The people who teach our kids apparently expect you to forget that equations have two sides.
Yet another study is out on the supposed economic benefits of a public defined benefit pension plan. It’s from CTPF, the Chicago Teachers Pension Fund. It purports to show that pension payments had a $2.0 billion positive impact on the Illinois economy, supporting more than 13,274 jobs in Illinois.
The trouble is, they looked only at the impact of outflows of benefits from the pension. They ignored what had to be paid in by taxpayers and pensioners, and what remains to be paid in. Those payments into the pensions take their bite out of the economy. Moreover, payments in have not been enough to cover the payments out, which is why our pensions have such huge unfunded liabilities, and that will have to be made up later. For CTPF, the unfunded liability was $10.9 billion as of its last financial report date, June 30, 2020. It has just 47% of the assets its actuary says it should have.
One-sided studies like this come out regularly from public pensions in Illinois and across the nation. They mean nothing. Both costs and benefits obviously must be included to make a study useful.
TRS, the state pension for teachers and Illinois’ biggest, did the same thing in 2019. Maybe CTFP was trying to avoid criticism by at least using a technically correct title: “Understanding the economic impact of CTPF benefit payments…,” but that’s pretty deceptive.
Also, readers here often ask how many Illinois pensioners reside in the state. The CTPF study says about 83% of CTPF’s annuitants live in Illinois and about half of those members reside in the City of Chicago. A 2019 analysis by the Daily Herald looked at the six state pension funds and found about the same — 82% of pension retirees reside in the state. The Daily Herald added, “More than 71,000 people collecting public pensions from six statewide retirement plans have moved out of Illinois, taking more than $2.4 billion annually with them.”
-Mark Glennon
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
“The National Institute on Retirement Security estimates that a pension plan can provide benefits at about half the cost associated with a 401(k) plan.” I believe that has been debunked also. But there are still great advantages in a DB pension plan. One is not the magnitude of pension spending, but the consistency. Dependable income for retirees, including Social Security and pensions, keeps normal business cycles from becoming depressions. It is better for the individual and for society/economy as a whole to equalize spending/consumption over ones lifetime. Government as a “model employer” benefits from practicing and encouraging this. Energy would… Read more »
A pension that is 47% funded means the pensioner saved 47% and the other 53% comes from current savers.
Someone with a $50,000 pension has savings of $23,500 at the time of retirement. The other $26,500 is paid by current workers. The State money covering the pensioner should be money set aside for current employees.
Theoretically, that’s one advantage of a Defined Benefit pension plan. Investment risk is shared over generations. Funding should never have gotten to 47 percent (or below). Time to pay the piper, but for Illinois, New Jersey, Kentucky, etc., it may be too late. It can be done. It is being done by other states and countries, for mutual advantage.
Let’s suppose they are right.
In that case, all society will benefit from every single worker classification being accorded similar defined benefits rights.
If the numbers work for teachers, they should work for everyone, right?
Let’s start with nurses, whose average age is higher than the age at which teachers retire and pull 6-figure benefits.
Let’s make Illinois as wonderful for all citizens as it is for 55 year old vested teachers entitled to free health insurance and monthly pensions with COLAs valued at 300-500% of social security (which begins 10 years later).
Sarcasm aside, that is the right idea. If the teacher’s pension fund had been properly funded for the last thirty years, it could have served as a good example.
Look up north.
HOOPP returns 11.4% in 2020
“HOOPP’s funding ratio was 119% at the end of the year, the same as the previous year. The net return was lower than the previous year’s net return of 17.1%.”
Sarcasm aside, the crony socialism model fails if all citizens try to enroll in the plan.
The paper explores the macroeconomic effects of three public pension reforms, namely an special thanks to the Economic Modeling Unit of the Research. As public pensions constitute a substantial share of the whole retirement .
The “Illinois Right to Collective Bargaining” amendment will be on the Illinois ballot in 2022. Please research it. The Chicago Teachers Union supports it. If this passes it will change the Illinois Constitution forever. The ambiguous way the bill is written assures that Illinois Unions will get everything they want anytime they want. It all depends on how you interpret it and you know who will be interpreting and taking advantage of it, not you or me. They won’t have to complain about what they want anymore they’ll just make it happen WITH NO INPUT FROM TAXPAYERS. Please read up… Read more »
Marie, you can rest assured that our coverage of that awful proposed amendment will be extensive. It’s not up for a year from November, however.
“One-sided studies like this come out regularly from public pensions in Illinois and across the nation”
Great piece of info. Thanks
LOL!
One sided studies come out…
On both sides.
Reality has been altered in Illinois – Pritzker and those in power believe what TRS and CTPF present is true. If the messenger isn’t a public employee union, Pritzker and the supermajority Democrats don’t care.
The following numbers will continue to grow but as of now there are 124,138 public Illinois pensioners receiving an excess of $50,000 per year. Almost 28,000 receive more than $100,000 per annum; many in the $200,000 plus range. Top pensioner gets $600,000 plus.
Not bad for being civil servants. Average age of retirement is about 5-6 years earlier than those in private work. No wonder they vote the way they do.
I’ve read, maybe someone here can confirm , that up to a 1/4 of some of the pension funds deposit those checks out-of-state.
Years ago I was on a lake in the rural northwoods during the summer and the guy with the biggest pontoon driving like a jerk was a Chicagoan with a pension. He was apparently well known around these parts because the patrons near us were all complaining about him and seemed to know a lot about him.
The most deafening silence comes when “property tax rate capitalization” is mentioned. Illinois property values have been signifcany depressed vs. American property values, for two decades. This can be attributed to the startling high property tax rates relative to the rest of the country. Property taxes which are outlier high and buy nothing of value (property taxes all over America pay for average quality schools, police, fire&rescue, parks, libraries, etc., but at much lower annual prices) are “capitalized” as a negative-value annual factor. Tax rate capitalization can be considered the ‘cost of carry’ of an asset that is someone’s home.… Read more »
Your take here is a litte misleading as to the impact given. Where I find the most obvious error is the implication that having public employees in IL pay Social Security taxes would be a cheaper means of financing their retirements. Maybe that’s true if we were comparing “apples” to “apples,” but that’s not the case. First, most of the rules for funding, eligibility for retirements and benefits are very different. Considering just that first issue the 6.2% Social Security payroll deductions come from both the employee and the employer. In IL public employees generally pay something on the order… Read more »
Compensation is totality of all employer expenses (gross wages, health care, retirement, fringe benefits etc) for an employee. The salary offered by a school district today is based on the fact they do not have to contribute to that teacher’s retirement (put aside the 0.58% of total payroll which was part of the legislation increasing the service year multiplier to 2.2 for the moment). If the school district had that additional expense, salaries would be lower. Say a teacher’s entire compensation package is $75,000, $50,000 of which is gross salary, and that teacher is converted to a hybrid social security/pension… Read more »
The argument put forth is all distraction. Just ask any teacher at or near retirement if they are willing to wait until age 66 1/2 to start receiving a pension payout. ( That is the social security full retirement age.). Shuts them up immediately, as we know the answer. Second ask them if they would settle for between $2k and $2.5k per month at that age, with no 3% annual escalator. They start running for cover. This is all very immorally unfair to the average private sector worker. I thought the teachers were about fairness, not.
Most private sector pension plans don’t even have COLA. Granted, pensioners contributed 0.5% of their salary for a COLA, but the state should have the power to revert back to original 1.5% simple COLA when it was first enacted. Of course, the state can’t because of the pension clause.
Voting for self-interest is a long-standing part of human nature. No surprise there.
Acting in one’s self-interest is a part of human nature. But of course most do not believe that means you may take whatever you want from others, based on your own self-interest. I say “most” because public unions seem to believe exactly that.
And I’d have to guess that if other counter-balancing forces had such power they’d vote similarly for their own self interests. I don’t think the people and groups you mention are more altruistic in general; they are just not as cohesively significant to sway things their way—yet.
One does not need to be altruistic to refrain from extorting fellow citizens.
It is amazing that anyone can believe that people can do whatever they wish, as long as the majority votes it to be OK.
James – another lecture on human nature? Are you just that much smarter than the rest of us? The most obvious missing point here amongst the talk on the benefits of pensions is just what exactly it costs to provide these benefits. The costs are so substantial that benefit claims are laughable. Who in their right mind would pitch the economic benefits of pensions without examining the staggering costs? Only a smug protected class would do so. Of course, state taxpayers must find a way to pay for this. They won’t, and a windfall from the feds is the only… Read more »
If the voter can’t vote for economic growth, then the voter shouldn’t be able to promise themselves the benefits that are only made possible by economic growth. As is, they vote for the path of least resistance and take pride in bail-outs. The voters fear they won’t get the pensions that they contributed toward. Their convictions mean a lot to others in their household, and to the many whose standard of living is supported by government welfare. Government workers and supporters, I assume most, believe in the importance of their jobs even though none directly produces economic growth. They have… Read more »
But, your personal rules for people who should be allowed to vote don’t matter. Become President and they might.
I don’t think voting has much to do with it anymore. Union funds are all donated to D’s, who grant the union consistently more power and dues money (aka property taxes). D’s gerrymander the districts to lock themselves in. Have you seen the maps? The reps pick their constituents. Looks like racketeering in my opinion.
It is factually inaccurate statiing that teachers pay 9% of salary toward their own pensions, teachers pay usually zero but only as much as 2%. 7-9% is paid on their behalf by taxpayers. Then the state pays another roughly 35% toward pensions. Another deliberately evaded point: that this 6.2% (social security) is part of salary which teachers get to keep and spend. This additional money provides household budget buffer which is not a luxury afforded private sector households, and may be part of the reason teachers are so sociopathically indifferent to the economic suffering of their communities. Also, the comment’s… Read more »
Your story has been mentioned and debated many times here. Its one of where the words “salary” and “compensation” are presented usually with obvious disdain as somewhat equal terms, but they are not. The employer should be primarily concerned with every dollar spent on the employees’ benefits–the “compensation.” “Salary” is what appears on their pay stub and only part of compensation. Its up to the negiations process how much of the overall compensation is paid as salary, and you’re not covering new ground in your argument on that score. I agree with with the first half of your second paragraph… Read more »
$1 invested in public pension plan, earning 7% compounded interest over 30 years, comes out to $7.31.
$1 taken from my retirement contribution to invest $1 in public pension plan, unable to earn 7% compounded interest over 30 years, comes out to -$7.31.
Net economic impact = $0
Precisely.
Oh, it’s worse than that. The notion that a public pension plan can earn 7% per annum is a convenient fiction. You, on the other hand, have a better chance of earning that rate. So net economic impact is negative.
The TRS (Teacher Retirement System) has a long-standing overall average in that 7% range, although that’s not to say its always there. But, I’ve seen that statistic from time to time, and I’d presume you could find it easily enough online. The few really good years or positive returns seem to counter-balance many years of lower-than-average results for TRS. Other IL public pension systems may not do as well, but I can’t speak to that.
James – averaging 7 percent returns – even if you are accurate – means little. A 15 percent decline in a bad year can take years to recover. This is the millstone of finance. There is a reason most actuaries suggest a 3 or 4 percent rate of return.
Achieving a 7% return in 1991 is entirely different than 7% return today. I could get a 7% return on a 5-year CD back in 1991.The pension systems have to make much riskier investments today to get big returns. The pension systems’ historical returns don’t mean much anymore as the investment mix is far more aggressive.
The TRS long-term average covers something like 30 years if my memory is correct. Yes, each year’s investment return can vary considerably from any adjacent year’s return, but we know a 30-year average covers the economic slides circa 2000 as well as 2008-2009 and 2020. There were probably one or two more such noteworthy periods economic downturns in there as well, too. Stll, the overall yearly return average was roughly +7%. Who can say what will happen in the next 30-year cycle? As always, past investment results are no guarantee of future results.
The lower discount rates reflect a very low risk investment. For instance, the 20-year General Obligation bond, reflective of AA municipal bonds, is yielding 2.14% today. I estimate that if the Illinois pension plans (including the poster-boy known as IMRF) used that rate, the unfunded liability would be somewhere between $200 billion to $300 billion. You cannot solve a crisis until you know what the depth of the crisis is. The purpose of the low rate is to establish a Market Value Liability. If the investors get a return in excess of the very low risk rate, then it will… Read more »