Underfunded pensions weigh on state workers

Tuesday, July 27, 2010

Countless barrels of ink have been spilled in lamenting Illinois' fiscal crisis brought on by the staggering growth in unfunded pensions and retiree health obligations, now amounting to $130 billion.

But consider the matter from the standpoint of an average state employee under the state's regular pension formula - Joe Midpoint, 40 - who is halfway through a career with the state. Joe started to work for the state at age 25, and he plans to retire at age 55 with a full pension. (If he worked for Chicago, he could have retired at 50.)

Joe - like virtually all state employees covered by the State Employees' Retirement Plan (SERS) - will receive both his pension and Social Security benefits. The pension benefits start at age 55. Like other Social Security beneficiaries, Joe will also start receiving the full amount of his Social Security payments at 67.

Let's suppose Joe retires at age 55 with an average salary (over the last four years) of $60,000. What will Joe get?
First, each year Joe will receive a pension. The first year after retirement, he'll get $30,000. But that's just to start. Each year after that Joe will get an automatic 3 percent cost-of-living adjustment - whether there is inflation or not. So by the time Joe reaches 67, his annual state pension will be almost $43,000.

Second, starting at age 67, Joe's Social Security annual payments, using today's standards, would be about $19,000.
So, by age 67 his combined pension and Social Security - almost $62,000 - add up to more than he was making, on average, in his last years of state employment.
Except for one thing: Joe's state pension fund, SERS, may run out of money in a decade or so, before he plans to retire.

His contractual relationship is with the pension fund, not the state. So his claim would be against the pension fund. If the fund goes broke, Joe is probably out of luck. The Illinois Pension Code provides that "any pension payable under any law herein before referred to shall not be construed to be a legal obligation or debt of the State . . . " (Section 22-403). Likewise, the law creating the state employees' retirement system says that the state is to establish the fund, make contributions to it, and cause pensions to be paid from it - but nowhere does it say that the state is a guarantor of the obligations of the pension funds.

Where does that leave poor Joe if and when the pension fund runs out of money? It leaves him with only Social Security.
But before that happens, a few questions may occur to Joe: "Why should I keep paying 4 percent of my salary - month after month - into the pension fund, when the folks who will get the benefit of my contributions are likely to be those who have already retired or those about to retire, including senior union leadership? Is this what they call a Ponzi scheme?"

"Wouldn't I - and other state workers like me - be better off if we could freeze the current plans and make sure that our future contributions go into new plans that would benefit us?"

Illinois' pension underfunding problem dwarfs all the other issues. Our state can't deal with our radically unbalanced budget without reforming the pensions. Maybe at some point, Joe - and his colleagues in organized labor - will see that reform is in their interests as well.

R. Eden Martin is president of the Civic Committee of The Commercial Club of Chicago and a member of the Illinois Is Broke campaign, www.IllinoisIsBroke.com.