Originally published at Forbes.com on August 15, 2018.
What should states be doing with respect to retirement benefits for their workers? Is it just a political debate, like everything else? Red vs. blue, left vs. right? Here in Illinois, at least, it’s a much more fundamental issue, one of public trust.
Recall that our state plans are among the worst-funded in the nation. Local municipal plans are also in terrible shape and the source of massive tax hikes and shortfalls in city services. A recent analysis by the Illinois Policy Institute documented the degree to which pension spending is sucking up property tax revenue that would otherwise go to providing services.
And the reason is not simply deferred contributions, but benefits which far exceed the private sector in their generosity after multiple increases in benefit levels, reductions in retirement age, increases in COLA (see my prior listing of benefit increases at the state level) — increases which, to their credit, legislators tried to remedy with a Tier II benefit for new hires starting in 2011, but by then the horse was already out of the barn, in terms of benefits already guaranteed to state workers, amounts which are simply massive.
But, more immediately, the city of Chicago and Mayor Rahm Emmanuel have proposed issuing Pension Obligation Bonds to the tune of $10 billion. As explained by Adam Schuster at the Illinois Policy Institute, the city is marketing this as, basically, free money, with the expectation that they’ll be able to gain more money in investment earnings than they’ll spend in interest payments on the bonds — a sort of shell game which wouldn’t fly as a means of generating cashflow for ordinary city spending and shouldn’t be on the table here, either. What’s more, due to the city’s credit rating, Schuster writes,
Officials suggest the plan may leverage a financial vehicle known as securitization, putting taxpayers on the hook by dedicating specific revenue streams to ensure the bonds are repaid. In other words, bondholders would be guaranteed repayment while taxpayers face the prospect of service cuts or tax hikes in the event of a downturn.
Does this mean that investors are guaranteed their return even in case of bankruptcy? I’m not expert enough to know.
And Chicago’s pensions are even more poorly funded than those of the state of Illinois, with a funding ratio of 27% across all City of Chicago plans, due to the same combination of generous benefit promises and poor funding.
This is a violation of public trust.
In order to gain the short-term benefits of public approval for their spending initiatives without the pain of taxes, in order to get union support for their re-election campaigns, in order to promise everything now, without regard to the impact of their actions on future generations, politicians in Chicago and in Illinois happily increase benefits and defer funding. And, again, the Democratic candidate for governor, and likely next governor, has no intention of remedying the situation.
I had previously written that public pension pre-funding is vital as a matter of good governance and fiscal responsibility. But I’ll be honest with you: the example of Illinois and Chicago make me very dubious that we can rely on states to follow through on whatever commitments they make with respect to funding their pension promises from year to year. Whether that’s by simply not making required contributions, or developing delusionally-optimistic contribution schedules, the temptation is simply too great to borrow from future generations in ways that are hidden and conform, on paper, to balanced-budget requirements.
Now, perhaps in other cities and other states, these games are incomprehensible. It is true that there are a few bright spots in public pensions, such as Wisconsin’s risk sharing pension (watch this space . . . ), but Illinois is hardly the only such state; New Jersey is similarly troubled, as outlined in an op-ed even just today. And politicians now in office might defend themselves by arguing that it was their predecessors that got created this problem, but that doesn’t remedy our current situation.
The bottom line is that I simply don’t see any path forward other than removing states and municipalities from the business of running pension plans. If unions don’t want their members subject to the risks of individual accounts, let them run plans for their members and take on the risk themselves, negotiating with employers for fair contribution levels in line with the private sector and educating their membership on the need for additional voluntary contributions. But we can’t keep the system as it is.
December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.
Your statement regarding lowering the retirement age for future state pensioners is incorrect.State after state have increased the retirement age and in the past 15 years benefits have been drastically reduced.You fail to mention that the average salary for state and municipal employees is dwarfed by the private sector.People choose government service for a number of reasons,getting rich isn’t one of them.The fact that the states and municipalities have failed to invest funds properly should not be the fault of the worker.Promises made should be promised kept.Why dont you instead focus on the fleecing of the American worker by corporate greed.Its under reported and shameful the average American has to work two and three jobs just to raise a family.Parents high five as they pass each other on their way to the next job.
You have reasonable points. However, the more recent increases in retirement age (e.g., Illinois’ “Tier 2” benefits) were preceded by generous retirement age reductions, e.g., 30 and out, rule of 85, etc. Also, the question of how public sector and private sector salaries compare is in dispute, but at the core of my complaint is that legislators and unions both agreed to provide generous pension benefits as a trade-off to higher salaries, because the generous pension benefits could be funded by future generations instead of right now.
In some instances this is true. In New York State they are now up to Tier 6 with a cap on double dipping. Now I believe only 15k over your base salary can be averaged in. Many retirees earn as much or more than their final average salary with COLA. But many have passed on because Tier 1 ended in 1973. We have to define what you believe is a normal pension vs. an exorbitant one.All these comments are true in a sense but every situation is different. Individuals that gave up wages means that they had deferred compensation in which the employer did not have to pay taxes on. and it gets more complicated. look out America if earned pensions are taken away . The money is going to have to come from somewhere.
You fail to mention that the average salary for state and municipal employees is dwarfed by the private sector.People choose government service for a number of reasons,getting rich isn’t one of them.
Unskilled GED educated, rank and file gov jobs like cop and firewhiner are making more than ANYONE in the public AND private sector, including Doctors, Lawyers, Judges, Dentists, Nurses, even the POTUS. They are, literally, becoming MULTI-MILLIONAIRES, in less than 1 year in some cases (like new LAPD Chief Moore). GED educated Gov employees are becoming multi-millionaires. The new 1%er’s. New LAPD Chief Michael Moore pulled down $1.5 million in a one year time frame ($1.27 million DROP pay out included). It will top $2.5 million at the end of his second year, and will pay out $550K every year after. So, where in the private sector does that happen? Where unskilled Gov jobs pay out MILLIONS ? No where, that’s where. So stop the spin that public employees make less forbetter benefits. The make FAR MORE in every aspect. And I am not even going to count the value of their time off (15-40 days PAID vacation, 14 PAID holidays, 12 PAID sick leave days- all “bankable”):
“$1,270,000 DROP fraud (unheard of in real life)+ $170,000 unused sick leave (unheard of in real life)= $1,440,000 in cold hard cash, + $240,00/year pension at age 53 (unheard of in real life) + $299,000/year salary ($539,000/year total) = $1,440,000 + $539,000/year pension-salary = $1,980,000/First year pay out.
http://www.latimes.com/local/lanow/la-me-chief-drop-2018-08012-story.html
Great article on the Illinois pension scam——–No excuses out of control historical theft ——
“If unions don’t want their members subject to the risks of individual accounts, let them run plans for their members and take on the risk themselves, negotiating with employers for fair contribution levels in line with the private sector and educating their membership on the need for additional voluntary contributions.”
The unions did the same thing with regard to multi-employer pensions. Enriched benefits for those cashing in and moving out, and screwed younger generations.
https://larrylittlefield.wordpress.com/2018/08/15/an-open-secret-mta-capital-costs-have-soared-to-pay-for-underfunded-metro-new-york-construction-union-pensions/
Business? How about GE.
Look beyond pensions and you’ll find that every deal, decision and trend of the past 35 years has gone the same way — to benefit Generation Greed, at the expense of those to follow. It’s about values, the values of a generation, something appearing in public discourse in the UK more than the US.
https://larrylittlefield.wordpress.com/2018/07/22/generation-greed-away-from-new-york-is-omerta-starting-to-crack/
Larry: We were subject to the risks of individual accounts in the form of a defined benefit pension. If you do the math benefits were cut in the fund on a continuous basis. So would would be the difference of a monthly benefit cut or a loss in your 401K. Trustees aimed to shift the losses to the retiree the greatest . Current workers still maintain increased pension contributions and salary. retirees can’t play catch-up football. do you think UPS is contributing enough in upstate New York with contribution levels of 33-36k a year per employee?