New Jersey has done it again. New Jersey’s government has ‘discovered’ that the guaranteed health benefits for its retired public workers are underfunded by $58 billion according to the New York Times. Leaving aside any political implications, there were a few comments I had to pick out of the article:
- “New Jersey officials say the state simply cannot afford to create a reserve at this time, given its debt. Instead, they plan to pay each year’s retiree benefits out of revenues and work to control future costs.”
- “When New Jersey stopped funding its retiree health plan 13 years ago, it also stopped trying to keep track of the cost. That created the illusion that the long-term obligation was zero, not billions of dollars, and made it easy for the state to enhance its already rich benefits.“
- “From 1987 through 1994, New Jersey was one of only a handful of governments that went to the trouble of setting aside money for retiree health care. Gov. Christine Todd Whitman stopped the practice the year she took office, along with cutting back on pension contributions. The official explanation was that inflation in health costs had subsided and that setting aside money could create a bigger reserve than was needed. Also, her administration noted, the Clinton White House was working on a national health plan.”
What parallels can be drawn between this situation and your personal finance situation?
- Failing to build up adequate emergency savings can really derail your personal finance plans. New Jersey’s tax burden is already enormous. “Containing future costs” is a code phrase indicating that there’s simply no more revenue to be squeezed from the taxpayers of the state. However, as health care costs continue to increase, keeping these year-to-year costs in check will be increasingly difficult, and will almost inevitably result in borrowing. If you don’t have the savings to meet an emergency, the first place most people will turn is back to their credit cards or home equity lines of credit.
- If you don’t prepare for the future, things will get worse, not better. New Jersey decided that if no-one reported the problem, maybe it would just go away. It never does. If you fail to prepare for your financial future, you are inviting disaster. Make sure that when you plan, you take into account worst-case scenarios. What if the market has a sudden downturn? What if I am disabled and unable to work? What if my company goes under and I have no health benefits anymore?
- Don’t count on someone else to bail you out. If the statement is true that New Jersey’s governor in 1994 was counting on health cost inflation to ‘subside’ and on the Clinton administration to take care of universal health care, she was far more incompetent than a governor has any right to be. Whatever can be said of the Clinton administration’s attempt to fix health care, it was most certainly never a “sure thing” by even the most optimistic measure. If you are hoping to collect Social Security, or get 18% returns in the market year after year you are putting your future in danger. If you think that your employer will always provide you with health benefits, or that you’ll never need that emergency fund so you might as well cash it out for your new home down payment, you should pause a minute and reconsider.
State governments always have one advantage individuals don’t. If I were to go to my clients six months after beginning work and say “you know what? I know we agreed on an annual rate, but my kid’s braces are really expensive, so I’m raising your rates by $5000 per year” most would respond by firing me. If the state government has runaway expenses, though, they can raise property taxes or state income taxes and require you to pay them, by law. Sure, you can “fire” your government at the next election, but that may not be for up to four years. I would love to be able to build in a four-year contract with my clients that said “no matter how often I raise my rate, you can’t fire me until four years after I start working with you.
So speaking as a proud resident of the state at the end of the tunnel, let Jersey’s woes be a warning to you. And if you’re wondering about the title of the post – it’s called the Garden State because it’s covered in manure.