By Ted Dabrowski -
Even if Illinois pension funds see investment returns that exceed expectations, that still won’t be enough to plug the largest fund’s hole.
The Teachers’ Retirement System reported its pension underfunding grew to $55.73 billion as of June 30, 2013 — an increase of more than $3.5 billion since the end of the previous fiscal year — despite the fact that TRS experienced above-average investment returns of 12.8%.
Two key factors are driving the growing unfunded liability.
First, TRS only has $0.40 in the bank for every dollar it should have today to make necessary pension payouts in the future. That means the high investment returns in 2013 were earned on less than half of the assets that TRS should have.
TRS acknowledged this in a recent press release:
“Despite these strong returns, TRS cannot invest its way out of the funding hole we are in,” Ingram added. “This increase in the System’s unfunded liability, even with good investment results, is another wake-up call to state officials and our members that TRS long-term finances continue to head in the wrong direction.”
Second, the inherent flaws of the state’s defined benefit pension system have driven up the shortfall significantly. According to the Commission on Government Forecasting and Accountability, the state’s pension shortfall grew by $41 billion from 1996 to 2012.
Of that amount, nearly $23 billion came from some form of missed “assumption” that continually plagues defined benefit pension plans:
- The investment returns for the state’s five pension funds were lower than their assumed 8% expectation. Cost to taxpayers: $9.5 billion.
- Unplanned benefit increases for employees. Cost to taxpayers: $1.1 billion.
- Changes in actuarial assumptions. Cost to taxpayers: $4.9 billion.
- “Other” actuarial factors. Cost to taxpayers: $7.2 billion.
TRS fails to acknowledge the failures of the defined benefits plan and instead chooses to blame taxpayers for not contributing enough to the system.
But the truth is taxpayers have contributed much more to TRS than its own members have.
Member contributions increased by 108% between 1998 and 2012. During the same time period, taxpayer contributions to teacher retirements increased by 409%.
In 2012 alone, Illinois taxpayers contributed $2.56 billion to TRS, almost three times more than what its members contributed.
High investment returns and ever-higher contributions from taxpayers won’t solve Illinois’ pension crisis. The only sustainable solution is to move all state workers to 401(k)-style retirement plans for future work.
The Illinois General Assembly need only look toward Illinois’ State Universities Retirement System for a model plan: more than 18,000 of its members already control and own their retirement plans.