The Illinois pension pot: the less you put in, the less you earn

Wouldn’t it be nice to earn 7 to 8 percent interest on money you don’t have in the bank? That’s exactly what caretakers of the state’s public pension systems assume. Illinois’ five pension systems are expected to pay out more than $600 billion between now and 2045. In order to pay for these benefits, the...

Wouldn’t it be nice to earn 7 to 8 percent interest on money you don’t have in the bank?

That’s exactly what caretakers of the state’s public pension systems assume.

Illinois’ five pension systems are expected to pay out more than $600 billion between now and 2045. In order to pay for these benefits, the pension systems would need $159 billion on hand. Not only that – this $159 billion would also need to earn nearly 8 percent investment returns every single year for the next three decades.

But here’s the catch: the pension systems have just $62 billion on hand. So even if the pension systems are able to achieve their promised returns, they are missing out on billions of dollars every year in lost investment income.

An 8 percent return on $62 billion is a lot less than an 8 percent return on $159 billion. Because the pension systems can’t earn interest on money that isn’t there, it’s earning absolutely nothing on the unfunded liability.

Altogether, the pension systems miss out on more than $7.6 billion per year in investment returns. That works out to nearly $21 million per day that the state loses as a result of the pension shortfall.

Of course, the first step to get out of the pension debt hole is stop digging. The only way to keep the pension liability from growing further is to shift government workers to a defined-contribution plan for all future work. That means taking control over retirement savings away from the politicians and giving it back to workers. The longer the state goes without comprehensive pension reform, the worse the cost of inaction will grow.

That’s a cost the state simply cannot afford to bear.