No, unfunded pension liabilities are not measured on the assumption that all workers retire today.

By: Mark Glennon*

Here’s a common myth we often hear about public pensions, recently repeated by Laurence Msall, President of The Ciivic Federation, in a WBEZ interview, when asked what it mean that Illinois has $130 billion in unfunded pension liabilities:

If all state workers were to retire today, that would be the obligation that the state of Illinois has — to make payments to them over when they retire — that it does not currently have assets to cover. It’s not likely and it’s really not realistic that all employees would retire at the same time, but it is a measurement of the liability.

Not true. No actuary or accountant measures pension liabilities based on an assumption that all workers retire today, and I’ve never even seen that tried because it would be pointless.

Getting that wrong is part of why some of the public doesn’t understand the scope of our pension problem. In emails and comments here, we often hear the myth repeated, to the effect that we needn’t worry about unfunded pension liabilities because they are just theoretical numbers — based on a false premise that all workers retire today.

Unfunded pension pension liabilities are key because they are the most commonly cited numbers in our pension crisis. Officially, for Illinois’ five state-level pensions, that’s  about $130 billion (aside from the 650 or so local pensions).

Those liabilities have traditionally been called UAAL — unfunded actuarially accrued pension liabilities. The modern accounting term is NPL — net pension liabilities. It’s the most frequently measure used for how far pensions are underwater.

Unfunded liabilities represent obligations accrued for work already performed by (in Illinois) Tier 1 workers only. More to the point, they are based on projections about retirement age, not the assumption everybody retires today. Those liabilities would be substantially higher if, instead, all workers were assumed to retire today.

They’re also based on mortality tables and assumptions about returns on invested assets that are widely ridiculed as far too rosy.

Instead, we should apply reasonable assumptions. Moody’s, the credit rater, is one to have moved in that direction. They say Illinois’ five state level pensions have an unfunded liability of $250 billion, not the officially reported $130 billion. Other experts put the numbers far, far higher.

Here’s what Illinoisans  should understand, especially pensioners: Even using the rosy assumptions behind officially reported pension numbers, there’s not enough money there to cover Tier 1 work already performed.  Nothing is set aside for anybody else.

Mark Glennon is founder of Wirepoints.

 

 

 

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Mike xyz
1 year ago

Adding the BGA interview, it’s evident that Mr. Msall is part of the messaging problem. The WBEZ interview went down differently than portrayed in this article though, probably due to the fact the WBEZ article also has errors. In both the BGA & WBEZ interviews, the interviewers brought up the topic. That doesn’t absolve Mr. Msall, rather, one does wonder the interviewers source. Additionally, the lead sentence in the WBEZ article perpetuates the myth, and the WBEZ interview followed the BGA interview by 4.5 months. Maybe some of that is a coincidence. Maybe there are people intentionally perpetuating the myth… Read more »

Mike xyz
1 year ago

It was the radio interviewer, not Laurence Msall, that used the words, “If all state workers were to retire today”. That’s not clear in the the online reporting of the radio interview, which instead of placing the phrase in the question, placed it in the response using square brackets. Thus an inappropriate use of square brackets. Msall pointed out in his response that it’s not likely or realistic that all employees are going to retire at the same time. WBEZ’s poor reporting of a poor question is a candidate for the Media Watch section of the WirePoints website. Following are… Read more »

P M
1 year ago
Reply to  Mike xyz

I just want to point out this sentence: “Illinois did not fund its pensions according to what the actuaries told the government it was going to cost.” I discuss this further at the bottom of this thread. But in short, even if they state did fund the pensions as the actuarial math dictates, it does not solve the problem. True, the state would be in much better shape but: 01) You have no guarantee of the actuarial assumed rate of return 02) The state contribution was at a point in time that did not take into consideration the huge growth… Read more »

Stephen Douglas
1 year ago

“If all state workers were to retire today…”

Yes, misleading. Also misleading what that $130 (plus) billion means. Maybe every now and then you could clarify that that is today’s value of the projected cost over the next thirty years, assuming three percent wage increases, yadda, yadda, yadda.

Ceteris paribus.

1 year ago

Wow, another pubic employee who is an “EXPERT” in EVERYTHING!

Freddy
1 year ago

Question? How much of all the property and local taxes in your area that were and are earmarked for pensions were “Diverted” to either higher salaries- political pet projects-pension spiking (Cayman Islands) and so on over the years. Now they come back to the taxpayer because the funds are underfunded! I think we are paying over and over the same bill. If the pension monies were (100%) appropriated to the funds at time of payment by taxpayers the under funding ratio would be much better now. Were the public union officials and pension recipients ever checking that it is funded… Read more »

James
1 year ago
Reply to  Freddy

Freddy, the part where you question whether IL public employers ever questioned underfunding of their pension systems at least enough to bring a court challenge was settled something like 15-20 years ago. The court ruled that since no public employee pensioner had ever been slighted as to the amount nor even the time of his/her pension payment there was no grounds for the lawsuit being considered. The 1970 IL Constitution only specifies that pensions be paid at the time and in the amount required. No funding source nor adequacy of funding such pensions was specified by it. So, yes, public… Read more »

S and P 500
1 year ago

I once posted a comment on some you-tube vid about how federal debts and unfunded entitlements and pensions are around $700,000 per taxpayer. A response came back about how soc. sec and medicare have always been pay-as-you-go, so what’s the problem ?? The problem is, if we’re doing all of that paying as we’re going then there won’t be any money for free healthcare for everybody, fixing infrastructure, or anything else. If we’re paying as we’re going on state and local pensions, then there won’t be anything left over for schools or higher education. There won’t be anything to pay… Read more »

nixit
1 year ago
Reply to  S and P 500

Right, when the pensions go bust, we’re pay-as-you-go. The real fun begins when there’s no money left for current employees because we can’t leverage stock market gains to pay the retired employees.

1 year ago

Mark is absolutely correct about this.

http://stump.marypat.org/article/443/stupidity-round-up-funded-ratios-and-racial-proportions

‘In no actuarial method that I know of do we assume that everybody is going to retire tomorrow in setting the value of that liability. There is a set of assumptions, one of which is the distribution of ages at which people will retire.

‘Now, those assumptions can be wrong, but nobody uses the “everybody retires tomorrow” assumption unless something really bizarre is happening.’

nixit
1 year ago

What about the other myth that Tier 2 is going to save the day?

nixit
1 year ago
Reply to  Mark Glennon

No doubt, but what happens when Tier 2 benefits are enhanced between now and when everyone in Tier 2 starts collecting? All these actuaries are using assumptions that Tier 2 will remain in its current state. Gotta think some union-friendly governor/legislature is going to lower the age limit or remove the salary limit or reduce the contribution rate between now and 2040.

I’d like to see actuaries project pension liabilities assuming some sort of benefit enhancement. Show everyone how precarious the “savings” of Tier 2 are.

Larry Littlefield
1 year ago
Reply to  Mark Glennon

“They contribute more than needed to cover their own benefits.”

And that is fair — how?

And future taxpayers will pay more than is required to fund their own services.

P M
1 year ago
Reply to  Mark Glennon

I am missing why we should care what is fair to collective members of The State? They are our oppressors. When you start to see then enemy as human you develop compassion for them; that is a mistake. I do not share this weakness many of you exhibit. I know who the enemy is. What should be done, is to gin up the anger of Tier 2 employees against the Tier 1 employees. It is natural for Hyenas to prey on Jackals and Jackals to steal from Hyenas, “we” (the good guys) just need to set one pack of The… Read more »

Stephen Douglas
1 year ago
Reply to  P M

I hope that was sarchasm. Somehow, I doubt it.

1 year ago

I hope that was “sarchasm”. Somehow, I doubt it.
Wow, I say the exact same thing about YOUR comments!

Bob Out of Here
1 year ago
Reply to  P M

That’s already happening with the pension intercepts. Current employees (until they get fired) vs pensioners.

P M
1 year ago

Awesome.

Stephen Douglas
1 year ago
Reply to  Mark Glennon

“They contribute more than needed to cover their own benefits.”

Is that based on the usual 7-8 percent discount rate? And is the state also “contributing enough”?

P M
1 year ago
Reply to  Mark Glennon

The reality is, it is a house of cards. Think of it this way, there is no guarantee any investment will have a positive real except perhaps TIPs and that real return if generally measure in a fraction of a single percent. But of course the pension plans are set-up so they cannot invest solely in TIPs even if they wanted to. And of course a fractional percent cannot keep up with a guaranteed minimum 3% annual increase. The point is, defined benefit plans are a bad idea from the get go. It is all based looking in the rear… Read more »

Stephen Douglas
1 year ago
Reply to  P M

“No one pretends that defined benefit plans are perfect or all-wise. Indeed, it has been said that defined benefits is the worst form of pension except for all those other forms that have been tried from time to time.”
(Sorry Winston Churchill)

Joseph Hillström
1 year ago

DB plans put risk on employer while DC plans put it on the employee. (DC plan assets ‘belong” to the employee.) With DB plan, employer bankruptcy or other financial distress imposes risk on employees — particularly younger employees. Similarly, DB plans are subject to manipulation by employers through actuarial assumptions and the like. During intervals when unions have power vis a vis their employer, they are likely to extract large promises. That’s what the Teamsters did. Teamsters are likely to get hosed. So are public employees. Social Security recipients less likely to get hosed because U.S. can (in a pinch)… Read more »

1 year ago

During intervals when unions have power vis a vis their employer, they are likely to extract large promises. That’s what the Teamsters did. Teamsters are likely to get hosed.
The Teamsters are already getting hosed in the multi-employer pension plans, like Central-States. But in some of those cases it was not the Teamsters fault at all. In fact one was under Federal receivership/oversight and was so mismanaged it was essentially 80% wiped out. Public employees on the other hand are directly responsible for the massive underfunding of their plans…

Joseph Hillström
1 year ago

I disagree to the extent that Teamster locals bargained contracts for higher wages and justified the wage increases by permitting employers to maintain pension contributions at artificially low levels. This was (in part) so union local leadership could get re-elected based on having delivered pay increases. Also, Teamster bosses misused plan assets, as you seem to be noting. Deregulation of the trucking industry put a lot of small companies out of business so funding from those companies diminished to zero. Some are fond of saying pensions are deferred compensation. I think they are more like people wanting too much now… Read more »