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.