Tuesday, September 6, 2011

Pt. 2 of “Waiting for Super [Legislators]” to Address the Budget Problems of Illinois and the Officious Civic Committee...

Why Is Pension “Reform” Not the Most Important Issue in Illinois?

First, pension sustainability has little to do with a state’s deficit reduction because it is a symptom of the aforementioned points (discussed in part one) and the following substantial issues that need to be addressed, of which many are in a cause-and-effect relationship with a pension’s solvency. Focusing on public pensions’ unfunded liability (pension plans will always have liabilities!) will not revive the Illinois economy and produce jobs.

Second, liabilities in a public pension fund never come due all at once. Only 15 states have a funded ratio over 70% (Barclays Capital). Funded ratios are unpredictable, and long-term liabilities are subject to changing variables. Furthermore, investment returns can overstate or understate liabilities.

Third, according to the Illinois Retirement Security Initiative, a Project of the Center for Tax and Budget Accountability (February 2011), “when compared to the State’s projected revenue growth, the State’s required pension contribution may be more manageable than many believe… assuming revenues grow at 2.8 percent per year, and the State maintains its personal income tax rate at five percent and its corporate income tax rate at seven percent.” This is contingent upon the State of Illinois reforming its revenue and tax system, re-amortizing its pension debt, and paying full contributions to the pensions systems (which it has not done for decades).

In line with this type of thinking, we may assume that the State’s revenues and budget, along with anticipated assets in the pension systems, will increase proportionately in the future. “Even Illinois, [with] the most underfunded pension plans in the country, would only have to boost tax revenue by less than 0.2 percent over the next 30 years to meet its projected shortfalls” (Dean Baker, Co-Director at the Center for Economic Policy and Research).

Pension reform should not be the focus in Springfield. It should be tax reform, where fairness, long-term revenue stability and a progressive tax rate become the State’s priorities and solutions for the budget issue. As determined by the Institute on Taxation and Economic Policy (November 2009), the State of Illinois does not tax equitably, and it is in the top ten of regressive state tax systems where the wealthiest taxpayers do not pay as much of their incomes in taxes as the poorest and middle-income wage earners.

Therefore, the focus should be on the “fundamental disconnect” and a long-term economic policy by promoting structural reforms (American Enterprise Institute, June 2011) and not on any unwarranted modification or the inevitable elimination of pension benefits that is perpetuated by the Civic Committee’s, the Civic Federation's and the Chicago Tribune's fallacious, lingering deflection and blaming the State’s public employees’ defined-benefit pension plans.

Consider that increasing current employee contributions and reducing benefits for future employees so that members in the defined-benefit plan will choose a defined-contribution (401k or 403b) option do not address the existing unfunded liabilities in Illinois. What is assured, however, is the slow, deliberate destruction of the Tier I defined-benefit plan and, thus, the Teachers Retirement System.

The Center for Retirement Research (April 2011) maintains that “meaningful defined-benefit plans could remain as a secure base for the typical public employee, and defined-contribution plans could be ‘stacked’ on top to provide additional retirement income for those at the higher end of the pay scale. Such an approach would ensure a more equitable sharing of risks…” Three states already use a capped defined-benefit plan in combination with a defined-contribution plan for new employees. They are called “hybrid” plans.

However, let us not forget that defined-benefit pension plans have an economic impact of several hundred billion dollars each year and support several million American workers in their jobs; they contribute over a hundred billion dollars to annual local, state, and federal revenue, while reducing government expenditures; they also provide capital to the financial markets, and they deliver the same level of retirement income as an individual 401(k) type savings account at half the cost as a result of their professional asset management and better long-term investment strategies, particularly during challenging economic times. Let us also not forget that defined-benefit pensions are associated with far fewer American households experiencing food privation, shelter adversity, and health care hardship and provide a bastion of hope and financial stability for millions of people in this country (The National Institute on Retirement Security). Instead of annihilating the defined-benefit pension plans, they should be advocated by everyone.

It is true that state-funded pensions are less expensive for Illinois taxpayers than Social Security and Illinois taxpayers save hundreds of millions of dollars per year by not paying Social Security payroll taxes for 78% of all active employees in the five-State-managed plans (Illinois Federation of Teachers).

It is also true that the state has control over its revenue and spending and can improve funding instead of altering and lowering public pension benefits (Fitch Report, January 2011), the next topic for discussion in tomorrow’s post.

-Glen Brown

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