Illinois public pensions

by Neil Rickert

Public pensions have been much in the news recently in Illinois.  This is largely because the state has serious budget problems, and part of those problems are pension related.

[Full disclosure:  I am currently receiving a pension from SURS – the State University Retirement System]

Some state politicians see the public pensions as too generous, and as a drain on the state budget.  So they want to cut pensions.  There are three kinds of cuts that have been suggested:

  • Cuts to people currently receiving pensions;
  • cuts to future pensions of current employees;
  • cuts to pensions of people hired in the future.

I have no problem at all with the third of those.  The state, as employer, can set whatever employment conditions it wants.  People are free to choose not to work for the state of Illinois if they do not consent to the working conditions.

The other kinds of cuts are what concern me.  For those look as if they would amount to the state reneging on its contractual commitments.  Some of the politicians concede that, and admit that proposed cuts might not survive a court challenge.

SURS pensions

I am most familiar with pensions for university employees, so will mainly comment on those.  At the time that I chose to work for a state university, I had job offers at two other institutions.  The pay that I was offered for the Illinois campus was 10% lower than I could have received elsewhere.  I was willing to accept that lower salary, because I took the pension into consideration and treated it as part of the compensation.  Allowing for the pension, the Illinois offer still seemed a tad lower, but not by much.

I am pointing this out, because it contradicts the claim that pensions are a big giveaway.  When job offers are made in the free market, the pension is part of the compensation package considered by those being hired.  Illinois was able to pay lower cash salaries, because the potential employees would look at pension benefits as part of their compensation package.  What is particularly strange, is that some Republicans, who always champion the free market, don’t seem to understand this.

Reducing costs

As I see it, the state pension system saved the state money.  They could pay lower salaries, because the pensions were considered part of compensation.  In addition, they were able to avoid payroll taxes, because the state pension was accepted by the Federal government as a suitable alternative to social security.  Moreover, an employee had no vesting in his pension until he had remained in the state system for a number of years.

The effect of being able to offer lower salaries might approximately balance the cost of the pensions.  That, in addition, the state avoided the employer component of payroll taxes, and the state had no commitment for short term employees, was a net benefit to the state.

If the state had put aside funds, each year, as actuarially predicted, there would be no current state pension problem, and the state would still have saved money compared with paying free market wages.

This is the point that the politicians are hiding.  They blame the pensions for state budget problems, when the pension system actually reduced costs.

What went wrong?

The real failure in Illinois, is the failure of the state government to fully fund the pensions.  They should have been putting aside the actuarially predicted funds each year, so that there would be funds there to meet the pension costs when they were incurred.  This, in effect, amounts to “creative accounting”.  The state was spending money that they should have been setting aside.  They were, in effect, borrowing from the future to pay current expenses, but hiding the fact that this amounted to a form of borrowing.

Other state pensions

I do not know as much about other state pension systems.  However, I am inclined to suspect that the problem is the same.  Many of these pensions were negotiated in union bargaining deals.  The unions accepted lower salaries in return for the deferred compensation of pensions.  I have not done the math, but I suspect that if the state had put aside what was actuarially required, they would have still saved costs for the state with those pension deals.

Summary

I see the state pension problem as primarily due to legislators (of both major political parties) failing to set aside funds for future pensions.  And if they had set aside such funds, I suspect that the pension systems would still have resulted in savings for the state — and there would have been no pension crisis.

In short, I see the pension crisis as due to the failure of state legislators to follow honest accounting practices.  The best “fix” would be for them to admit their role in the problem, and to fix the flawed accounting practices that allowed the crisis to develop.

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