Your Purchasing Power May Drop Again

If state funding for health-care costs and retirees do not improve, the taxpayer’s purchasing power will be affected because the cost may have to rest on their shoulders.

But let’s see why this could even happen…

I know marijuana is legal in Colorado and Washington, but I’m wondering now if crack is legal in Illinois…

It may be that six of the seven members of Illinois’ Supreme Court have simply lost their minds. In a recent decision, the judicial body put another nail in the state’s fiscal coffin.

The Illinois state pension program is in trouble; it’s underfunded by a whopping $250 billion, according to one estimate. This might lead people to believe that pensioners are at risk of losing their benefits, but they have an ace up their collective sleeve.

The Illinois constitution contains a provision that “membership in any pension or retirement system of the State shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.”

This sort of constitutional protection exists in around 18 states. Public workers in Illinois have taken this to mean that their pensions can’t be reduced or taken away even though the state is running in the red.

Their case looks pretty good, given that the constitution is clear about not being able to change the benefits.

The governor and legislature have been looking for ways to get the public employees to pay more into the fund or accept smaller payouts. They aren’t buying it, and the law is on their side.

This liability is potentially crippling to the state of Illinois and its taxpayers, but the State Supreme Court decided to pile on even more.

Applying hazy legal logic, the court has ruled that not only are pensions constitutionally protected, but so are health-care benefits for retirees. Hmm.

Going back to the quote above from the state constitution regarding pensions and retirement systems, claiming that this includes health care, requires mental gymnastics.

Pensions are pretty straightforward — you get payments each month. A retirement system is a collection of pension organizations that typically exist in public employment.

In this scenario, a city, school district, or fire department, for example, will put its pension program inside of a larger, usually statewide, system for the efficiency of size.

None of this contemplates health-care benefits, or any other perk that retirees might receive. It couldn’t be more clear.

This is not an idle conversation. The Illinois pension system is underfunded, as noted above, with a funding ratio (the amount it has compared to what it needs) of roughly 40%. This sounds like an awful number, because it is.

The Illinois retiree health care system is underfunded by $56 billion, which is less than the gap for pensions, but the funding ratio for health care is 0%.

That’s right. The state doesn’t have any money saved for paying health-care costs. It instead pays for health-care benefits out of current tax revenue.

Illinois is not alone. Most, if not all, states view health-care benefits as an additional benefit granted by the state, which the state can also take away if and when it sees the need to do so. Since the benefit isn’t a contractual obligation, there’s no need to save for it.

This might seem a bit disingenuous, with the state providing a benefit that it doesn’t guarantee. Most states operate this way. It’s why so little funding exists for public retiree health-care benefits.

Public pension obligations run in the trillions of dollars, and are underfunded by more than $500 billion. Public retiree health care benefit obligations are estimated at around $600 billion, and are underfunded by about $500 billion.

If Illinois — as well as other states — deem public retiree health-care benefits to be constitutionally protected, then there will be financial food fights going on in states that never thought they had a problem.

Expect higher taxes, particularly on businesses and rental properties, so be careful how you plan your financial future. The money needed to pay for these benefits will have to come from somewhere, and that somewhere is your wallet.

Rodney

P.S. These aren’t the only things that may affect our purchasing power. Harry Dent makes that very clear in his article, “Purchasing Power Equals Debt in This Economy.

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Categories: Health Care

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.