$620 Billion Promised, Only $62 Billion Set Aside in Illinois

Published September 4, 2013

Opponents of pension reform try to downplay Illinois’ $100 billion in official pension debt because it’s “not due at one point in time.” They like to compare the pension debt to a “mortgage,” which is paid over 30 years.

But this argument is misleading, and here’s why: Illinois isn’t on the hook for just $100 billion in pension debt over the next 30 years. The truth is that Illinois will pay out $620 billion in pension benefits through 2045. This $620 billion is the amount that Illinois’ five state-run pension systems will pay out in retirement benefits and cost of living adjustments for work already completed by workers and retirees. And the bill starts getting paid next year. The pension systems will pay out nearly $9 billion in benefits in 2014. These payouts will increase every year through 2045. 

The problem is, the five pension funds have only $62 billion in assets set aside for those $620 billion in future obligations.

Untrustworthy Politicians

Illinois workers and retirees are finding that after decades of entrusting their retirements to the government, politicians have squandered their savings. And they’re learning from Detroit’s bankruptcy that no amount of constitutional protections can protect workers retirements from politicians’ follies and federal bankruptcy laws. 

Without major reforms, Illinois’ pension systems and its retirees are only one market downturn away from bankruptcy.

Disturbing Actuarial Analysis

The state’s actuaries say the five state-run funds should have $159 billion in assets today to meet their full obligations through 2045. That amount, invested at a rate of 8 percent every year until 2045, would be enough to make the retirement payouts of more than $600 billion.

However, with only $62 billion in assets on hand, the funds have a shortfall of $97 billion. That means Illinois has only 39 cents of every dollar it should have today to make sure its government workers receive their pensions.

The $97 billion shortfall also means the pension funds can’t earn investment income on that amount. In one year alone, the funds will miss $7.76 billion in investment income, assuming their expectation of 8 percent returns.

Unrealistic Actuarial Assumptions

To make matters worse, academics and the credit rating agencies say the state’s 8 percent expected investment returns are unrealistic and make the pension systems look healthier than they actually are. Using lower returns based on Moody’s Investors Service’s new methodology for measuring pension debt, the Illinois Policy Institute estimates the state’s 2012 pension shortfall is more than $200 billion—dropping the funding ratio to less than 25 percent.

Illinois workers and retirees are trapped in a collapsing system over which they have no control. That’s the result of the state not allowing workers to manage their own retirement savings. And as the Detroit crisis reveals, retirees can’t escape the consequences of bankruptcy.

No Control Over System

Illinois’ workers shouldn’t be forced to participate in a retirement plan they don’t own. 

Instead, Illinois should move to a plan that gives current workers full control over their retirement investments. Such a plan already exists in Illinois, and one of the five state-run retirement systems, the State Universities Retirement System, runs it.

Nearly 18,000 state university employees or retirees 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 of a potential bankruptcy, because they have full ownership over their retirements.

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.

Ted Dabrowski ([email protected]) is vice president of policy at the Illinois Policy Institute.