Pension Guarantee Would Be a Hammock Not a Safety Net

Published May 8, 2013

A few years ago, I was talking to a new college graduate who was moving to an expensive, distant city where she didn’t have a job.

I asked, “How will you support yourself?”

She shrugged and said her parents had money and would support her whether or not she found work.

I couldn’t help but think, “Her parents aren’t doing her any favors.”

Sure enough, during the past several years she has failed to hold steady long-term employment.

These types of blank-check relationships often are filled with good intentions but seldom have positive results.

Illinois Moves Toward Guarantee

And right now, the Illinois General Assembly is on the brink of creating a similar relationship with its pension funds.

The mistake is called a pension guarantee.

And several pension reform bills being considered by the General Assembly – including one introduced by House Speaker Mike Madigan (D-Chicago) – have guarantee language.

The legislation allows the pension funds to sue the state if the amount of money they request is not provided. The amount the funds can request is based on actuary projections and investment returns.

No such guarantee exists now.

In fact, here is what the pension code says on the matter:

‘Not a Legal Obligation’

“Any pension payable under any law hereinbefore referred to shall not be construed to be a legal obligation or debt of the State, … but shall be held to be solely an obligation of such pension fund, unless otherwise specifically provided in the law creating such fund.”

But the Madigan bill would change that.

If the state becomes legally obligated to cover the pension costs, what incentive do the pension funds have to invest well? After all, the taxpayers would be standing there with an open checkbook.

Fund managers could sit back and do nothing, and the funds themselves would become perpetual wards of the taxpayers.

Conversely, fund managers could end up making high-risk investments knowing that no matter how much money they lose state taxpayers would make up the difference.

Guarantee for Perpetuity

I posed this scenario to Dave Urbanek, spokesman for the Teachers’ Retirement System, the largest of the state’s pension funds.

“I don’t think this would affect investment decisions tremendously,” he said.

But keep in mind this is a guarantee for perpetuity.

While the current managers of the pension funds might not be tempted to alter investment decisions based on a state funding guarantee, who knows what a fund manager will do 20 or 30 years from now?

If we have learned anything from past pension “reforms,” kicking a problem down the road isn’t a reform at all.

Scott Reeder ([email protected]) is journalist in residence at the Illinois Policy Institute.