By: Mark Glennon*
Few things irk real pension reformers more than the constant claim by opponents that protecting pensions is about defending the little guy. The opposite is true. Let’s explain and look at some numbers.
First, we’ll start with a premise, which is that most state and local pensions in Illinois as now scheduled will not be fully paid for the simple reason that they can’t be. One way or another, whether by default, bankruptcy, constitutional amendment or whatever, cuts will come. Regular readers here know that. If you don’t accept that premise, please either study up or stop reading now, link over to this fairy tale site and continue believing what you do.
We’ve all seen countless examples of pension excess — spikers, double dippers, overpaid union chiefs who participate in government pensions and, most importantly, those with pensions that are simply too generous to be affordable.
But aren’t at least some pensions reasonably sized and genuinely needed to avoid hardship in old age? Ideally, I think most would say we should at least try to find a way to reform pensions that identifies and protects those small ones — reform that’s means-tested or progressive in some way.
With haircuts a certainty, however, each day without real reform makes protecting those little guys less likely. Unfunded liabilities are growing rapidly, even when market returns are great, as we’ve seen in recent years. The inevitable cuts likewise are growing, which means the number of modest pensions at risk also grows each day.
So, how many of those little guys with modest pensions are there? You won’t find any useful studies because nobody has cared about this topic. We can, however, get some insights by sorting in different ways using the public pension databases. I’ll use the Better Government Association’s 2015 database, which lists individually over 457,000 pensions including all Chicago area pensions and the statewide pensions. It does not include police and fire pensions outside of Chicago. (Yes, there are 457,000 pensioners beyond those police and fire pensions. No wonder we’re broke, but that’s a different story.)
Now, to get at the question of which pensions are small and which are large, you need to think on a full-career basis. A pension of, say, $20,000 per year, is pretty small unless it’s for a very few years of service. Personally, I think most people should be working at least 40 years. If they haven’t worked 40 years, they should have some additional income and source of retirement savings from their other years working. The main exceptions might be cops and firefighters. Most of them aren’t in this data anyway.
Let’s first look at the numbers on the right, which is pensioners in the database with 40 or more years of service. Notice, first, how few of those there are — just 7,066 of the 457,000 pensioners in the database worked 40 years or more.
Second, take your pick on which pensions should be considered small enough to deserve a higher level of protection and sympathy. Keep in mind that these pensions are for one person only. Married couples probably have other sources of retirement income. Also, even these pensions may include those who worked part time for some or all of their forty years. The database doesn’t break those out. Maybe you would pick $50,000 or so as the cut off, which most in the private sector would say is still mighty generous — the cash value of an annuity that size for a 55-year old is over $1 million. Using that cut-off, you find 2,033 with pensions of $50,000 and under, which is 29% of all pensioners with 40 or more years of service.
Now, let’s expand that to look at pensioners with 30-40 years of service, which is on the left. There still aren’t that many of them — 132,302, to be exact. And you still don’t find that many with pensions that might be considered meager. There are 49,146 pensioners getting annual payments of $50,000 or less with 30-40 years of service, which is just 37% of that group.
You could keep going with this analysis if you wanted to extend some kind of special protection or sympathy to workers with fewer than 30 years of service and make this as complex as you want, perhaps by adjusting all pensions to look at what they would be on a full career basis. But the primary point here would hold, which is that the percentage of pensions that might be considered meager is pretty small — roughly a third of all pensions if you deemed less than $50,000 to be meager.
All this may be academic for the purpose of pension reform because nobody has shown any interest in special help for the little guys. The record is to the contrary. The 2010 reforms stuck new hires into “Tier 2” and obligated them to make additional contributions towards the unfunded liability they didn’t benefit from. (All unfunded liabilities in Illinois are entirely for Tier 1 services already performed.) Also, under the SB-1 reform bill that was invalidated by the courts, a cap on pensionable salaries would have been imposed. But, no surprise, those with salaries that already exceeded those caps would have been excluded — a special fat cat exclusion would have protected those already fat.
And if any particular system goes into bankruptcy there is no clear means of favoring smaller pensions over fat ones if haircuts are needed. All unfunded pension claims go into one pot with other unsecured creditors.
Let’s recap with a few key points, observations and other things from the database:
• On a full-career basis, around a third have pensions of $50,000 or less.
• The numbers we are using are aggregates, and circumstances in any particular pension may vary. The extent to which even meager pensions are likely to go partially unpaid may vary dramatically depending on the pension. IMRF, for example, is almost fully funded (according to its own numbers, that is), but Chicago’s police and fire pensions are less than 30% funded. Expect the inequity of haircuts pensioners will face, depending on which system they are in, to become a big issue.
• 299,045 have pensions for less than thirty years of service, which is 65% of all pensioners. (However, that includes those who may have worked 30 years or less in one system then the same in another.)
• 13,970 pensioners in the database are getting over $100,000 per year.
Finally, just to make you sick, click this link to skim through the list of pensions for judges. Note the size and the lengths of service. Keep in mind that these are generally well off folks — successful lawyers — who no doubt had plenty of income and retirement funding in their other careers. Good luck ever getting them to sign off on pension reform that favors small pensions over fat ones.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.