Fatal conceit: The truth about Illinois’ government-run pension systems
Politicians have proven incapable of making the decisions required to maintain the health of Illinois’ pension systems, as they lack the knowledge and actuarial understanding to do so.
The Illinois House of Representatives on July 28 conducted its second hearing in a set of meetings to discuss Gov. Bruce Rauner’s new pension proposal, which affects state employees, university workers, downstate teachers, Chicago teachers, and Chicago and downstate police officers and firefighters. The governor’s plan includes changes to collective bargaining, allows municipalities to declare bankruptcy, gives employees a choice between benefit decreases or other employment reductions (depending on the retirement system), and starts a hybrid plan for new police officers and firefighters.
A third hearing is scheduled for Aug. 5. Most of the discussion thus far has had little to do with the real structural problems facing Illinois’ pension systems; the focus instead has been on raising taxes and moving more funds from state coffers to bail out Chicago.
The truth of the matter is that it doesn’t make sense to continue to fund a pension system that doesn’t work – politicians have proven incapable of making the decisions required to maintain the health of the systems, as they lack the knowledge and actuarial understanding to do so. They also fail to realize the long-term implications of mass underfunding.
Pension-fund math is complicated. It involves calculating the present value of expected future benefits, which only works when everything that goes into the equation is exact: the retirement age, the interest rate, the mortality table and much more. For example, imagine a pension system has one employee, age 30, who will retire 35 years from now at age 65 and die for sure at age 95. If one could know for certain that this worker’s retirement salary would be exactly $65,000 per year, the rate of return on investments during his career would be 7.5 percent and every payment would be made by both employer and employee, then yes, one could calculate the employee and employer contributions necessary and the plan would work because the math is correct.
But under Illinois’ pension system, politicians have to determine all of these variables – the age of retirement, what percent of final salary the pension annuity will be based on and whether it will be adjusted based on cost of living, without recalculating the employee and employer contributions. This results in an unbalanced plan due to faulty math. This is clearly an impossible task to ask elected officials to do perfectly.
Recent court rulings have reaffirmed that according to the Illinois Constitution’s pension clause, even if elected officials fail miserably at this task, even if unintentionally, nothing that can be done to correct the decisions that those officials may have been ill-suited to make in the first place.
Continuing down the defined-benefit pension path won’t work – not for taxpayers, the workers who are counting on their pensions to be there when they retire or the poor and disadvantaged who continue to see services cut as pensions take up an ever-growing chunk of the state budget. Illinois should adopt a 401(k)-style retirement system that removes elected officials from the process of determining retirement benefits. The state needs to empower workers to control their own retirements, and remove taxpayers from needing to make up the difference when lawmakers get the calculations wrong.