By: Mark Glennon*
The City of Chicago is crafting a buyout program to help address its monstrous pension crisis– a $36 billion combined, unfunded liability owed by its four pensions. The idea is to cancel pension obligations in exchange for a single, lump sum cash payment to pensioners who opt in. It would require state legislation. The concept is inspired by the State of Illinois’ buyout program for its own pensions, as reported Thursday by the Chicago Sun-Times.
Buyouts might be a good idea, if done correctly and transparently. But, so far, there’s one thing we know for sure that the Chicago discussion has in common with the Illinois program: flimflam. We’ve begun hearing some of the same claptrap in Chicago that we’ve long heard about the Illinois program.
The main question is how much, if anything, the government saves through buyouts. Answers have been wrong or dishonest, and those who are supposed to know provide no evidence behind their claims. We do know, however, that savings from the state program – if any – have been tiny.
“Just look at how much the unfunded pension liability shrunk as a result of buyouts.” That, in a nutshell, is the boast routinely made by politicians who take credit for their prowess addressing pension problems through buyouts.
That framing is utterly misleading but was repeated to support the Chicago idea by Sen. Robert Martwick (D-Chicago) in the Sun-Times column. Citing the Illinois program as precedent, Martwick said it has reduced Illinois’ pension obligations by approximately $2 billion. Martwick chairs the Illinois Senate Pension Committee and nobody in Illinois government, in our view, is a more villainous figure in the pension crisis. He was the lead proponent, for example, of last year’s legislation increasing benefits paid by two of Chicago’s pensions.
Here’s why that framing is so wrong:
It’s true that, when a pensioner chooses a cash buyout, the pension itself is able to report a reduction in its liability to reflect cancellation of the regular, lifetime annuity payments the pension would otherwise have to make.
But here is what’s ignored: The state itself has to pay the cash lump sum. You have to look at both sides of ledger. Still worse, in the case of Illinois, the state doesn’t have that cash so it borrows the cash through a bond offering. The net result is that the pension liability goes down but the state’s bonded debt goes up, together with interest costs.
Importantly, however, state pensioners who opt for buyouts take a haircut. They get a cash payment of just 60% or 70% (depending on which of several programs they are in) of the present value of their expected lifetime pension benefits. That’s good for the state. Potentially, that’s how the buyouts could save the state money.
But it’s questionable how much of that discount for the state is real.
First is what’s called the “adverse selection” problem: The state does no personal health analysis on who takes the buyouts. An overweight individual with cancer and a heart condition gets treated the same as a fit person of the same age and gender. When the state buys out a person less healthy than normal according to age and gender, the state is overpaying.
There is plenty of empirical evidence that pension cash-out takers tend to have shorter true life expectancy than those who keep their annuity. For example, a frequently cited 2012 study by Boston College researchers, “Dying to Retire: Adverse Selection and Welfare in Social Security,” found “robust evidence” that people who live longer choose larger annuities by delaying benefit claims, while those who claim early are those who actually do die sooner.
Not all the evidence on that is consistent, which I leave to the actuaries to sort out. However, it appears that the bulk of the studies show that adverse selection is a real problem, and we know for sure that it’s an issue ignored by the State of Illinois.
The second issue, also raised by the adverse selection problem, is that it may be invalidating the rest of the actuarial tables on which cost of the pension system is based. Specifically, if you take the short-lifers out of the pool of pensioners, the average pensioner left in the system is going to live longer than the averages on which costs are calculated. In other words, paying for the remaining annuitants will cost the state more than it’s reporting to the public.
Third, nobody knows what other assumptions are used in calculating the pension buyout amounts. The discount rate is particularly impactful. It’s used to reduce the value of projected monthly pension payments when coming up with a buyout number to reflect the reality that payments later are worth less than payments today. The state has never provided an analysis that includes that or other details about how it calculates the effect of its buyout program on its overall fiscal situation.
Most importantly, the impact of the state’s buyout program is tiny no matter how you look at it. The unfunded liability of the state pensions is about $144 billion. Even if you used Martwick’s approach and looked only at a $2 billion reduction in unfunded liability, the improvement is less than 1.4%.
You’d never know any of that if you’ve been listening to the state’s grandiose claims about its buyout program.
Gov. JB Pritzker said in 2019 that a study was done of what the savings would be and “it’s billions and billions, potentially $25 billion of savings.” He often repeated that claim.
We asked for that study over and over again, directly and in our many articles on the matter, some of which are linked below. We also filed a with a Freedom of Information Act request.
We got nothing. There was no such study, we concluded, and the state had no sound basis for the numbers it was claiming.
The Illinois Answers Project watchdog group was also stonewalled when it asked about the study. They concluded that Pritzker’s claims about the study and buyout savings were “mostly false.”
That hasn’t stopped Pritzker and Martwick from continuing to brag about the program by ignoring the cost side of the ledger. In 2022, Martwick said “The savings generated by the pension buyout program is big point of pride for me,” and Pritzker cited just the liability side of the ledger as proof of success.
As Chicago considers a buyout program it should provide what the state has never provided. That’s a full analysis showing all costs of the program, including borrowing costs for the cash needed to make the buyouts, and all the assumptions made in the analysis including a review of the adverse selection issue. Without that, we will see the same hot air from politicians trying to look like they are addressing the pension crisis that they’ve long ignored.
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If you’ve jumped down to this conclusion because this article got too long and wonky with math, take heart, because that’s the broader lesson in this. Our pension system is, as we’ve said for years at Wirepoints, hopelessly opaque, far too easily corrupted and impossible for most voters to assess. Buyouts are just another example. As Chicago proceeds to consider replicating the state’s buyout problem, be skeptical, because the politicians are likely to repeat the same deceptions and evasions they’ve used before.
*Mark Glennon is founder of Wirepoints.
Earlier relevant Wirepoints columns:
- Four reasons why the state pension buyout program is problematic for taxpayers
- Sham Buyout Solution For Illinois Pensions Now Being Exposed – Wirepoints
- Governor Pritzker, we’re still waiting for the proof you claimed on supposed savings from pension buyouts
- Stonewalled Again on Savings Claimed from Illinois Pension Buyout Program
- Pritzker’s Latest Pension Flimflam And Contradictions With Illinois Bond Documents
- The whopping lie behind huge, new pension liability imposed by Springfield on Chicago
- Senator Martwick At It Again, Leading Move To Increase Chicago Pension Liability By Billions
Audio and summary 
If this bill passes, say goodbye to local control over all Illinois parks and expect to see open drug and alcohol use, needles, no sanitation and fire hazards, but no ordinary park users.
The governement should be able to tell us, at minimum, if the buyout participants are: male or female (females live longer) how many years they vested how old they were at retirement (older retirees would be more likely to take the money upfront) what their beggining pension was (smaller pensions w/ smaller COLAs might take the money upfront) The government should also reconcile death certificates filed against these participants and reconcile the final cost. We should be able to tell quite easily how much is saved or not over time. But we need the data. If the argument was these… Read more »
Buy–0ut $ depends on interest rates and as rates go down, lump sums increase. So timing will be a factor. Give the buyout participants Illinois bonds at FACE value and let them decide when to cash-in by selling them in the market. Buyouts are federally taxable unless rolled over. Lots of issues that few understand and unions will bargain over points that legislators don’t understand or decide to ignore. Voters will likely have no voice and will be distracted by short-term alleged savings. System assets may have to be sold at a loss to raise needed cash. Public employer and… Read more »
there is one public pension fund in IL which is doing great-in fact it is one of the top in the entire country with a 97% funding level as of 2026.
Let us guess- you’re a member, right?
Let me guess: you’d like him dismembered, right?
that’s a non-sequitur & i am merely stating facts so it’s only fair to give credit where credit is due.
The people in the pool are drowning. But look over there, that one guy in the corner isn’t drowning!
OK.
Much easier to pay into one pension system when you short-change the other half-dozen.
I think y’all shouldn’t downvote this comment, though ahimsa42 should’ve pointed out the plan is IMRF… and we all know why it’s doing so well:
It’s not a mystery why they do a lot better than the others — they pay for their promises, and they promise small.
The other IL plans could use that lesson.
Spoiler alert: it’s the IMRF
1) adverse selection: unhealthy will elect, throwing off actuarial assumptions.
2) toxic empathy: impulse to help those who run out of money and can no longer support themselves.
3) professional skims (scams?): actuaries, lawyers, CPA’s and consultants clean up.
4) union vig: nuttin’ comes for nuttin’.
5) money manager rush: commission-hungry brokers beg or bribe HR to get info on lump sum recipients.
6) ETC.
All excellent points. The person who is likely to select the buy out is single, sick and able to honestly assess their lifespan. These people would have no survivor annuities to be disbursed upon their death but with this buyout program they are able to create an estate which can be distributed to non-spouse survivors. Further, they keep their health insurance so there is no reduction in the unfunded liabilities related to healthcare or their access to very good healthcare services. The state has within its control all the information to know what the true reductions in cost and liability… Read more »
I agree with your observations. My own experience with buy-outs at public universities bears this out. With public schools and universities, we are not dealing with a random population. Teachers can put their heads together and unions can hire advocacy-minded experts. [Unions probably have better lawyers and actuaries than a governmental body that that hires its licensed “experts” based on politics and kickbacks (sometimes called political contributions)]. There is nothing arms-length in the give-&-take between governing boards/administrators and employees. In fact, the salaries and benefits of administrators are often increased in tandem with what the unions negotiate for the rank… Read more »
This is a great executive level report and very helpful! You need a very simple infographic to get the word out there because 95% of the public does not understand basic financial math.
Why is any affluent taxpayer left in Illinois? Family considerations must be secondary as true costs continue to ramp up.
Excellent article. Martwick is a known bamboozler, and Pritzker bloviates about false accomplishments, e.g. eliminating the grocery tax. Why would anyone of good conscience trust either of them? However, Chicago and IL Democrats are all about the hustle with their public employee unions. So I fully expect more fiscal malfeasance and fleecing of taxpayers.
Yup, that “$2 billion saved!” sounds impressive, if you don’t have any of the Illinois pension numbers anywhere near it. Oh, the unfunded liabilities (as officially measured) are about $150 billion? Mmm, well, $2 billion in savings is nice, but it’s minimal when put in context. And Illinois pensions are better-funded than Chicago pensions….before those extra sweeteners passed last year. This is going to do nothing for Chicago. Heck, given the cash flow problems of the fire pensions, BEFORE THE SWEETENERS, this is going to cause further liquidity strains. GREAT GOING. (Nobody is stupid enough to put forth POBs as… Read more »
Thanks for a clear explanation of the pension buyout proposal’s financial implications. The public needs more light to be shined on where the buyout money is coming from (you say more bonds) and the cost of paying out money the state/city doesn’t actually have.