The Register-Mail

Judy Guenseth: Force politicians to fix pension system

Tuesday, October 12, 2010

Public employment has long been considered a sacrifice due to what seems to be better pay and opportunity for workers in the private sector. To compensate for this apparent inequality, government entities have responded by providing pensions and other retirement benefits to their employees. However, Illinois and many other states have seriously neglected the funding of their pension obligations. The negative effects of these liabilities substantially increase as politicians do little to address this mounting crisis.

Some believe this problem is the result of party politics or an errant politician making poor choices. Certainly these things could be factors, but this problem is pervasive throughout all pension programs both public and private and is being reported throughout the business world, in foreign countries and in a large majority of the states. Robin Blackburn of Political Quarterly reported that many prominent U.S. companies had pension liabilities exceeding their equity in 2002. He also points out Great Britain’s public and private pension entitlements are far below expectations for individual pensioners. The Pew Center graded all 50 states on how well they managed their retirement benefits. The results indicated that 15 states needed improvement and 19 states were rated as having serious concerns. Illinois was one of eight states with the absolute worst rating.

This problem is also exacerbated by recessionary times. During good market times, pension funds grow at a rate that maintains solvency without contributions. However when the market loses ground, state governments have less tax revenue to fund programs and even fewer dollars to support their pensions and other retirement benefits. This creates one of the major causes of the underfunded pension. As markets cycle, some of this boom and bust evens out in the long term. Yet with the steep investment losses of the past two years, state governments cannot act as if the stock market will rebuild their pension funds and The Pew Center estimated the gap between pension liabilities and what the states actually have in their coffers was one trillion in 2008. But laws require states to fund their pensions and in making up for these debilitating deficits, they will have to make budget cuts in crucial programs such as healthcare and education.

This situation is compounded by the large faction of baby boomers who are set to retire in the next decade or two. Life expectancy has also increased for this generation compared to earlier generations. Most states fund their retiree health care and non-pension benefits on a pay-as-you-go basis and as the number of retirees increases the looming liability becomes even larger. In 2008 only $32 billion of the $587 billion of the non-pension retirement benefits were funded with 95 percent of the liabilities held by only half of the states, according to The Pew Center.

These trends and numbers indicate a problem that is not likely to fix itself without serious reform. The difficulty is that politicians are the ones who will need to bring about the change through laws, different pension dynamics and budget reform, but there is little reward for the public official who attempts or establishes change within the system because the positive results are years away. However, Sen. Dan Liljenquist of Utah said in response to underfunded pensions, “Reality is not negotiable. The fact is somebody bears the risk. Ultimately, the state is bearing more risk than it can.” This is definitely true in Illinois. Furthermore, many of the changes suggested only focus on reducing budget shortfalls and neither party in Illinois seems to have real answers in addressing true reform.

It is obvious the present course of underfunded pensions for Illinois is not sustainable especially in light of so many government employees set to retire in the coming years. Budget issues are a factor but ultimately the government cannot continue to makes promises to employees that cannot be reasonably met. The focus should be on remolding an inadequate system and may require a perspective shift for government employees. It is likely public employees will balk at these changes. However, those entities that are addressing this issue are working toward a tiered program that protects current workers but establishes less burdensome and more realistic retirement benefits for employees. This may not be a perfect answer but the status quo has far worse consequences.

The state budget is already stretched due to the recession and the temptation for lawmakers in an election year is to channel money to competing programs such as education and continue to neglect this growing monster. Yet the very programs that benefit from these influxes now will ultimately sacrifice their own services in the future when the pension demands will decimate not only extraneous programs but vital government services. It is up to the voters to understand the problem and hold elected officials accountable.