Yeah it’s a horrible mess. One generation promised itself the next generation will pay them massive, undeserved pensions. That first generation is still calling the shots (and voting avidly) and the coming generation is going to be stuck with an impossible tab, continuously rising taxes, lowered pensions and benefits, and a miserable situation all around.
Or Illinois could find a way to renege without filing for bankruptcy to avoid throwing out the baby with the bathwater.
Perhaps someday Madigan and his political machine will pay for what they’ve done. But likely not.
The thing is: part of a person's paycheck goes into a fund that is supposed to support their pension. So they're not really passing the buck to the next generation, the money they contribute is supposed to be there for them when they retire.
The PROBLEM is that corrupt politicians in the 90s used the pension money and basically lost all of it. So we're in a situation where the money that should have been sitting around for people with pensions to draw from is GONE, and all we can do is scoop and throw until a miracle happens.
edit: I shouldn't editorialize and say "corrupt politicians", please mentally replace that phrase with "The money was badly mishandled"
One generation promised itself the next generation will pay them massive, undeserved pensions
Defined-benefit pensions are a form of deferred compensation. State employees in the past accepted lower salaries in exchange for this future benefit. Taking away that pension now would be theft from these people.
That's a massive fraud. It's like I'd promise to hire somebody and pay him top salary, but the salary would be paid by the guy next door. And that guy is then stuck with a huge bill. He'd just refuse to pay, he didn't hire anybody and is not obliged to pay anything. But somehow sticking the bill to the guy next 25 years instead is completely normal.
Long story short, if you defer compensation you suffer a significant chance the other(larger) party will manage to screw you out of it.
The same is true if its a private or state entity. You either get money or assets in hand, or its effectively vapor. It also shows that working for the government may be stable, its certainly not good for pay.
All parties agreed to a contract. They "deserved" it because that's what the contract said.
It's crummy that the state made promises it's now reneging on, but that in no way makes any sort of pension offer "undeserved."
This is a contract issue, not a moral one.
Or, think of a similar situation: the old guy who's fired shortly before retirement so that he doesn't qualify for his pension. The company says his performance was fine, but didn't want to pay a pension. Do we then conclude that his pension was "undeserved"? Of course not.
When you talk about generations, it is probably better to be more specific and talk about "generations of unionized workers". Police, teachers and few others. Not unionized workers have nothing to do with that.
Illinois has significant assets and the power of taxation over a large economy. I can't see a court just allowing them to discharge their obligations. It's also not clear that states _can_ declare bankruptcy.
I think a federal bailout of some kind is more likely, not a better idea necessarily, but more likely.
This is a dishonest characterization. Those people put their work into those pensions. They deserve them as much as you deserve your paycheck. The problem is we keep electinng crooks and weasels who undermine services and programs so they are doomed and then say “Look these programs don’t work!!”
This ties into the larger problem of Western democracies generally degenerating into gerontocracies. Older voters can form a bloc protecting pensions and pensioner-directed state-benefits that no politician dare take on.
The results of this is a political trap without an easy exit: Impose punitive taxes on the working population and you'll strangle the economy and incite capital flight and outright rebellion. Form a consensus with other mainstream politicians to slash pensions and benefits, and you'll push the pensioner voting bloc into the arms of whatever extremists promise to protect their interests. And you can't allow large-scale immigration to correct the demographic imbalance and raise tax revenues, because the same pensioner voting bloc is also rabidly anti-immigration.
Brexit was a first taste of this: The 1997 Labour government saw the demographic and revenue crisis coming and thought EU migration was a solution. But the long-term result was to inspire an anti-immigration and anti-EU movement amongst older voters that has forced the country out of the EU. In Germany you see the same forces at work with the rise of AFD, and in France with the FN. This is going to get a lot worse before it gets any better.
Funny thing is that 20 years ago all the history and economics text books when I was at school were talking about growth and how it was going to stop soon.
But since the politicians invented mass immigration that conversation has seemingly disappeared.
Politicians have engineered a massive ethnic and cultural shift inside their own countries without asking anyone just to keep infinite growth going, which doesn't sound like it'll work long term and has resulted in the rise of the right.
It's pretty insane what they've done, apparently a 1/3 of all children today in the UK have at least one immigrant parent.
Solution: You can't vote your first 17 years and you can't vote your last 17 years. The average life expectancy in the US is ~78 years so you can't vote after 61, periodically adjusted for changes in avg. life expectancy.
There is a very simple solution to this problem of politicians and unions leaving future taxpayers on the hook. The state simply pays an insurance company for an equivalent annuity. Or the state pays the union the normal cost (the cost of whatever defined benefit pension is earned in a year of work), and then it's the union's problem to fix its deficits.
Either way, remove the government from these long term obligations with easily corruptible pots of money, and the problem fixes itself. And you get transparent, accurate accounting of government costs instead of the manipulable numbers we get now, which of course politicians and unions fill fight against.
I think you're vastly overestimating the simplicity.
Your 2 proposed solutions and its problems:
>The state simply pays an insurance company for an equivalent annuity.
This requires a willing insurance company that wants to be on the hook for it. The problem is no rational insurance company with competent actuarial skills would calculate that the Illinois premiums payments would be enough to meet 100% future pension obligations. Or, you'd get the alternative scenario where you have a dishonest insurance company just taking the premium payments with no intentions of paying all the pensions and conveniently declaring bankruptcy. Therefore, you'd have the same "unfunded" liability as you have right now.
>Or the state pays the union the normal cost (the cost of whatever defined benefit pension is earned in a year of work), and then it's the union's problem
Again, the union would have to agree to this. The union isn't a puppet of the state such that they would automatically agree to anything the state proposes. The union is an adversary against the state when it comes to negotiating pay and benefits. The union does not want to be on the hook for the increasing future benefits; it wants to the state to have that financial responsibility.
Your "simple" solution requires self-interested actors to do what they don't want to do.
You seem to be under impression that underfunded pensions is some kind of a mistake, due to the lack of a system to create funded pensions. Not at all. People know how to save for the future, have known for millenia. The purpose of the defined benefit pension scheme is to cheaply promise massive benefits and to stick the next generation - when current politicians have retired - with the bill, thus keeping the employees content and happy without busting the budget and collecting exorbitant taxes. The fact that these benefits are not funded is not some omission that nobody noticed. It is by design. They do it not because nobody came to them and proposed your scheme, they do it exactly because they want to be in control of easily corruptible pots of money, and they do not want transparent and accurate accounting of the government costs, and do want manipulable numbers. And as long as people keep voting for those fraudsters, it will not change.
> There is a very simple solution to this problem of politicians and unions leaving future taxpayers on the hook. The state simply pays an insurance company for an equivalent annuity. Or the state pays the union the normal cost (the cost of whatever defined benefit pension is earned in a year of work), and then it's the union's problem to fix its deficits.
I'm not sure why you think that what would be (pragmatically in Illinois) giving over state pensions to some state official's cousin to manage at their overextended insurance company that will fail at the first sign of stock weakness would fix anything, or is significantly different from what actually happened.
We recently left Chicago after living there for 11 years, and this was one of the ~dozen reasons why. We had a kid, started looking at buying a place, and couldn't justify making a long bet on the city given its financial situation.
Chicago has lost population for three years in a row.
Chicago is losing population from the south and west sides --- for good reason --- but has hit historic low unemployment rates. If you're in the middle class, you can safely pretend none of what's happening to low-income residents has anything to do with you.
Pensions in principle are great. The problem in the US is a combination of (i) unrealistic return expectations, (ii) laws that allow pensions to be underfunded, (iii) poor governance that reduces investment returns, and (iv) overly generous benefits.
Other countries (e.g. Canada) address all four of these problems and have pension systems that are widely admired as well funded, well governed, sustainable and savvy investors. The US needs comprehensive reforms to address all four of these points. Without that, any partial solutions such as increased funding or reduced benefits, only serve to delay fixing the system.
For (i), returns should be conservatively based on a bond index rather than an unrealistic 7-7.5% return.
For (ii), pensions provides should be legally required to maintain a small funding surplus (e.g. 105%).
For (iii), pensions should have independent boards comprised of investment professionals that are free of political meddling and actually pay their staff Wall Street level salaries so they can attract top talent to compete, rather than constantly being fleeced by Wall Street.
For (iv) I don't have any specific recommendations, but it would be interesting to see the distribution of benefits for the Illinois pensioners.
These could happen, except politicians excluded taxpayer funded pensions from any type of oversight, starting with its exclusion from ERISA. Even now, taxpayer funded pensions don't have to follow rigorous accounting standards such as IFRS, and instead choose to use GASB, which are intentionally lenient so it hides the underfunding.
It's telling that once non-taxpayer funded pensions were brought to fully account for their promises, they started disappearing. It's just too costly and too unpredictable to promise something 30+ years into the future. It's ridiculous as a concept, I've never heard of anyone else saying with confidence that they can predict that far into the future, yet we have billions and trillions of dollars of liabilities based on these projections.
The public pension system is flawed. Unions hold significant political sway and no politican will want to go against them. There was a multi-year standoff between the governor of Illinois and the house on this. The governor of Illinois tried to balance the budget and adjust compensation to market rates; he failed. Here is an article on it: https://www.nytimes.com/2015/10/27/us/illinois-budget-stalem....
The full report plays a lot of games to produce these striking, misleading graphs, like comparing yearly numbers with total values of all future pension liabilities at face value instead of any attempt at NPV. If you're curious to spot more, the 1993 edition of How to Lie With Statistics chapter 7 ("The Semi-Attached Figure") and 9 ("How to Statisticulate") are a lighthearted read.
In Illinois, there have been austerity measures taken that have put more burden on younger residents:
* Pensions for new employees fall under a tiered system where the benefits are far far lower than the old plans.
* Funding to services (eg higher education) have been cut to divert money to pay for the short falls.
* Almost every new tax is earmarked to pay for old pensions.
So not only do we have to pay more for today's services (tollways, rising transit fees, property taxes, sales tax, college), we have to pay for yesterday's underfunded promises.
The tolls in Illinois are ridiculous. I was heading up to Madison, WI and decided to take I-90 despite the fact that it had tolls. I figured that the gas saved would make up for the tolls. That turned out to be an expensive mistake. What an absolute racket.
This (or the original, rather: http://www.wirepoints.com/illinois-state-pensions-overpromis...) is a lot of graphs and percentages with very few absolute numbers, and all of them deceptive, with endless spurious comparisons such as comparing the percentage rise in "promised pensions" to the rise in average income.
Literally inviting you to think that retired state workers make 11x the average salary of working people in Illinois. They do this by comparing the total pensions committed to be paid over a lifetime to people to a bunch of yearly metrics, and most deceptively of all, comparing the rise in total promised pension payments to the rise in inflation during the time that the promises were made.
The people who wrote this report are terrible people who were paid to sell a conclusion, not to study anything. The reason that everything was pushed to pensions was simply a way to pay employees less. If they simply paid their workers, they wouldn't have to promise such a luxurious retirement.
In Kentucky, the governor is essentially committing political suicide by deciding to tackle the issue. Kentucky's pension is rated as the worst state in the union by S&P.
The press has excoriated him (as have much of the public). The fact that he is actually addressing the crisis is commendable, though.
Honestly, this is one of the reasons I am looking to move out of state. Eventually somethings gotta give and I am assuming it will be much higher state and property taxes.
> Eventually somethings gotta give and I am assuming it will be much higher state and property taxes
Well since y'all refuse to consolidate governmental units, it will be higher property taxes. A typical suburb with 50,000 people has its own police department, its own fire department, its own library system, its own parks department, road department, etc. Two school systems (K-8 and high school), each with a full administration! Drive your car, cross an intersection, and now you are in some other identical suburb of 50,000 people with all those same governmental units.
I know you want your community to feel like a little village, and your community is better than the one next door, so you'll never vote to combine into one. This is how much it costs.
Someone pays $15000 per year tax on a $280000 house. I pay $9000 per year on a $650000 condo. I share the cost of a police chief with 2.7 million people and you share it with 50,000.
Here is my worry: IL, CA, and hundreds of states and municipalities will come hat-in-hand to the US government for bailouts in 10 or 15 years. If that happens, everyone in the country is on the hook.
"Total pension benefits have grown at an annually compounded rate of 8.8 percent over the past three decades. Compared to 1987, benefits have grown 1,061 percent." How could they let this cost grow at 8.8% for 30 years! Yikes. How immoral.
When you "pay" workers with delayed benefits like pensions it doesn't break your budget, it becomes someone else's problem. Hence high, unfunded pensions with government jobs.
imo it would be best to just not have these benefits. just increase salaries by the amount that would have been added to the pension fund, let them choose between a Roth or traditional IRA and increase the tax deductible contribution limit. then they are free to allocate the funds at an appropriate level of risk and choose low-fee institutions.
idk why you wouldn't want to be able to do that. if you really can't understand the basics of personal finance, then maybe you could pay into a third party pension service. but in general, i think it is fair to expect guaranteed benefits to be less than the expected value of market appreciation if you just invested that money yourself. if that were not the case, it would be too risky to offer the benefit!
The happy medium would be a good 401(k) or 403(b) plan with employer matching contributions which defaults to a low-fee target date mutual fund with options for low-fee equity and debt index funds. Many employers already offer something like that.
This is one of the many reasons NY wife and our son spent the last week looking at properties in Raleigh NC and Tampa FL this week. We feel that the clock is ticking for Illinois and the judgement day is going to be spectacular. It's time to vote with our feet.
the state is becoming increasingly unlivable. my parents have a house worth about $750k in teh suburbs and are paying ~$15k/year in property taxes. they get almost _nothing_ in terms of services for this money, and taxes are likely going to go up.
[+] [-] ComputerGuru|8 years ago|reply
Or Illinois could find a way to renege without filing for bankruptcy to avoid throwing out the baby with the bathwater.
Perhaps someday Madigan and his political machine will pay for what they’ve done. But likely not.
[+] [-] p3llin0r3|8 years ago|reply
The thing is: part of a person's paycheck goes into a fund that is supposed to support their pension. So they're not really passing the buck to the next generation, the money they contribute is supposed to be there for them when they retire.
The PROBLEM is that corrupt politicians in the 90s used the pension money and basically lost all of it. So we're in a situation where the money that should have been sitting around for people with pensions to draw from is GONE, and all we can do is scoop and throw until a miracle happens.
edit: I shouldn't editorialize and say "corrupt politicians", please mentally replace that phrase with "The money was badly mishandled"
[+] [-] pulisse|8 years ago|reply
Defined-benefit pensions are a form of deferred compensation. State employees in the past accepted lower salaries in exchange for this future benefit. Taking away that pension now would be theft from these people.
[+] [-] smsm42|8 years ago|reply
[+] [-] crankylinuxuser|8 years ago|reply
The same is true if its a private or state entity. You either get money or assets in hand, or its effectively vapor. It also shows that working for the government may be stable, its certainly not good for pay.
[+] [-] Frondo|8 years ago|reply
All parties agreed to a contract. They "deserved" it because that's what the contract said.
It's crummy that the state made promises it's now reneging on, but that in no way makes any sort of pension offer "undeserved."
This is a contract issue, not a moral one.
Or, think of a similar situation: the old guy who's fired shortly before retirement so that he doesn't qualify for his pension. The company says his performance was fine, but didn't want to pay a pension. Do we then conclude that his pension was "undeserved"? Of course not.
[+] [-] shitgoose|8 years ago|reply
[+] [-] dmm|8 years ago|reply
Illinois has significant assets and the power of taxation over a large economy. I can't see a court just allowing them to discharge their obligations. It's also not clear that states _can_ declare bankruptcy.
I think a federal bailout of some kind is more likely, not a better idea necessarily, but more likely.
[+] [-] ebbv|8 years ago|reply
[+] [-] stupidcar|8 years ago|reply
The results of this is a political trap without an easy exit: Impose punitive taxes on the working population and you'll strangle the economy and incite capital flight and outright rebellion. Form a consensus with other mainstream politicians to slash pensions and benefits, and you'll push the pensioner voting bloc into the arms of whatever extremists promise to protect their interests. And you can't allow large-scale immigration to correct the demographic imbalance and raise tax revenues, because the same pensioner voting bloc is also rabidly anti-immigration.
Brexit was a first taste of this: The 1997 Labour government saw the demographic and revenue crisis coming and thought EU migration was a solution. But the long-term result was to inspire an anti-immigration and anti-EU movement amongst older voters that has forced the country out of the EU. In Germany you see the same forces at work with the rise of AFD, and in France with the FN. This is going to get a lot worse before it gets any better.
[+] [-] mattmanser|8 years ago|reply
But since the politicians invented mass immigration that conversation has seemingly disappeared.
Politicians have engineered a massive ethnic and cultural shift inside their own countries without asking anyone just to keep infinite growth going, which doesn't sound like it'll work long term and has resulted in the rise of the right.
It's pretty insane what they've done, apparently a 1/3 of all children today in the UK have at least one immigrant parent.
[+] [-] dmm|8 years ago|reply
Solution: You can't vote your first 17 years and you can't vote your last 17 years. The average life expectancy in the US is ~78 years so you can't vote after 61, periodically adjusted for changes in avg. life expectancy.
[+] [-] hkmurakami|8 years ago|reply
[+] [-] lotsofpulp|8 years ago|reply
Either way, remove the government from these long term obligations with easily corruptible pots of money, and the problem fixes itself. And you get transparent, accurate accounting of government costs instead of the manipulable numbers we get now, which of course politicians and unions fill fight against.
[+] [-] jasode|8 years ago|reply
I think you're vastly overestimating the simplicity.
Your 2 proposed solutions and its problems:
>The state simply pays an insurance company for an equivalent annuity.
This requires a willing insurance company that wants to be on the hook for it. The problem is no rational insurance company with competent actuarial skills would calculate that the Illinois premiums payments would be enough to meet 100% future pension obligations. Or, you'd get the alternative scenario where you have a dishonest insurance company just taking the premium payments with no intentions of paying all the pensions and conveniently declaring bankruptcy. Therefore, you'd have the same "unfunded" liability as you have right now.
>Or the state pays the union the normal cost (the cost of whatever defined benefit pension is earned in a year of work), and then it's the union's problem
Again, the union would have to agree to this. The union isn't a puppet of the state such that they would automatically agree to anything the state proposes. The union is an adversary against the state when it comes to negotiating pay and benefits. The union does not want to be on the hook for the increasing future benefits; it wants to the state to have that financial responsibility.
Your "simple" solution requires self-interested actors to do what they don't want to do.
[+] [-] smsm42|8 years ago|reply
[+] [-] robert_foss|8 years ago|reply
I'm sincerely wondering why they aren't working in the US?
[+] [-] jostmey|8 years ago|reply
The root issue is that Illinois is corrupt and short-sided. No one complained about kicking the problem down the road.
[+] [-] pessimizer|8 years ago|reply
I'm not sure why you think that what would be (pragmatically in Illinois) giving over state pensions to some state official's cousin to manage at their overextended insurance company that will fail at the first sign of stock weakness would fix anything, or is significantly different from what actually happened.
[+] [-] banned1|8 years ago|reply
[+] [-] gregorymichael|8 years ago|reply
Chicago has lost population for three years in a row.
http://www.chicagotribune.com/news/local/breaking/ct-met-chi...
[+] [-] tptacek|8 years ago|reply
[+] [-] jostmey|8 years ago|reply
[+] [-] surfearth|8 years ago|reply
Other countries (e.g. Canada) address all four of these problems and have pension systems that are widely admired as well funded, well governed, sustainable and savvy investors. The US needs comprehensive reforms to address all four of these points. Without that, any partial solutions such as increased funding or reduced benefits, only serve to delay fixing the system.
For (i), returns should be conservatively based on a bond index rather than an unrealistic 7-7.5% return.
For (ii), pensions provides should be legally required to maintain a small funding surplus (e.g. 105%).
For (iii), pensions should have independent boards comprised of investment professionals that are free of political meddling and actually pay their staff Wall Street level salaries so they can attract top talent to compete, rather than constantly being fleeced by Wall Street.
For (iv) I don't have any specific recommendations, but it would be interesting to see the distribution of benefits for the Illinois pensioners.
[+] [-] lotsofpulp|8 years ago|reply
It's telling that once non-taxpayer funded pensions were brought to fully account for their promises, they started disappearing. It's just too costly and too unpredictable to promise something 30+ years into the future. It's ridiculous as a concept, I've never heard of anyone else saying with confidence that they can predict that far into the future, yet we have billions and trillions of dollars of liabilities based on these projections.
[+] [-] anilshanbhag|8 years ago|reply
[+] [-] ckinnan|8 years ago|reply
http://www.wirepoints.com/illinois-state-pensions-overpromis...
[+] [-] Harkins|8 years ago|reply
The authors of this report are former employees of the Illinois Policy Institute: http://www.wirepoints.com/mark-glennon/ https://www.illinoispolicy.org/author/ilpoliski/
The Illinois Policy Institute is, politely, a conservative think tank: https://en.wikipedia.org/wiki/Illinois_Policy_Institute
The full report plays a lot of games to produce these striking, misleading graphs, like comparing yearly numbers with total values of all future pension liabilities at face value instead of any attempt at NPV. If you're curious to spot more, the 1993 edition of How to Lie With Statistics chapter 7 ("The Semi-Attached Figure") and 9 ("How to Statisticulate") are a lighthearted read.
[+] [-] sct202|8 years ago|reply
* Pensions for new employees fall under a tiered system where the benefits are far far lower than the old plans.
* Funding to services (eg higher education) have been cut to divert money to pay for the short falls.
* Almost every new tax is earmarked to pay for old pensions.
So not only do we have to pay more for today's services (tollways, rising transit fees, property taxes, sales tax, college), we have to pay for yesterday's underfunded promises.
[+] [-] jdhn|8 years ago|reply
[+] [-] pessimizer|8 years ago|reply
Literally inviting you to think that retired state workers make 11x the average salary of working people in Illinois. They do this by comparing the total pensions committed to be paid over a lifetime to people to a bunch of yearly metrics, and most deceptively of all, comparing the rise in total promised pension payments to the rise in inflation during the time that the promises were made.
The people who wrote this report are terrible people who were paid to sell a conclusion, not to study anything. The reason that everything was pushed to pensions was simply a way to pay employees less. If they simply paid their workers, they wouldn't have to promise such a luxurious retirement.
[+] [-] mglennon|8 years ago|reply
[deleted]
[+] [-] oflannabhra|8 years ago|reply
The press has excoriated him (as have much of the public). The fact that he is actually addressing the crisis is commendable, though.
[+] [-] selleck|8 years ago|reply
[+] [-] concrete-faucet|8 years ago|reply
Well since y'all refuse to consolidate governmental units, it will be higher property taxes. A typical suburb with 50,000 people has its own police department, its own fire department, its own library system, its own parks department, road department, etc. Two school systems (K-8 and high school), each with a full administration! Drive your car, cross an intersection, and now you are in some other identical suburb of 50,000 people with all those same governmental units.
I know you want your community to feel like a little village, and your community is better than the one next door, so you'll never vote to combine into one. This is how much it costs.
Someone pays $15000 per year tax on a $280000 house. I pay $9000 per year on a $650000 condo. I share the cost of a police chief with 2.7 million people and you share it with 50,000.
[+] [-] Leader2light|8 years ago|reply
Get out while you can even still sell your home.
[+] [-] TuringNYC|8 years ago|reply
[+] [-] danvoell|8 years ago|reply
[+] [-] LorenPechtel|8 years ago|reply
[+] [-] Leader2light|8 years ago|reply
Insider info, State Farm is next. Major cuts. Again IL is dead.
Thanks Chicago.
[+] [-] ryandrake|8 years ago|reply
[+] [-] leetcrew|8 years ago|reply
idk why you wouldn't want to be able to do that. if you really can't understand the basics of personal finance, then maybe you could pay into a third party pension service. but in general, i think it is fair to expect guaranteed benefits to be less than the expected value of market appreciation if you just invested that money yourself. if that were not the case, it would be too risky to offer the benefit!
[+] [-] nradov|8 years ago|reply
[+] [-] DubiousPusher|8 years ago|reply
[+] [-] vidanay|8 years ago|reply
[+] [-] wyldfire|8 years ago|reply
[+] [-] mylons|8 years ago|reply