Public Sector Pension Reductions are Needed

Defined benefit pension plans, which give a guaranteed payout at retirement, are a mess. That is why they have been diminished or altogether closed in so many instances. They are huge pots of money prone to theft, all it takes is an incompetent investment manager to sustain huge losses, and the high expense level created by required contributions cripples an organization in tough times.

Defined contribution plans, like a 401(k), function more effectively.  The organization can give in good times but not in bad, and in many cases employees can defer salary into the plan tax free. They are not as prone to theft because most plans give each employee control of an individual account. Employees do have to make investment decisions. But employees really should. The minute you start trusting someone else with financial planning it is dangerous territory. Taking a job based on an income stream promised in twenty years is a dubious proposition at best.

It is amusing how retiring Baby Boomers who have had an increasing role in running the state for the last two or three decades, and contributed greatly to this problem, are now saying: “how dare you lower OUR benefits. We were PROMISED”. They are looking at those of us coming up behind them and saying: “YOU need to pay up”.  How can you promise yourself something unrealistic, insufficiently fund it, and then get mad when people who basically had no say in the matter do not want to shoulder these luxuries?

Defined benefit plans have had payouts reduced on multiple occasions.  United Airlines’ plan got taken over by the Pension Benefit Guarantee Corporation, an independent agency of the U.S. Government which provides insurance, and ended up paying out cents on the dollar.  People in Detroit got substantial cuts during the recent municipal bankruptcy. When IBM converted their plan to Cash Balance format some people got their payouts cut by half.  Workers at Delphi Automotive, a former GM unit, had their pension payouts cut by thirty percent or more.  Prior to 1984 all Social Security benefits were tax-free.  Now those benefits are taxed depending on how much additional income exists.

In many other cases defined benefit plans have been altogether replaced with defined contribution.  According to a 2009 article from the Social Security Administration, from 1980 to 2008 the percentage of private sector workers covered by defined benefit retirement plans went from thirty-eight percent to twenty percent.  During that same period the percentage covered only by defined contribution plans went from eight to thirty-one percent.  During this past month the House and Senate in Pennsylvania passed a pension reform bill that will replace the defined benefit plan for state and school district employees with a defined contribution plan.

Similar changes need to be made in Illinois.  To put it simply we are drowning.  Twenty-five percent of our budget currently goes to bankrolling public sector retirement benefits the rest of us can only dream of.  Despite that fact Crain’s Chicago Business recently reported unfunded liability in Illinois’ pension funds hitting $119 billion in fiscal 2015, the latest year for which data were available. That increased from $111.5 billion in fiscal 2014.

These massive obligations have been a prime driver in the downgrade of Illinois’ credit rating.  During this past month it was reduced to one step above junk status by both Moody’s and S&P.  That makes everything more expensive for all of us.  The lower the credit rating the more it costs our government to borrow money, something necessary during the course of normal operations.

If so many other defined benefit programs have made reductions why do we seem to struggle so much in Illinois?  We have a clause in our state Consititution that says once pension benefits are awarded they can never be reduced.  It is hard to say if this is the most ridiculous situation ever seen.  But it is definitely in the top twenty.  State Constitutions are meant for serious matters, not protecting 3% annual cost of living increases for a privileged portion of the population.  It is past time for that Constitutional clause to be removed.

Illinois public sector workers need to grow up.  Sympathy is warranted for someone who gets hit with a reduction.  But that is life.  Plenty of people in the private sector, and public sectors of other states, have faced reductions.  According to a brief from the Center for Retirement Research at Boston College seventy-four percent of state pension funds made benefit cuts in years following the financial crisis.  What makes our state workers think themselves worthy of such royal treatment at the expense of the rest of us?

© 2017


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