The story of Illinois pensions over the last 20 years is full of reforms that were supposed to put the five state-run government pension systems on sound footing, but failed once they were implemented. Despite repeated attempts at a solution, the state’s official pension debt has jumped to nearly five times what it was in 1995.

Taxpayers and government workers are shell-shocked. And with more and more tax dollars going toward pensions each year, they don’t understand how things got this bad.

Pension managers and legislators have consistently underestimated the cost of pensions; the pension systems’ official unfunded liability is now nearly $100 billion, and the state now has the worst-funded pension system in the nation.

The faulty assumptions and missed expectations that are endemic of defined benefit systems have almost always driven up the shortfall and understated the true cost of pensions to taxpayers. As a result, the state’s uncontrollable unfunded pension liability has gone up spectacularly.

Because neither the state nor its actuaries have been able to provide a realistic status of defined benefit pension systems, taxpayers and government workers should not be expected to take the government’s own actuarial projections on faith.

Actuarial data need to be made fully transparent so the public can hold the government accountable for its poor performance in managing pensions and to ensure that the pension policy mistakes of the past 20 years are not repeated.

It’s a common refrain that politicians, and by extension taxpayers, haven’t paid enough into Illinois’ pension system. In reality, it is the faulty assumptions and missed expectations of the state’s actuarial calculations that are largely responsible for the pension crisis. And these errors go unchecked even though they occur continually.

Since 1996, taxpayers have contributed $8 billion more to pensions than the 1995 plan enacted by then-Gov. Jim Edgar called for. At the same time, the unfunded pension liability has increased dramatically.

Time and time again the state has demanded more money from taxpayers to fund its pension fixes. But every one of those fixes failed because the state underestimated the future cost of pensions.

When Edgar’s plan was passed, the pension shortfall was less than $20 billion. By 2003, however, unfunded liabilities had grown to more than $43 billion. In response, the state put an additional $10 billion into the pension funds from the sale of “pension obligation” bonds, but that did little to stop the growing shortfall.

By 2008, unfunded liabilities had risen to $54 billion, when the state sold an additional $7.5 billion in pension obligation bonds in 2010 and 2011. Once again the state’s attempted fix failed, and Illinois’ unfunded pension liability jumped to $97 billion in 2012.

In total, the state’s pension shortfall grew by $76 billion from 1996 to 2012, according to the Commission on Government Forecasting and Accountability, or COGFA. Of that amount, nearly $45 billion came from some form of missed “expectation” or faulty assumptions.


These include:

  • Investment returns for the state’s five pension funds that were much lower than the assumed 8 percent. Cost to taxpayers: $17.2 billion.
  • Unplanned benefit increases for employees. Cost to taxpayers: $5.8 billion.
  • Changes in actuarial assumptions. Cost to taxpayers: $8.8 billion.
  • “Other” actuarial factors. Cost to taxpayers: $12.9 billion

The remaining $32 billion was made up of a combination of employer contribution shortfalls, including a $2.3 billion pension holiday in 2006 and 2007, and unearned interest due to the $45 billion in shortfalls mentioned above.

The pension system relies primarily on investment returns to grow its assets. When money is missing from the pension fund due to faulty assumptions or funding shortfalls, the systems’ unfunded liability starts to snowball because the pension system can’t earn interest on money it doesn’t have.

Failed assumptions are costing taxpayers billions of dollars and driving the pension systems toward insolvency, and these same flawed practices have been going on for years. But actuaries have little reason to alter their methods since much of the actual process for making pension projections is done out of the public eye.

State organizations such as COGFA and the Illinois Department of Insurance only report on data released by state and local actuaries; they do not perform their own analyses of the pension systems. The state and local actuaries, in turn, only release the results of their analyses, and not the actuarial pension data itself.

Illinois’ politicians have proven themselves both unable to manage the pension system and incapable of passing any real solutions. As the last 30 years of missed expectations have shown, politicians cannot manage defined benefit pension plans because they are simply unmanageable.

The state of Illinois should make the pension systems’ complete actuarial data publically available so public watchdogs, private actuaries and policy institutions may challenge, analyze and confirm the status of Illinois’ pension systems.

Specifically, the Illinois General Assembly should require that all government pension funds operating under the authority of the state or its local governments release their “participant data.” These data provide a complete profile (age, gender, wages, job title, years of experience and other relevant factors) of the current workforce and of retirees. These data are essential for independent institutions to run their own analyses and create their own projections regarding the status of Illinois’ pension systems. This would allow for independent groups to run their own stress tests and alternate projections.

In addition, state actuaries should also be required to publish similar stress tests based on different actuarial assumptions. For example, Illinois’ pension funds currently use overly optimistic investment return assumptions in calculating their unfunded liability, but they should be required to run additional reports that use more realistic return rates. These optimistic numbers cause the state’s actuaries’ pension projections to look better than they should.

Stress tests would require state actuaries to publish alternate projections that use various:

  • Market discount rates
  • Mortality and participant assumptions
  • Other key actuarial assumptions

The pension systems should also be required to publish alternate projections based on possible actuarial changes and pension reforms. For example, state actuaries should publish projections and costs/savings of reform based on reforms such as, but not limited to:

  • Increases in the retirement age
  • Reductions in cost-of-living adjustments
  • Increases in employee contribution rates
  • Caps on pensionable salaries

These “stress tests” and alternate projections will allow taxpayers to see the real state of Illinois’ pensions, as well as the benefits of pension reform.

The ultimate solution to solving Illinois’ pension crisis and eliminating the unfunded liability going forward is the use of 401(k)-style retirement plans. 401(k)-style plans will remove control of pensions from the hands of politicians, ending the perennial shortfalls and surprises.

401(k)-style plans are also extremely transparent because the state’s retirement contribution goes directly into an employee owned and controlled account each pay period. Workers can see what’s in their accounts, and taxpayers are certain about their contributions.

But even if a 401(k)-style plans were enacted tomorrow, the existing defined benefit plans would still need to be managed for decades until no further defined benefit annuitants remain.

The citizens of Illinois have been kept in the dark about the cost of state pensions for far too long.

Only through greater transparency can taxpayers be certain that government programs are being administered honestly and competently. It is especially important that the pension system be transparent; both government workers and taxpayers depend on it operating efficiently.

Pension transparency will bring pressure on lawmakers to pass real reforms that will end the pension crisis.

And coupled with greater transparency for legacy defined benefit plans, 401(k)-style plans will end politicians’ control over worker retirements, give workers power over their own retirement dollars and save taxpayers from having to continually bail out a failed system.