Here’s a pension crisis waiting to happen
“Anything and everything is on the table because we do have to stabilise the city’s finances,”
What is being talked of is Chicago’s pension promises. The FT reports the words of it’s Mayoral candidate, Susana Mendoza and there is no one defending the situation the City is in.
Chicago’s four city employee pension funds reported an aggregate funded ratio of 28.1 per cent last year, compared with a national average of 82.5 per cent, leaving the city’s retirement system among the worst funded in the US.
Yes you did read that right, over 70% of the promise in Chicago is not funded but dependent on the City coughing up the money out of public revenues. That leaves the police force, the firemen as well as those working for the City with a doubtful wage when they retire.
Chicago has also become a test case for how state and local governments may cope as cash-strapped public pension plans edge towards insolvency.
Points out FT reporter, Sun Yu in New York.
In the UK we have a well funded system of Local Government , currently embarrassingly in surplus, in stark contrast to the state of some of the Councils (West Midlands step forward). If you were not prejudiced by being American or British you might think that the British system is as overfunded as American is vice versa.
To suppose that Britain has inadequate pensions is to ignore a large part of our working population whose retirement promise goes beyond what’s paid as the universal right to our State Pension.
So long as people are in public funded pensions (whether funded or unfunded) there is no doubt that pensions will be paid. This is not the case in Cities in America which like Chicago are seeing what little fund they have disappearing.
Few US cities better exemplify the country’s public pension crisis than Chicago, whose retirement plans’ aggregate funded ratio has fallen by more than two-thirds since 2000. For decades, successive city administrations cut contributions to Chicago’s public retirement system to ease short-term budget pressures, contributing to tens of billions of dollars in unfunded pension liabilities.
The recent US stock boom has done little to change the broader picture as the rally has failed to help the funds balance their books and they remain vulnerable to a downturn, Susana Mendoza warns
“We have missed quite a significant wave of excellent returns and we can’t get that back,” she said, adding that the funds would be “toast” if the market turned lower.
De-risking?
American Cities like Chicago are living with a level of risk to public servants retirements that would not be countenanced in the UK
“The pension debt is caused by the failure of the city to pay what it owed in the past,”
said Anders Lindall, a spokesperson for AFSCME Council 31, Illinois’ largest public employees’ union,
“saying that you won’t talk about future benefits is actually not addressing the problem. That’s kind of a misdirection play”.
Mendoza also proposed expanding voluntary pension buyouts, allowing eligible workers to take lump-sum payments in exchange for giving up certain future benefits, while directing any surplus city revenues towards pension stabilisation and the city’s rainy-day fund.
Duh! Where ya been?
“a leopard can’t change its spots” … an entity’s fundamental character or personality, especially their bad habits, cannot be altered even if they try. Democratic federal, state and local governments all pander to public unions – especially when it comes to financing retirement benefits.
Most recent national example? President Biden, via the Social Security Fairness Act, adding perhaps as much as a trillion to Social Security’s long term liability by eliminating the Government Pension Offset (GPO) and Windfall Elimination Provision (WEP) that applies to millions of federal, state and local public employees whose employer opted out of Social Security.
In terms of Chicago and Illinois, 15 years ago …
https://www.civicfed.org/press-room/StatusOfLocalPensionFundingFY2012
https://www.illinoispolicy.org/moodys-illinois-fy-2012-pension-shortfall-jumps-to-187-billion/
This was, is, continues to be, the “spots” of Democrat politicians who promise public and represented employees more than they are willing to properly fund (ignoring funding deficits while promising wage increases, additional benefits, etc.) as a means to buy votes.
In Illinois, it is complicated by a state constitutional provision that the Illinois Supreme Court has upheld.
https://www.ctbaonline.org/press-room/pension-reform-dealt-blow-illinois-supreme-court
Bottom line, Chicago and Illinois have a more European approach to retirement benefits where the relevant legislative limit applies not only to pension accrued benefit to date (the typical limit applied in private sector defined benefit plans, where the plan sponsor generally retains the right to prospective amend the benefit formula or to freeze the plan) but also precludes changes to the accrual rate for future service for existing workers.
Public employee pensions are not alone! The last group in America to deliberately, intentionally, all but fradulently collude to underfund their pensions for decades were the labor/management multiemployer plans. How intentional was the underfunding? The funding deficiency and structural issues were clear to all in the American retirement industry decades ago – confirmed by then President Jimmy Carter who signed the Multiemployer Pension Plan Amendments Act of 1980 into law. That was 40+ years prior to the (future) taxpayer bailout of hundreds of those plans via a provision in the American Rescue Plan Act of 2021 signed into law by President Biden.
https://www.abc.org/News-Media/Newsline/taxpayer-bailout-of-multiemployer-pension-plans-and-government-mandated-project-labor-agreements
Love it , Benefit Jack
The pot calling the kettle black, Henry?
The UK’s total unfunded public sector pension liability is officially valued at approximately £1.3 trillion. Distributed across the UK population of roughly 68 million, this translates to a liability of about £19,000 per person (or over £45,000 per household).
Former Bank of England economist Neil Record, however, calculates the total unadjusted value of future pension payments that will be owed over the next 80 years at up to £5.8 trillion, or roughly £200,000 per UK household.
Chicagoland’s metropolitan GDP is roughly $923 billion.
In comparison, the UK’s national GDP is approximately $4.3 trillion.
While the entire UK economy is about 4.6 times larger than the Chicago metro area, Chicago still packs an economic punch, producing an economy comparable to entire nations like Saudi Arabia or Switzerland.
The “public sector pension liability” will just have to be welched on. A hard-headed man might say that the beggars did nowt, or next to nowt, to earn it, so easy come easy go.
For all its weaknesses at least a DC pension gives you a pot of money which is unambiguously yours. Until, that is, governments take powers to instruct you on how it must be invested.
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Went back and found this writing over 10 years old, in 2016:
“… Actually, I am very familiar with Illinois’ situation. My last degree is a LLM-Employee Benefits from John Marshall Law School (2013), earned in the Chicago loop. I wrote a scholarly paper on this specific topic. … I believe it is specifically because (the politicians) DO understand the problem (and the solutions) that they want to try to stumble through this. They include the politicians and public workers and retirees – but not the taxpayers. They believe that if (public) workers resist, if there is some ‘blue flu’, if they demagogue long enough and loud enough (see Wisconsin and Act 10, or Ohio Senate Bill 5), that (attempts to reform) will go away – that the government (and taxpayers) will never allow the (retirement) plans to go bankrupt.
It is the same issue with Social Security – no one believes that given a choice between a ~25% benefit cut and increased taxes, sometime early in the 2030’s, that Congress won’t approve a tax increase.
The difference today, however, is that no one believes that a state has to offer these higher levels of total rewards to keep the employees it currently has. Wisconsin, see Act 10, clarified that too many public employees are on a gravy train when it comes to pay and benefits … with total rewards that dramatically exceed those of the taxpayers who are called upon to fund those plans. Similarly, given the productivity and capability of many government workers, no one believes that highly talented government employees will bolt to the private sector should their be a significant increase in employee funding for their retirement benefits or a significant reduction in prospective pension accruals.
You state: “… This is something that will have to be hammered out among the political elites. …” …it won’t ever be hammered out …
Similarly, some of the (Democrats) in office in Illinois and elsewhere would prefer nothing more than to allow the Illinois and Chicago pension systems to fail, to have to reduce benefits to the level of taxes/funding. It would become their top argument in every future race for office – how the Republican governor refused to support new, higher taxes necessary to properly fund workers’ retirement benefits. It is why we may never have a Social Security solution – it is just too good of a political weapon for the Democrats. It fits right in with their top argument in this next election too – I want the best benefits YOUR money will buy. Or, don’t tax you, don’t tax me, tax that guy behind the tree.
… Your solution of a federal law would likely not supercede the Illinois Constitution, and the State would likely prevail arguing the 10th Amendment applies.
Either way, mandating (proper) funding would trigger massive changes in public employee plans, either much greater funding, pension freezes or prospective benefit reductions (in states where those are not prohibited). …”