It’s not just Illinois, but Illinois Is Ground Zero for the Public-Sector Pension Crisis.
It seems [no, it is] not only unfair, but also unreasonably costly, to force hundreds of millions of Americans to shoulder a burden that has nothing to do with them.
Only 4 percent of Americans working in the private sector have access to a defined-benefit pension plan as their sole form of retirement security. The rest of us must rely on some combination of 401(k)s, hybrid plans, or Social Security.
The Prairie State’s pension debt is the worst in the nation relative to the size of each state’s economy. Moody’s Investors Service estimates unfunded liabilities in Illinois’ five state-managed pension systems at $230 billion for fiscal year 2019, equal to about 26 percent of gross domestic product. Moody’s also projects that the debt will grow to an all-time high of $261 billion for fiscal year 2020, owing to investment losses in markets riled by COVID-19.
Hiking taxes or otherwise throwing more money at the current pension system will not solve the problem. Illinois spends more of its revenue on pensions than any other state in the nation but also has the largest gap with respect to what it would need to pay without reform. Voters recognized that income tax hikes are the wrong strategy when they soundly rejected a proposal to raise revenue by switching from a flat to a progressive income tax on the November 3 ballot.
Many of the toughest problems facing Illinoisans stem from this crisis, leaving their home state at the bottom of too many “best” lists and at the top of many “worst” lists.
- The second highest property taxes in the nation, leaving someone with a home valued at the median price of $187,200 paying $4,299 per year in property taxes, according to WalletHub.
- The second slowest growth in home values since the Great Recession.
- The second most debt per taxpayer according to Truth in Accounting, at $52,000 per state taxpayer.
- The “least friendly” total state and local tax burden for the middle class, according to personal finance site Kiplinger.
- The largest raw population decline over the past decade, with the high state and local tax burden the most common reason residents say they want to leave.
Problem With Tiers
There is much more to the article including a discussion of pension tiers.
Those hired before before the 2010 reforms are in tier 1. All groups have excessive benefits but tier 1 is outrageous. Teachers average $2.3 million.
The average tier 1 retiree makes $2 million in retirement.
Illinois’s courts will only allow changes that affect new workers, declaring the benefits of current workers and retirees off-limits, including even the future growth rate of benefits for work not yet performed.
The Solution
The solution is not pension reform, or higher taxes, but rather bankruptcy reform.
Serious pension reform will not happen unless and until bankruptcy reform happens first.
Pensions are not sacrosanct in bankruptcy. But courts will will rule they are until then.
Bankruptcy negotiation happens at the Federal level, not the state level. But states can opt out.
Illinois is one of the states that did opt out.
Bush did not try, nor did Trump, to fix this at the national level.
Of course, the matter would not even come up under Obama. He made negative progress on union and pension reform.
At the state level, many cities would immediately declare bankruptcy, if only they could. These cash-strapped cities desperately need to shed impossible to pay pension obligations.
If illinois Governor JB Pritzker was serious about fixing the pension mess, he would promote bankruptcy reform.
But he won’t. He is another corrupt governor beholden to corrupt unions.
Mish
Mish, you made the right moving leaving Illinois. My knowledge of Illinois corruption goes back to the fall of 1970, when Secretary of State Paul Powell died. Lots of cash was found in shoe boxes in his hotel room in Springfield, where he lived. It seems to Powell could be bought for the right price.
While the pension situation is crisis level, the workers are not to blame. I do not receive a pension nor am I eligible for one. The workers paid their fair share requirements and took less in pay for it and should not be held accountable for the misdeeds of others. The problem is that the politicians did not hold up their end and did not make the matching required contributions and have now had to borrow money to make obligations. Similar to what the Federal government has done to the Social Security fund. A start would be to eliminate all salaries, pensions, health plans and any other perks to all elected officials. Moving forward: replace the pension for new hires with Social Security and matching IRA contributions up to 3% like millions of other workers.
The probability of Madigan and Pritzker cutting any government jobs in Illinois is nil.
“It seems [no, it is] not only unfair, but also unreasonably costly, to force hundreds of millions of Americans to shoulder a burden that has nothing to do with them.”
So if you are not obese, over 75 with co-morbidities, you should not wear a mask, cease travel nor lock down?
If the democrats get back in charge, they’ll bail out the pensions in the democratic states and cities. Municipal bonds will be bought up by the FED. Not a question of if, but when.
When Detroit went bankrupt, even owners of its muni bonds took a haircut. If you are going to own any muni bonds issued by Illinois or its political subdivisions, stick to high quality credits.
It will happen. State pensions will be bailed out.
Sadly this does not happen in the general public. I knew a guy who worked for TWA for 30 years. He was supposed to get a $3000 a month pension. Thanks to Ichan buying TWA and using the pension money for other things, TWA went bankrupt and the pension plan is now transferred to the Government. He now gets $300 a month.
How do I know this. He retired but had to work as a Janitor in his 70s to make ends meet. He was the janitor in my office building.
Why would Canada pay a pension to someone who worked in the U.S. all his life?
One has to live in Canada for at least 20 years after reaching age 18 to qualify for an Old Age pension benefit. Anyone who has contributed to the Canada Pension Plan since it went into effect in 1966 is entitled to a benefit and can apply as early as age 60. In my case, I contributed a very modest amount to the plan from summer jobs while I was still in college and get a small benefit every month.
As a career teacher, I paid close to 10% of my modest salary (when compared with my peers with multiple graduate degrees and valuable experience) into the teachers retirement system in Illinois. This money accrued decades of interest. The state government opted to cop out of their statutory obligations to contribute a partially matching amount into the fund for a generation, leaving the fund underfunded. I, like most teachers in Illinois, did not contribute to social security while teaching, nor did our employees. We have no social security retirement eligibility. Our pensions are all we’ve got. The state hiding behind bankruptcy and further stealing from the funds, largely contributed out of member salaries is tantamount to theft. Not only is it illegal but morally reprehensible. What this article advocates is changing the law to make theft legal. Illinois has many fiscal issues derived from a litany of poor political decisions. I will not stand for teachers being the whipping boy again in a poorly disguised money-grab by the privileged 1% who try to divide and conquer regular working folks.
I understand.
One of my kids is a science (and GT) teacher . Here there are no unions, and she makes far less than a teacher does in Illinois…but like Illinois, they don’t contribute to SS and she will draw no SS benefit when she retires….and like most teachers, if you paid her by the our she’d probably make less than minimum wage.
No wonder teachers often bail when they get vested and get jobs that deduct for SS.
Unfortunately in the Illinois case, theft will be made legal….my guess is that the state will be allowed to go bankrupt at some point. Taxes are so high now the state is depopulating.
Only federal bailouts can delay defaults…and at some point those will be politically impossible, I think.
It’s always working people who get screwed on pension mismanagement. It’s an old story. It happened with smokestack industries and it’ll happen with unionized state employees at some point.
HA! welcome to Kentucky! (isnt it an R state?) https://www.pbs.org/wgbh/frontline/film/the-pension-gamble/
I am guessing there are probably janitors, police, bus drivers, and other employees who do not have to go to college for 4 years will probably get larger pension payments than some Illinois teachers. I do have a cousin who will pull in $95k a year teacher pension. I do not have a pension. Sort of wished I took the teaching route.
The new Fed/Treasury coalition, under the auspices of MMT, will simply dump a trillion, or so, digital dollars into the PBGC, and viola, all fixed.
Then another trillion or two into the DNC to see to it both houses of Congress stay blue for decades, and there it is. A hybrid system of government located on a line somewhere between Canada and the old Soviet Union.
Create a crisis, then offer a solution. American politics in a nut shell. And to think, Rahm (never let a crisis go to waste) Emanuel is back on his way to stardom in the new administration. Suppose he still has connections to Illinois?
And certainly, the teachers unions still maintain an office in the vicinity of K Street?
I just looked at a doc provided for the teachers in that Illinois system. Its not clear how long they contributed, but for at least a portion of the time they contributed 6% of salary to the pension plan. The tier 1 formula is somewhat complex and depends on years of service, average salary for four consecutive out of 10 last years as well as age of retirement. They used an example of 30years, aveage salary of 85K and age 60 giving an annual benefit of 56,100.
My back of the envelope quick estimate of 6% contribution + 6% state match + 6% return over 30 years should have resulted in roughly enough to fund the above amount for 18 years.
So.. idk. I’d need more info on the orginal employee contribution rate before saying the blame is on the unions. Sounds on face of it most of the blame lay with the state for underfunding and poorly investing.
One way or another, taxes will go up.
Abandon the benefit oension system and the state and local employment benefits are severely behind the private sector in terms of attating employees. Wages in the paycheck would have to go up.
I receive offers from state and local governments every couple months, and I laugh at the pay rates–BUT their healtcare options and defined pension plans make up a portion of the differential.
It’s a puzzle, because you want competence in you state and local government
Slow news day…I thought this was interesting…..
Do Illinois teachers Tier 1 make 2 mil a year or in total retirement over years?
Total.
Doesn’t matter – the money isn’t there anyway 🙂
Takes two to negotiate and the politicians are as guilty as the unions. No one forced them to sign these agreements but it was an easy way to kick the can down the road. Low wages for big pensions later. And then wages started to increase and wow! A really big problem. Especially when you add overtime to the mix – especially in the police unions.
The illinois pension problem has been obvious for at least 20 to 30 years, so this is a bit of a “duh” type of article…it has been written about in much more detail many times. Slashing outrageous pension benefits is the obvious solution, but the guilded class called public employee unions, and politicians themselves, will never allow that. In the end they will be bailed out by the Federal Government. Count on it.
“Moody’s Investors Service estimates unfunded liabilities in Illinois’ five state-managed pension systems at $230 billion for fiscal year 2019”
The Treasury just clawed back $500 billion from the fed that was appropriated to go to ultra rich, corrupt, pampered, socialism thrown at Wall Street, rich gigantic corporations, and the Ultra Rich.
We give Racist Nazi Israel $38 billion a year to mass murder non Jews who have brown skin, kill their babies, steal their land, and segregate them along racial lines base on their skin, religion, and race…for no other reason than they are not Jewish.
John McCain and Barack Obama gave criminal Wall Street Fraudsterts how much…was it $500 billion – for free and didn’t prosecute them.
The Fed has a balance sheet of about $7,000 billion (7 Trillion) that it gave to the Ultra Rich and rich gigantic corporations.
And.
Now.
Mish.
Complains.
About.
Giving.
$230 billion.
To.
Working.
Folk.
Seriously?
what if we pump the s&p500 to 10,000? would that solve the crisis? what would be the downside of pumping it to 10,000 and leaving it there?
To me the reality is the state will see draconian service cuts first. You won’t see a state declaring bankruptcy and not paying pensions. There will be more use of tiers.
A mess like this convinces me that public service unions are a problem, at least when it comes to salary and benefit negotations
No provision for states to declare bankruptcy.
Just cities, municipalities, etc.
States can default
I looked at Canada….there is much to like..but guys who do what I do have a hard time making a good living off what NHS pays….and everybody has it, so they expect you to take it. From what I’ve gathered, there is a lot of fraud by unscrupulous doctors.
Taxes are a lot higher…and they don’t let everyone in, either….to get a visa, you need to have a job first.
The cities there have that serious real estate bubble thing going that makes the one here look small in comparison.
I think Mish’s decision on Utah was pretty good…It’s warmer here though, and 62% of the people here don’t attend a church that believes in Golden Plates somebody found in New York in 1820.
I don’t believe theirs any utopian place to live just +/- and what suits a person. Nothing is free and anyone that says otherwise is either a fool or bold face liar. I prefer to believe the person is just a misguided fool in the obviously most caring of ways.
You say Bush nor Trump? Wasn’t Obama an Illinois Senator and would’ve been aware of the situation in depth?
Yes, but Obama was beholden to unions. Would never even be under consideration. Thought that was a given but will add a note.
I can definitely see that standpoint. The next big crisis will be pensions and most democrat run cities face the biggest issues along with the high taxes. I just don’t see a two party system. Sure you have different slogans, narratives and public relations. At the end of the day there’s only two parties which are the working and the “elite”. Nothing will be solved as over the last say 20 years I can’t think of anything with great conviction that has benefited the second half over any meaningful long term way. The pensions are just one of the many buy the vote schemes no different than identity politics or any other fear mongered entitlement “social security” to be taken away as if either side is footing the bill. – Thank you for the clarification!