Illinois Is Ground Zero for the Pension Crisis

Mish

In Illinois, hundreds of billions of dollars in pension debt are dragging residents and the government at every level, under water.

It's not just Illinois, but Illinois Is Ground Zero for the Public-Sector Pension Crisis.

It seems [no, it is] not only unfair, but also unreasonably costly, to force hundreds of millions of Americans to shoulder a burden that has nothing to do with them.

Only 4 percent of Americans working in the private sector have access to a defined-benefit pension plan as their sole form of retirement security. The rest of us must rely on some combination of 401(k)s, hybrid plans, or Social Security.

The Prairie State’s pension debt is the worst in the nation relative to the size of each state’s economy. Moody’s Investors Service estimates unfunded liabilities in Illinois’ five state-managed pension systems at $230 billion for fiscal year 2019, equal to about 26 percent of gross domestic product. Moody’s also projects that the debt will grow to an all-time high of $261 billion for fiscal year 2020, owing to investment losses in markets riled by COVID-19.

Hiking taxes or otherwise throwing more money at the current pension system will not solve the problem. Illinois spends more of its revenue on pensions than any other state in the nation but also has the largest gap with respect to what it would need to pay without reform. Voters recognized that income tax hikes are the wrong strategy when they soundly rejected a proposal to raise revenue by switching from a flat to a progressive income tax on the November 3 ballot.

Many of the toughest problems facing Illinoisans stem from this crisis, leaving their home state at the bottom of too many “best” lists and at the top of many “worst” lists.

Problem With Tiers

There is much more to the article including a discussion of pension tiers. 

Those hired before before the 2010 reforms are in tier 1. All groups have excessive benefits but tier 1 is outrageous. Teachers average $2.3 million.

The average tier 1 retiree makes $2 million in retirement. 

Illinois’s courts will only allow changes that affect new workers, declaring the benefits of current workers and retirees off-limits, including even the future growth rate of benefits for work not yet performed.

The Solution

The solution is not pension reform, or higher taxes, but rather bankruptcy reform.

Serious pension reform will not happen unless and until bankruptcy reform happens first.

Pensions are not sacrosanct in bankruptcy. But courts will will rule they are until then.

Bankruptcy negotiation happens at the Federal level, not the state level. But states can opt out.

Illinois is one of the states that did opt out. 

Bush did not try, nor did Trump, to fix this at the national level.

Of course, the matter would not even come up under Obama. He made negative progress on union and pension reform.

At the state level, many cities would immediately declare bankruptcy, if only they could. These cash-strapped cities desperately need to shed impossible to pay pension obligations.

If illinois Governor JB Pritzker was serious about fixing the pension mess, he would promote bankruptcy reform. 

But he won't. He is another corrupt governor beholden to corrupt unions.

Mish

Comments (62)
No. 1-16
hazeod
hazeod

You say Bush nor Trump? Wasn't Obama an Illinois Senator and would've been aware of the situation in depth?

Realist
Realist

Pensions are one of many examples of US "exceptionalism". Just like health care. Horribly mismanaged. In both cases, the US could look to much better run systems in other countries. But you don't. And you probably never will. Too much pride to ask for help as you sink into the quicksand.

When I mention this, some often respond that the systems in other countries are "just as bad". Which is totally wrong. But hey, drink as much kool-aid as you want.

I have suggested to Mish, that he could have avoided high health care costs, and leave pension worries behind by moving to Canada. They have a pretty good health care system and some really great public pensions (most are fully funded). Instead, he moved to Utah. That is like moving one deck higher on the Titanic.

Perhaps he preferred the climate in Utah. Probably a good choice.

Eddie_T
Eddie_T

I looked at Canada....there is much to like..but guys who do what I do have a hard time making a good living off what NHS pays....and everybody has it, so they expect you to take it. From what I’ve gathered, there is a lot of fraud by unscrupulous doctors.

Taxes are a lot higher...and they don’t let everyone in, either....to get a visa, you need to have a job first.

The cities there have that serious real estate bubble thing going that makes the one here look small in comparison.

I think Mish’s decision on Utah was pretty good...It’s warmer here though, and 62% of the people here don’t attend a church that believes in Golden Plates somebody found in New York in 1820.

Sechel
Sechel

To me the reality is the state will see draconian service cuts first. You won't see a state declaring bankruptcy and not paying pensions. There will be more use of tiers.
A mess like this convinces me that public service unions are a problem, at least when it comes to salary and benefit negotations

anoop
anoop

what if we pump the s&p500 to 10,000? would that solve the crisis? what would be the downside of pumping it to 10,000 and leaving it there?

Greenmountain
Greenmountain

Takes two to negotiate and the politicians are as guilty as the unions. No one forced them to sign these agreements but it was an easy way to kick the can down the road. Low wages for big pensions later. And then wages started to increase and wow! A really big problem. Especially when you add overtime to the mix - especially in the police unions.

mrutkaus
mrutkaus

Do Illinois teachers Tier 1 make 2 mil a year or in total retirement over years?

Eddie_T
Eddie_T

Slow news day...I thought this was interesting.....

njbr
njbr

One way or another, taxes will go up.

Abandon the benefit oension system and the state and local employment benefits are severely behind the private sector in terms of attating employees. Wages in the paycheck would have to go up.

I receive offers from state and local governments every couple months, and I laugh at the pay rates--BUT their healtcare options and defined pension plans make up a portion of the differential.

It's a puzzle, because you want competence in you state and local government

LawrenceBird
LawrenceBird

I just looked at a doc provided for the teachers in that Illinois system. Its not clear how long they contributed, but for at least a portion of the time they contributed 6% of salary to the pension plan. The tier 1 formula is somewhat complex and depends on years of service, average salary for four consecutive out of 10 last years as well as age of retirement. They used an example of 30years, aveage salary of 85K and age 60 giving an annual benefit of 56,100.

My back of the envelope quick estimate of 6% contribution + 6% state match + 6% return over 30 years should have resulted in roughly enough to fund the above amount for 18 years.

So.. idk. I'd need more info on the orginal employee contribution rate before saying the blame is on the unions. Sounds on face of it most of the blame lay with the state for underfunding and poorly investing.

Scienceguy
Scienceguy

As a career teacher, I paid close to 10% of my modest salary (when compared with my peers with multiple graduate degrees and valuable experience) into the teachers retirement system in Illinois. This money accrued decades of interest. The state government opted to cop out of their statutory obligations to contribute a partially matching amount into the fund for a generation, leaving the fund underfunded. I, like most teachers in Illinois, did not contribute to social security while teaching, nor did our employees. We have no social security retirement eligibility. Our pensions are all we've got. The state hiding behind bankruptcy and further stealing from the funds, largely contributed out of member salaries is tantamount to theft. Not only is it illegal but morally reprehensible. What this article advocates is changing the law to make theft legal. Illinois has many fiscal issues derived from a litany of poor political decisions. I will not stand for teachers being the whipping boy again in a poorly disguised money-grab by the privileged 1% who try to divide and conquer regular working folks.

William Janes
William Janes

Why would Canada pay a pension to someone who worked in the U.S. all his life?

KidHorn
KidHorn

If the democrats get back in charge, they'll bail out the pensions in the democratic states and cities. Municipal bonds will be bought up by the FED. Not a question of if, but when.

Dodge Demon
Dodge Demon

The probability of Madigan and Pritzker cutting any government jobs in Illinois is nil.

Working Stiff
Working Stiff

While the pension situation is crisis level, the workers are not to blame. I do not receive a pension nor am I eligible for one. The workers paid their fair share requirements and took less in pay for it and should not be held accountable for the misdeeds of others. The problem is that the politicians did not hold up their end and did not make the matching required contributions and have now had to borrow money to make obligations. Similar to what the Federal government has done to the Social Security fund. A start would be to eliminate all salaries, pensions, health plans and any other perks to all elected officials. Moving forward: replace the pension for new hires with Social Security and matching IRA contributions up to 3% like millions of other workers.

Anon1970
Anon1970

Mish, you made the right moving leaving Illinois. My knowledge of Illinois corruption goes back to the fall of 1970, when Secretary of State Paul Powell died. Lots of cash was found in shoe boxes in his hotel room in Springfield, where he lived. It seems to Powell could be bought for the right price.


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