Two scholars say that Minnsotans may have to pay another $2,000 per household in taxes, just to make good on promises made to public pensions.
Robert Novy-Marx of the University of Rochester and Joshua D. Rauh of the Kellogg School of Management looked at the problem of pension underfunding, and ran the numbers for each state. (Here’s a link to the PDF version of the report.) If we don’t make any changes, they say, the average American household will have to pay an extra $1,398 in taxes–beyond what they could expect to pay already–for public pensions. The situation is better in some states, and worse in others–including Minnesota.
Our bill is $1,928 per household in additional taxes. And the number may be slightly higher than that, $2,040 per household, if we take into account the fact that some people will move out of state in response to higher tax rate. Either way, it’s money that we won’t have to save for college, invest in business, or use for household purchases.
Can we do something to reduce that additional tax? Sure. But the easy changes won’t do much. If we redo the retirement system for all new employees–put them into a defined contribution system,–the average burden will decline by … $175. How about a more dramatic step, such as freezing all benefits accrued thus far to current levels? That brings the pain down to $800. That’s a reduction of the problem by more than 50 percent. But it’s still a testimony to the hole our leaders have dug in the past by under-funding and over-promising pension benefits to state and local workers.