If Illinoisans needed any more proof that the state’s defined benefit pension systems are unmanageable and dysfunctional, they got it on Aug. 26.
Dick Ingram, head of the Teachers’ Retirement System, or TRS, informed Illinois’ pension conference committee that TRS’s actuaries made a mistake in calculating the expected savings of House Speaker Mike Madigan’s proposed pension fix.
Madigan’s plan, which makes some modifications to the existing pension plans but keeps the defined benefit system intact in his Senate Bill 1, was found to overstate savings by nearly $25 billion.
From Ingram’s letter to the pension conference committee:
“The revised analysis was prepared by Buck Consultants after carefully reviewing their original work. It increases state contributions by a total of $24.49 billion from the original amounts with a corresponding reduction in estimated state savings. The original estimate of savings developed in May of $130.74 billion have been reduced to $106.25 billion.”
Madigan’s plan was wholly inadequate prior to this mistake. His savings proposal would have only reduced the state’s unfunded liabilities to 2011 levels – levels that were then dangerously high and already the worst in the country.
And with $25 billion less in savings, his plan needs to be scrapped. His proposal doesn’t end the crisis in Illinois – it perpetuates it.
The bigger problem – the continuation of defined benefit plans
The bigger problem with Madigan’s plan and those being considered by the conference committee is these plans continue to bet on the failed defined benefit system. Defined benefit plans are rife with complexities and full of nasty surprises. Buck’s calculation mistake is just more evidence of that. And that’s why no matter how much money taxpayers and retirees throw into the system, the underfunding always gets worse.
Here’s proof: According to the Commission on Government Forecasting and Accountability, the state’s pension shortfall grew by $76 billion from 1996 to 2012. Of that amount, nearly $45 billion came from some form of missed “expectation”:
- The investment returns for the state’s five pension funds were lower than their assumed 8 percent expectation. 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.
There’s more. In 2011, when the pension underfunding totaled $83 billion, Madigan and the General Assembly increased taxes on Illinoisans by $7 billion a year. A majority of that money has been used to make the state – meaning taxpayer – contributions to the pension funds. Yet the unfunded liability is now nearly $100 billion according to official numbers.
What makes things worse is that taxpayers have put in $8 billion more than what was originally called for since former Gov. Jim Edgar’s 1995 pension “reform” proposal was implemented.
This defined benefit system is wreaking havoc on Illinoisans’ lives.
Retirees don’t know if they are going to see a pension check in the future, and Detroit’s bankruptcy has turned that fear into a potential reality.
Taxpayers don’t know how much it’s going to cost them to bail out the pension funds. Using the Illinois Policy Institute’s estimation of the state’s 2012 underfunding based on Moody’s Investors Service’s new methodology – each household is on the hook for nearly $45,000.
And the poor and disadvantaged, who rely on core government services to get by, don’t know how much more they’ll see indiscriminate cuts to education, health care and public safety.
Politicians have proven they can’t manage a retirement system based on defined benefit plans. The plans are unmanageable, unpredictable and unaffordable.
The conference committee members should vote themselves out of the pension business and move toward a plan that gives workers true retirement freedom. Such a plan already exists in Illinois and, ironically, one of the five state-run retirement systems, the State Universities Retirement System, runs it. More than 18,000 state university employees have their own self-managed plan that is similar to a 401(k)-style plan.
They are the only group of state workers and retirees in Illinois that will be spared the chaos and pains of a potential bankruptcy because they’ve been given full control and ownership over their retirement accounts.
Illinois must modernize its retirement system to give all workers control over their future. The Illinois Policy Institute has put together a plan that does just that. It can be found in House Bill 3303 and Senate Bill 2026.