Pension Debts Hit $530 Billion
Hello Illinois taxpayers, the Pension Shortfall Surpasses $500 Billion and your average debt burden is now $110,000 per household.
Moody’s estimate of Illinois’ retirement debts, made up of pension and retiree health shortfalls at the state and local level, hits $530 billion in 2020.
This is despite a massive multi-year stock market rally and huge tax hikes that went to pension funds and little else.
Illinois just reached an alarming milestone: each Illinois household is now on the hook for, on average, $110,000 in government-worker retirement debts. That figure is the result of dividing Illinois’ $530 billion in state and local retirement shortfalls among the state’s 4.9 million households. In 2019, the burden was $90,000 per household.
Shortfall Contribution
- Illinois’ five state-run pension funds – $313 billion
- State retiree health insurance – $55 billion
- State pension obligation bonds – $9 billion
- Chicago and Cook County pensions and retiree health – $122 billion
- Other local government pensions and retiree health – $32 billion
llinois’ debt swamps that of its neighbors and other big states. At $313 billion, Illinois’ state-level pension debt is the nation’s biggest, the 2nd-most on a per household basis, and the highest when measured as a share of state revenues and GDP. Illinois also has the nation’s highest pension costs as a share of revenues, according to Moody’s.
Spotlight Chicago
The $110,000 per household is an average across the entire state, but the precise burden for Illinoisans differs depending on where they live. The debt burden on Chicago’s one million households is larger because of the city’s deeper debt crisis. There, each household is on the hook for $180,000 for their share of state and local retirement debts.
Illinois vs Other States
- California, with more than triple the population of Illinois, has a state-level shortfall of $240 billion – $70 billion less than Illinois.
- Texas, with more than double the population of Illinois, has a shortfall of $173 billion – $140 billion less than Illinois.
- Kentucky, suffering a pension crisis of its own, has a $56 billion state-level shortfall – just a fifth the size of Illinois’.
- When measured on a per household basis, Illinois’ state-level pension debt totals more than $64,200. That’s the nation’s 2nd-largest burden, behind only Connecticut’s $65,400 per household.
- Illinoisans’ state-level household burden is four times larger than the national average of $15,600
- Compared to residents in neighboring Iowa and Wisconsin, Illinoisans’ burdens are 18 to 20 times larger. Iowa and Wisconsin’s per household burdens are $3,500 and $3,200, respectively.
Pension Shortfall vs Revenue
Moody’s says Illinois’ “tread water” pension cost – the annual state contribution required to ensure the state’s pension shortfall doesn’t grow from one year to the next – equals 21 percent of Illinois’ own-source tax revenues.
No other state comes close to that amount. Connecticut’s tread water cost equals 15 percent of revenues, the national average is just 4 percent, and all of Illinois’ neighbors’ costs, except Kentucky, equal just 5 percent or less of revenues.
Pension Funding Ratio
Hard Truth
The hard truth is that Illinois’ crisis will only worsen over time. As the state’s retirement debts continue to grow, more and more Illinoisans will be motivated to leave the state’s debts behind while fewer migrants will be willing to move in and assume the pension burden. A growing debt burden on an ever-shrinking population will only hasten Illinois’ downward spiral.
Pension reform is inevitable. The question is whether Illinois’ legislature will address the crisis now, while Illinois still has assets and dynamism left, or delay until this state is a shadow of its former self. It’s a question of whether those reforms will happen in a controlled, organized fashion, or under the duress of fiscal and political chaos. And it’s a question of whether lawmakers will enact true structural reforms or pass more can-kicks as they have in the past.
Solution
Wirepoints offers a four-pronged solution to the Illinois Pension Crisis
- A constitutional amendment that “conclusively overrides the pension protection clause and all other state law issues”.
- State retirees would be required to pay for half of their health insurance costs – the national average for public workers – on a means-tested basis.
- Freeze benefits.
- Local funds’ circumstances vary substantially. The state has 665 locally sponsored pensions. They may require different reform options.
Bankruptcy Reform
I agree with all the points above, but Wirepoints missed a huge one: bankruptcy reform.
Trump wasted his first two years attempting to kill Obamacare. Instead, we could have had national bankruptcy reform and who knows what else.
As it stands now, states can either allow or disallow municipal bankruptcies. Illinois does not allow municipal bankruptcies.
Municipal bankruptcies fall under Federal, not state rules. If Illinois allowed municipal bankruptcies, that alone would offer a way out.
Federal laws would immediately supersede any state law that says pensions are sacrosanct.
So rather than spelling it out in a constitutional amendment, the simpler approach is to just allow bankruptcies.
The mere threat of bankruptcy, would bring unions and pension plans to the table.
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That said, more and more states, https://www.illinoispolicy.org/oklahoma-pension-reform-401k-style-plans-for-new-state-workers/, have moved their workers onto some form of a DC plan in an attempt to get their budgets under control and give workers more ownership over their retirements. Kentucky’s governor has also set his sights on https://www.illinoispolicy.org/kentucky-governor-elect-401k-style-plans-for-new-government-employees/“
That only continues in the public sector because the public treasury can be raided to make up http://shortfalls.es and everyone else.”
“Is there a way to bridge this pension divide between the private and public sectors? The 1970s-era Saskatchewan NDP government under Premier Allan Blakeney did just that. In 1977, the NDP government thought it was a good idea to limit the risk delivered to future taxpayers courtesy of future pension liabilities.”
“As of 1977, the New Democrats grandfathered existing employees they could keep their defined benefit plan or move into the new defined contribution plan. And new public sector employees were automatically enrolled in defined contribution plans that, by design, do not create unfunded liabilities, but which anyway deliver retirement income.
Such a reform was more than fair. It makes sense to ask the government sector to be content with the combination of pension contributions plus investment returns. That is how most of us will fund our retirement.
Decades later, here’s the result of Saskatchewan’s reforms: That province’s auditor general http://auditor.sk.ca/pub/publications/public_reports/2011/2011-report-volume-2/2011vol2fr.pdf that future cash flows needed to fund defined benefit pension plans will continue to increase until 2021. Then, such needed cash flows will decline and be on a path to permanently extinguish Saskatchewan’s obligations to long-ago closed public sector pension plans.”
available at the time of this study. The 2009 cash flow projections show
that the Government expected future cash flows for these plans to
increase each year over the next ten years and to peak around 2021 for
total combined cash outflow of $425 million (see Graph 2).”
This must be done with these pension debts.