Broken pension system puts Schaumburg taxpayers on the hook for bad investments
The defined-benefit pension system threatens the retirement security of government workers, as well as the pocketbooks of overburdened taxpayers.
When an Illinois investor takes a risk in the stock market and it doesn’t pay off, she takes a loss. Her neighbor isn’t forced to make up the difference.
But that’s exactly how local government pension funds function across the state.
Schaumburg taxpayers, who already pay some of the highest property taxes in the state, could be on the hook for $8.7 million due to lower-than-expected investment returns for the police pension fund, according to the Daily Herald.
Officials expected the fund to earn around $7.5 million in 2016 from investments, but the fund took a $1.2 million loss instead. This dropped the pension fund’s funding ratio to 60.5 percent from 64.2 percent. In 2017, the fund was able to cover less than half of that loss.
As the Daily Herald points out, local governments in Illinois are required to bring local pension funds up to at least 90 percent funded by 2040.
This debacle highlights the inherently flawed nature of defined-benefit pension plans, which are becoming extinct in the private sector and are increasingly being phased out in state and local governments as well.
Defined-benefit pensions rely on politicians’ promises as well as investment returns to fund benefits that have grown far faster than taxpayers’ ability to pay. This has forced persistent property tax hikes and services cuts across the state, even as homeowners have been dealing with lagging home values and a weak state economy. These poor investment returns during a time of economic growth also give uncertainty to government workers, who worry about the solvency of their government-managed retirement fund.
The solution to this problem in the long term is simple, and has been sitting under state lawmakers’ noses for nearly two decades: 401(k)-style retirement plans.
Created in 1998, more than 20,000 university workers have opted for a 401(k)-style retirement plan facilitated by the State Universities Retirement System, which offers workers more portability, flexibility and control. It also offers taxpayers far more certainty in what they’ll owe for worker retirements. Instead of relying on investment returns and other actuarial assumptions, local governments can budget a set percentage of payroll each year toward worker retirements.
Without beginning to end the pension crisis through self-managed retirement plans, Schaumburg taxpayers can expect continual property tax hikes to bail out a failed system.