Well, let's just say that somehow what you are saying is correct. How comfortable would you be investing in a long-term muni bond after that? If you were a contractor, how would you feel about working on a long-term project for a state or local government? Who would want to work for the government when there is no way to trust that any of the benefits will materialized (other than the salary; then again, who knows?)
It's not just former employees that will suffer. Everyone suffers when states have to pay higher interest rates on their bonds because of poor credit ratings (that's what bankruptcy does to a state) or have to pay more for workers and contractors. Everyone will have to pay higher taxes and everyone will receive less from the government.
I cannot understand the logic of not making good on government obligations. You can take the position that the government should stop promising pensions, but how can anyone think it is a good idea for the government to fail to pay for the pensions it already promised people (or, frankly, any other promise the government made)?
This is exactly why people have been screaming about this problem for a couple of decades.
It is going to be HUGE and do incredible damage. Retirees will be hurt catastrophically, costs of government borrowing will skyrocket, programs will be cut massively, workers will abandon government.
The issue is that the costs of meeting the prior obligations will be completely impossible. States, cities, and school districts will go bankrupt, massive numbers of people will be fired, and taxes will go up while service goes down.
Unfortunately the politics prevent a fix today and prevented a fix 10 or 20 years ago when it would have been much cheaper. The fix will happen in 10 to 20 years and it's going to be horrific.
Happened in the private sector. Most millennials don't trust pensions and prefer 401k. As you are in control of the money and there isn't much that could be changed unfavorably in 50 years.
I am not sure millennials don't trust pensions; I think we never had the choice. It is also wrong to assume you are in control of your 401k, since for most people a 401k will be invested in mutual funds managed by the same businesses that manage pension funds. Some of those funds have absurd expense ratios that erode retirement savings.
A government changing its mind about pensions could easily change its mind about the favorable tax treatment of 401ks. Or go even further and follow HN's exhortations to implement a wealth tax. Upper-middle-class retirement funds are a huge component of inequality; reducing that can only be good, right?
You pay tax when withdrawing funds from 401k. Worst case they'll remove the 401k and force everyone to migrate to a Roth IRA. Which is the same as the status quo...aka not that bad.
As for Roth IRA. I don't trust the government to honor their end of the deal. I can see them taxing withdrawals for the top 10% in the future.
It's not just former employees that will suffer. Everyone suffers when states have to pay higher interest rates on their bonds because of poor credit ratings (that's what bankruptcy does to a state) or have to pay more for workers and contractors. Everyone will have to pay higher taxes and everyone will receive less from the government.
I cannot understand the logic of not making good on government obligations. You can take the position that the government should stop promising pensions, but how can anyone think it is a good idea for the government to fail to pay for the pensions it already promised people (or, frankly, any other promise the government made)?