> and the federal government will backstop the states

I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift.

I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle.

I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan.

> I think it's unlikely the federal government will be backstopping pension problems in IL and CA anytime soon, without a dramatic congressional shift.

Agreed. That shift is going to happen though. Seniors are not a cohort you can ignore. They vote like clockwork.

> I think you underestimate how much taxes will need to raise to cover these liabilities. The federal government already has its hands full with SS + Medicare commitments it can't handle.

I don't, but we should've been setting aside these funds. We didn't, and we'll still need to pay out even at a reduced benefits level.

> I'd rather see failures and bankruptcies at a local level, which will maybe convince other municipalities to reform before they collapse. I don't want everything centralized into one giant US federal government default. That's not a better plan.

Reform will not happen. That's code for "cutting benefits". As long as the US government maintains the ability to tax, it will not default. Social Security keeps a third of seniors out of poverty. 45 percent of Puerto Rican's are already in poverty. Cutting benefits further? That's not tenable.

No one held government accountable over the last several decades, and now we're stuck with the fallout.

EDIT: Because of ye olde' HN throttling limits:

Most seniors don't pay taxes, due to marginal tax rates. Seniors will vote all day to keep their benefits intact. I don't blame them.

Unless the brinks of defaults will happen in close successions in > 20-30% of the country, what are the incentives for MPs to vote yes on the backstopping for jurisdictions far from their own?

> Reform will not happen. That's code for "cutting benefits".

The benefits to be cut will happen in a few small areas given the size of the US, thus will not affect the majority of lawmakers. If the GOP controls the Congress, that doesn't seem like a large enough impact for them to change their overall ideology towards pension subsidies.

> what are the incentives for MPs to vote yes on the backstopping to jurisdictions far from their own?

Stick it in an omnibus bill with stuff they do like?

Sure, seniors vote. Don't assume that the seniors in, say, Texas are going to be in favor of higher taxes in order to rescue pensions in California and Illinois, though.

Texas (at the time of writing) only appears in this page the once ... which is surprising in this context given its history. [1]

A country / protectorate defaulting is not necessarily something that can't be recovered from, and in some cases is the only sensible (or indeed feasible) course of action.

[1] https://en.wikipedia.org/wiki/Texas_dollar

Well that's not the precedent. When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut. Detroit just had this happen after the state stepped in and dealt with that mess. Cleveland is in the process of cutting benefits before it goes bankrupt. CalPERS cut pensions last December for retirees from Loyalton. Same thing in the private sector; GM cut retiree benefits with the help of the Federal Government. Last year the Iron Workers union saw huge pension cuts. USPS is going to have this happen as well, probably very soon; you can be very, very sure Trump and the Republicans aren't going to bail out that hot mess.

We're actually getting pretty handy at cutting retiree pensions and benefits. The deals negotiated decades ago predicated on fantastic rates of growth aren't really plausible and they eventually have to be reworked. That means cuts. That's reality and reality has, at long last, arrived for Puerto Rico.

So expect cuts. Don't believe there is some pot of gold out there filled with untaxed entities that just need to be tapped to fix everything. Its fiction and it won't happen like that.

The big reckoning after Puerto Rico is going to be Illinois. Producers are straight up evacuating IL while the state government just keeps digging itself deeper into the hole. That situation is going to set all sorts of precedents for how this nonsense gets resolved.

I've been paying attention to the situation in Illinois. All signs point towards things getting worse.

More people are moving out of Illinois than any other state. In polls residents of Illinois are most likely to say they're planning on moving to a different state. The state hasn't passed a budget in over two years, a US record for any state. Average income difference between families moving in and out of Illinois is over $20,000. The property taxes are second highest in the nation relative to COL and everyone agrees that they need to be increased to maintain the current budget. The state cut funding for all college grants programs and the average freshman class size at state schools has shrunk an average of more than 20% in two years. Illinois is the biggest exporter of students, and many never return. Pension costs are already 25% of the state budget and this is projected to increase.

The state is so deeply corrupt that bankruptcy seems inevitable. If not for the whole state at least Chicago. Madigan literally runs the state from the shadows and gov. Rauner has no real power.

The budget problems are accelerating at a frightening pace as anyone that can afford to leave the state does. The most severe issue is brain drain of the most bright and educated young people. Illinois will experience the fallout from this for decades.

If I had any money invested in Illinois I would watch this case closely. If Puerto Rico is allowed to proceed with bankruptcy to shed pension obligations Illinois will follow

> When these mismanaged governments finally throw in the towel and hand the reins over to grownups what happens is the pensions and retiree benefits get cut.

What makes it appropriate to cut obligations to creditors we call pensioners, but inappropriate to cut obligations to creditors we call 'bondholders'?

(The answer is, obviously, that our politicians are quite happy to push our elderly under the bus, in order to protect wealthy investors.)

"but inappropriate to cut obligations to creditors we call 'bondholders'?"

The part where I said bondholders should be held harmless is a fiction inside your head. When the gears finally strip the bondholders in these cases (Detroit, GM, etc.) take epic baths, and I don't shed any tears for them either. $7 billion in bondholders’ obligations in Detroit were erased, for example.

So I suppose there is little difference between supposed "creditors we call pensioners" and actual creditors; everyone gets wrecked.

These are usually the same people. Pension funds hold bonds.

My biggest concern and issue with the federal government backstopping pensions is that the vast majority of people would now be paying for benefits for people who rendered services in areas they didn't live. Because the populace of one city voted to give certain benefits to public sector employees why should I be held accountable for that decision? I neither had a vote nor partook of their services.

I am sure I am being very naive here but this seems to me to be the essence of taxation without representation.

The EPA is going to spend millions of dollars to clean up Flint, Michigan's water supply lines; you don't get a say in that either.

"Representation" is a bit of a vague concept in US governance.

To me, there's a difference between something you need to live that was made poisonous by the government requireing aid and former managers pulling pensions of $200k+ a year. If I lived in Michigan, I'd have a big problem bailing out the FDNY pension fund when I heard that. It's endemic too, look up "LIRR Disability abuse".

http://nypost.com/2015/10/21/more-than-2-dozen-ex-fdny-colle...

I am fine with bailouts as long as systems are being put in place to avoid repeating it in the future. That's for Flint, pensions or banks. Obviously the prevention step never happens....

Bailouts create more bailouts because people know they are going to get bailed out.

Run for office. Help fix the problem. That's what I'm doing.

Neighboring towns near Flint took care of the problem at their own expense. Is it fair to them that Flint doesn't have to pay? Perhaps we should pay those neighboring town back, with interest, for the work that they did? Aren't we encouraging irresponsible behavior if we pay for Flint but not the other towns?