meier, Duluth's human resources manager, who attended the meeting where the actuary presented her findings.

Mayor Herb Bergson was more direct. "We can't pay for it," he said in a recent interview. "The city isn't going to function because it's just going to be in the health care business."

Duluth's doleful discovery is about to be repeated across the country. Thousands of government bodies, including states, cities, towns, school districts and water authorities, are in for the same kind of shock in the next year or so. For years, governments have been promising generous medical benefits to millions of schoolteachers, firefighters and other employees when they retire, yet experts say that virtually none of these governments have kept track of the mounting price tag. The usual practice is to budget for health care a year at a time, and to leave the rest for the future.

The intractable dilemma here is that there are fiscal and political realities at odds: younger workers in America cannot be asked to pay an estimated 50% (or 100%) more in taxes, yet the massive Baby Boomer demographic will not allow politicians to cut benefits. If reasonable steps for reform started now, there might be hope for armistice between the generations; otherwise, runaway entitlement spending can only result in growing resentment among workers supporting a relatively affluent elderly population.