The cost of pension inaction

by Conor Durkin When politicians lose interest in reform, taxpayers “lose interest,” too. Last week Gov. Quinn’s special legislative session failed to pass a bill dealing with Illinois’ pension problems.  Yet even if any measure had passed, Illinois’ massive problems would persist. The proposals debated in Springfield were far too small to make a visible...

by Conor Durkin
When politicians lose interest in reform, taxpayers “lose interest,” too.

Last week Gov. Quinn’s special legislative session failed to pass a bill dealing with Illinois’ pension problems.  Yet even if any measure had passed, Illinois’ massive problems would persist. The proposals debated in Springfield were far too small to make a visible dent in the state’s unfunded liabilities.

That’s too bad, because the longer Illinois politicians stall, the higher a price Illinois taxpayers will pay.

The price of inaction? Let’s take a look.

The state of Illinois is obligated to pay out $632 billion in pension benefits between now and 2045. To plan for these payments, the state needs to have $146 billion invested today. If that money earns the 8% annual return it is supposed to, the fund would be able to meet all future obligations without problem.

However, there’s a catch: the state doesn’t have $146 billion today. Instead, it has only set aside $63 billion, leaving an $83 billion hole.

The missing $83 billion is a problem in and of itself, but another major issue is what happens as a result of that $83 billion hole: lost investment income. The vast majority of funding for pension benefits is supposed to come from investment returns, but if there’s less money in the funds, they can’t earn a high enough return.  The funds have an annual investment target of about 8%, but 8% of $63 billion is much less than 8% of $146 billion.

Altogether, the funds miss out on more than $6.5 billion a year in investment returns.  That works out to nearly $18 million per day that the state loses as a result of the pension funding shortfall.

That’s a serious problem for Illinois. Realistically, pension reform may not fill the $83 billion hole in one shot, but serious reform measures could go far in fixing the problem.

The longer the state goes without pension reform, the higher the price of inaction, as lost investment returns snowball into an increasingly larger unfunded liability.

That’s a cost Illinois simply can’t afford.