Since the Great Recession in 2008, warnings of an impending pension crisis have been splashed across the business pages of newspapers across the country. Despite these boisterous decrees, America’s public pension funds are stable. We explore the roots behind the false pension crisis narrative and examine the facts.
In our first two posts in this series, we explored some of the false information peddled by anti-pension ideologues as they promote their “pension crisis” myth. We revealed the truth about investment returns and discount rates and examined the reality of unfunded liabilities. Today we explore the roots of the problems facing public pensions in Illinois (a state detractors are quick to cite as proof of their position). While Illinois has very real challenges, it is not for the reason anti-pension actors claim.
While New Jersey and Kentucky usually receive the dubious distinction of having the most poorly funded public pension plans, Illinois receives a lot of criticism because of the sheer size of its unfunded pension liability. According to some estimates, Illinois’ total unfunded public pension liability may add up to $251 billion. That is a significant amount of money, but an unfunded liability that large doesn’t happen overnight. The poor state of Illinois’ public pension plans is the direct result of decades of gross mismanagement by the state government.
Public pension plans work when they are properly funded. As we discussed in a report last year, making the full pension payment each and every year is the single most important thing a state can do to properly manage its pension system. Unfortunately, in Illinois, the state has not fully funded its pension payments in almost eight decades. Let that sink in for a minute. For seventy-eight years – the length of the average American life expectancy – Illinois has ignored its obligations to public employees and taxpayers and avoided its responsibility to fully fund its pension promises.
Illinois’ budgetary and financial problems go beyond public pensions though. The income tax collected by the state is flat and lacks a progressive structure. The state could be collecting millions of dollars more in revenue each year if it adopted a more progressive tax code. Voters approved a measure in 2014 calling on the state legislature to collect a 3 percent tax on incomes above $1 million to fund education. Unfortunately, the state legislature failed to pass the millionaires tax. Furthermore, many corporations in Illinois avoid paying their fair share – or paying any tax at all. Illinois’ pension problems are a symptom of, not the cause of, its large financial troubles.
It is not the nature of defined benefit pensions themselves that are causing Illinois’ problems. Wisconsin, the state’s northern neighbor, has a fully funded public pension system. New York, another large state with multiple public pension plans, has very well-funded pension systems. Even within Illinois, the Illinois Municipal Retirement Fund (IMRF) is well-funded. IMRF provides retirement security to employees of towns, villages, park districts, and counties across the state. The participating employers in IMRF are required by law to make their full pension payments each year. For this reason, the IMRF weathered the recession and remains well-funded.
Illinois does face real challenges with its public pension systems, challenges that will take years to resolve. There is no magical solution to fix the state’s problems. Anyone who says that closing the pension plans and putting new employees in 401(k)-style plans will solve the state’s problems is wrong (this is a subject we will explore more in the next post in this series). Illinois’ pension problems are the direct result of years of mismanagement and deliberate underfunding by governors and legislators of both parties. Resolving these problems will take the commitment of lawmakers from both parties to fully fund the state’s pension obligations every year.
Don’t let the pension critics fool you. When they hold up Illinois as an example and say, “see, pensions don’t work” – don’t believe them. Pensions work when they are properly managed and properly funded. Across the nation and even within Illinois, there are examples of well-funded public pension plans. The problem with the other pension plans in Illinois is that they were deliberately underfunded by an irresponsible state government for decades. This is why it is critical that supporters of public pensions remain vigilant to protect pensions from irresponsible politicians and misleading anti-pension critics.