The EconomistNovember 16th 2019 Leaders 1512 have often failed to pay in as much as the actuaries recommend.
In 2009 the actuaries for the Illinois Teachers scheme asked the
state to cough up $2.1bn; it paid just $1.6bn. By 2018 the annual
bill had risen to $7.1bn but the state paid only $4.2bn. The hole in
the pension scheme deepened to $75bn in 2018, or about $6,
for every citizen in the state. And that is just for teachers.
The problem could yet worsen. Pension schemes are vulner-
able to a market downturn and many were left reeling after the
global financial crisis of 2008-09. Even if markets do not tumble,
they would suffer in a long period of sluggish returns. That looks
plausible given that 30-year Treasury bond yields are just 2.4%
and American equity valuations are stretched relative to their
historical average. Some schemes are betting on “alternative as-
sets” like hedge funds and private equity to fill the gap. But
hedge-fund returns have been disappointing over the past de-
cade, and the private-equity industry is not large enough to ab-
sorb $4trn of public-sector pension assets.
And there is a final problem: the schemes’ accounting. When
working out how much they need to put aside today, all funded
schemes must calculate how much they are likely to pay out in
future. This means using a rate to discount the cost of tomor-
row’s pension payments. The higher the rate used, the lower the
cost seems to be. Public-sector pension schemes are allowed to
use the assumed rate of investment return as their discount rate,
even though they will still have to pay pensions whether they
earn that return or not. This has naturally led to a degree of opti-
mism about future returns: many assume 7-7.5% a year.
In the private sector, a pension promise is seen as a debt and
has to be discounted at corporate-bond yields, which are at his-
torically low levels. This makes pensions look more expensive
and explains why many companies have closed their final-salary
schemes. If the public sector had to use the same approach, its
average funding ratio would be a lot lower than today’s 72% and
the resulting hole, currently $1.6bn in total would be a lot bigger.
Public bodies are going to have to boost their contributions
even further. A study by the Centre for Retirement Research
found that in the worst-affected states—Connecticut, Illinois
and New Jersey—pension costs in 2014 were already 15% of total
revenues. That will trigger a squeeze on the public finances, as
other spending has to be cut or taxes have to be cranked up. Ei-
ther will be especially hard on younger people and workers in the
private sector, who do not get the same benefits.
The pensions crisis has been rumbling on for years, but some
states and cities will soon enter a downward spiral, in which
pension costs lead to bad public services or tax rises, in turn en-
couraging workers and firms to move out, which then shrinks
the tax base, making promises even less affordable. When that
happens some states and cities will tumble into a black hole. 7I
magine you are offered a job at triple your salary. But first you
must pass through a locked door, and someone with the key
won’t open it. You might be willing to pay them to let you
through. Whether this is fair or not is beside the point. They have
the key and you don’t. If you gave them a portion of the increase
in your wages, you would both be better off.
This is not a bad analogy for global immigration policy. When
migrants move from a poor country to a rich one, they typically
make three to six times as much money as before (see our Special
report in this issue). If everyone who wanted to migrate were al-
lowed to do so, the world would by one estimate
be twice as rich. Yet this vast gain cannot be real-
ised, because most would-be migrants are
forced to stay where they are. The door is locked,
and voters in rich countries hold the key.
Is there a way to open that door? Hardly any-
one is considering it. Instead, the debate in rich
countries veers between fearmongering and
moralising. Nationalists, from Donald Trump,
America’s president, to Viktor Orban, Hungary’s prime minister,
portray immigrants as a threat to the culture, wages and even
lives of the native-born. Pro-migration liberals, by contrast, are
quick to dismiss those who disagree with them as racists, and
mouth slogans that seem almost designed to alienate voters.
Several Democrats in America talk not of reforming but of abol-
ishing ice, the agency enforcing immigration laws.
A more pragmatic approach would be to think in terms of
costs, benefits and how they might be distributed. The biggest
beneficiaries of migration are the migrants themselves, whoearn far more and in many cases escape from oppression or sex-
ism. Their birthplaces benefit from the money they send home
and the knowledge they bring back when they return, which usu-
ally more than makes up for any “brain drain”.
The benefits to host countries are hefty, too. Skilled immi-
grants check pulses, write code and help local firms do business
with their homelands. Migrants are twice as likely as the native-
born to start a business and three times as likely to patent an
idea. Blue-collar immigrants provide cheaper plumbing, child
care and parcel deliveries. By one estimate, 83% of native-born
rich-country workers benefit from immigra-
tion. Migrants may drag down the wages of na-
tive workers with similar skills, but the effect is
so small that economists are not sure it exists.
The biggest cost of migration is the hardest to
measure. It is cultural. Many people like their
societies the way they are. Some bristle when
they hear foreign languages on the bus, or when
a mosque replaces a pub. Since migrants tend to
cluster, some places change uncomfortably fast. Such feelings
are inflamed by demagogues, who wildly exaggerate the threat
from a tiny minority of migrants—especially from crime.
Overcoming these objections will be hard. But not impossi-
ble, if policymakers observe four principles. First, border control
matters. Voters, perfectly reasonably, cannot abide chaos; gov-
ernments must set and enforce the rules for who comes. Second,
migrants must pay their way. Most already do, but it is crucial to
design policies that encourage this, by making it easy for them to
work and hard, at least for a while, to claim welfare benefits.Unlock that door
Barriers to movement make the world poorer. Only voters can remove themImmigration policyInternational migrants
Host countries, by income level, 2017, %
3020100 70605040LowMiddleHigh