Monday, February 6, 2012

Pension Fact Reminders- Worth reading again!

The Chicago Teacher's Union is in negotiations (if that's what it could be called with the Board of Education) about the upcoming teachers' contract.  Pension is being brought up, which is no surprise since the picture being painted is how the hard workers who have paid into their pension lo these many years are the ones bankrupting the city and state.  Since contracts for fire, police, and teachers are all up this year, I thought I'd re-print an excellent article that explains facts about the pensions in Illinois - how it is NOT bankrupt, and won't be in the next 10- 15 years.  Every time our government officials want to give us the shaft with their verbal spin, we need to remind them of some facts.

Originally printed in October 2011...

Story Image
Dick Ingram

Throughout Illinois, public pension systems have been a central topic of discussion for months as state government grapples with an uncertain economy.

State legislators and organized labor continue to discuss the future of these pension systems as well as their anticipated costs to both taxpayers and members of the pension plans (who also are taxpayers).
This discussion is vitally important for the state’s future fiscal health and will be most useful if based on facts and not hyperbole. Here are some truths to remember:

Illinois’ pension systems are not bankrupt. It is true that the systems together have accumulated a total debt of roughly $140 billion but now only have about $53 billion in assets. That leaves the systems with an unfunded liability of $87 billion.

However, that total debt never has to be paid off at one point in time. It is composed of money owed to retired workers as well as active public employees at some time in the future. Because employees cannot collect until they retire, the only amount that the systems must pay each year is that owed to retirees.

Much like the pension systems, families with mortgages carry a large amount of debt, and it is safe to say that most families could not pay off their mortgages all at one time. That is an unfunded liability.
But like the pension systems, these families don’t have to pay off the mortgage all at once. They only have to pay a monthly installment. Like the pension systems, these families are in debt, but they are not bankrupt.

Illinois’ pension systems will not run out of money and default in 10 or 15 years. The best example is the Teachers’ Retirement System, the state’s largest public pension plan with more than 372,000 members.

In fiscal 2010, TRS paid out $3.9 billion in pensions and benefits. Total revenue in the same year from teachers, school districts, state government and investments was $6.8 billion. TRS currently has $37 billion in total assets.

With a 30-year average investment return of 9.3 percent, TRS continues to exceed its long-term investment targets. These returns along with continued member and state contributions ensure that TRS will have enough money to meet our annual obligations for decades. TRS has carried an unfunded liability since at least 1953 and has never missed a pension check to anyone.

Pension benefits locked in place by the Illinois Constitution are not the main reason the systems carry unfunded liabilities. TRS members do not participate in Social Security, and their average pension is relatively modest. They pay more than half of the cost of their pension benefits.

The current cost of these benefits to the state pale in comparison to the amount of money that the state has failed to contribute to the pension systems — and that comprises more than two-thirds of the money budgeted for pensions.

In the case of TRS, since 1970 the state has left unpaid more than $14 billion of its share of current pension costs. This is the main reason for the system’s unfunded liability. Under actuarial “full funding” standards, the state should have contributed $33.2 billion to TRS between 1970 and 2010. Instead, TRS received $18.6 billion.

That unpaid $14.6 billion was not available for investment by TRS to further bolster the retirement fund. When you consider that TRS has earned an average of 9.3 percent annually on its investments since 1980, the lost income is significant.

In contrast with the state failing to contribute its share, the contribution by TRS members from their paychecks increased by 135 percent since 1980 and is now 9.4 percent of their pay.

The annual cost of pensions is not bankrupting state government. Let’s look at expenditures in fiscal 2010, when the total state budget was $56.9 billion.

Of that total, all social service programs — including health care for the poor, child protection and public health — cost $17.5 billion. Medicaid alone cost $9.8 billion. The bill for public education, from kindergarten through university, was $13.7 billion. Salaries for state employees came to $3.6 billion.

By comparison, the pension benefits paid out to state retirees in fiscal 2010 totaled $6.9 billion. The state’s contribution for these benefits was $4 billion.

Pension benefits paid to retired public employees are a return on an investment. Each dollar is recycled through the economy as retirees spend money as they did when they were receiving a salary. Combined, state government salaries and state pensions during 2010 translated into a $24.5 billion economic stimulus for Illinois.

Dick Ingram is executive director of the Illinois Teachers’ Retirement System.

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