Loyalton, California, can't afford the $1.6 million cost of its four-person pension promise. Math always catches up to you eventually.
The problem for Loyalton, in other words, is just a more acute version of the problem besetting municipalities across the country: Namely, that state pension authorities have been assuming unrealistic discount rates and rates of return on their investments for decades. The purpose of this phony accounting is to conceal the massive shortfall in public pension funds that are often underfunded and consistently fail to meet overly optimistic investment targets. As long as the real numbers aren't released, politicians, investors and public union bosses can look the other way. But the real value of obligations racked up over the years is finally becoming clear, and it stands to ruin fading municipalities that were roped into the system on false pretenses.
Walsh notes that "some see a test case taking shape for Loyalton and other cities with dwindling means." There is simply no way for many small government entities in California to afford what the state pension fund says they owe. If Calpers follows through on its threat to cut off Loyalton's retirees, then the fiction of "bulletproof" public pensions will be permanently undermined.
A simple numerical example may illustrate how important growth rates are to an aging economy. Let's say we have 99 workers and one retiree, and we want all of them to enjoy the same standard of living. Now say each worker can produce $100 worth of stuff. If each of our workers donates $1 apiece to the retiree, everyone gets $99 dollars.
But now let's say nine more people retire over the next nine years. Now we have 90 workers, generating total output of $9,000 a year. Split 100 ways, everyone gets $90 instead of $99. As more people retire, the math gets worse and worse. Eventually, the workers may well say "You non-workers are on your own."
Productivity growth could save us... if only we could regulate growth into existence.