Pension Liabilities Skyrocket: It’s the Promises, Stupid!

Unrestrained benefit growth is behind many state fiscal crises: Special spotlight on Illinois.

This is a guest blog courtesy of Wirepoints and authors Ted Dabrowski and John Klingner.

It’s the Pension Promises, Stupid!

You can trust public pension apologists to deflect any critique that calls out the failure of defined benefit plans. Unsurprisingly, their response to a recent Wall Street Journal editorial highlighting Wirepoints’ research was just that – deflection via misdirection and victim playing.

Wirepoints found that a skyrocketing growth in pension benefits, what are known as accrued liabilities, is behind most of the state pension crises playing out across the country. Uncontrolled pension benefit growth is swamping many state economies and the residents who pay for those benefits.

Apologists Deflect Facts

The apologists find the facts inconvenient, so they deflect. They revert to their standard narrative that state governments, and by extension taxpayers, are to blame for “failing to fully fund their public pension commitments.” Or that public employees are the only “victims.” Or they criticize unessential details to distract from the undeniable growth in benefits.

But the apologists don’t disprove the core findings of our research: that unrestrained benefit growth is behind many state fiscal crises.

That was the subject of our two most recent reports: Illinois state pensions: Overpromised, not underfunded and Overpromising has crippled public pensions: A 50-state survey.

The numbers are undeniable. And it’s not just the growth rate of accrued liabilities that’s daunting. It’s how they’re crowding out everything in their path.

Some public pension apologists took issue with the above graphic. They complained that comparing the growth of total pension benefits (accrued liabilities) to the growth in other economic indicators like GDP is “illogical and has no theoretical basis.”

The fact is accrued liabilities are a debt – they are the sum of every pension obligation made to all workers and retirees. The growth in that debt over time matters since taxpayers are liable for a large chunk of those promises. If the sum of those promises grows too fast year after year – far faster than an economy (GDP) and its taxpayers (household incomes) can keep up with – a shortfall will invariably occur.

Any person who’s managed a business knows you can’t let a significant debt grow uncontrollably – regardless of why it grows or the math behind it. Left unchallenged, it will bring insolvency. Same goes for a family and its credit card debt.

Yet that’s precisely what’s happening to some states like Illinois, New Jersey and Kentucky.

For example, look at the below chart of Illinois, where Wirepoints has gathered 30 years of pension and state budget data.

Illinois Pension Promises vs State Revenue

Promises are swallowing the budget and crowding out spending for everything else.

In 1987, total promises made to active workers and retirees were 1.6 times, or 162%, the size of the state’s yearly operating budget.

By 2016, those total promises had jumped to 6.8 times that of state general fund revenues. That’s outrageous any way you measure it.

How did that happen? The answer lies in the massive growth in the state’s total pension promises – some due to a growth in perks and some due to a more honest reporting of what those promises are really worth.

In 1987, total pension benefits promised to the state’s active workers and retirees was just $18 billion. That’s the total amount of benefits the state’s actuaries calculated were owed by the state.

By 2016, total pension benefits owed had ballooned to $208 billion, according to the Commission on Government Finances and Accounting, the state’s official number crunchers. That’s an increase of 8.8 percent, compounded annually.

In contrast, the state’s tax revenues grew to $30.5 billion in 2016 from $11 billion in 1987. That growth rate was about 3.6 percent a year, or about 36 percent faster than the inflation rate of 2.6 percent annually.

The bottom line: Total pension benefits owed by the state grew 2.5 times faster than state revenues, year after year, for nearly 30 years.

Illinois’ pension growth has dwarfed the growth of everything else in the economy – the state’s GDP (using state personal income as a proxy), the state’s tax revenues and its residents’ ability to pay for them.

It’s little wonder that Illinois pensions are dramatically underfunded. Taxpayer contributions could never keep up with that kind of growth. It’s left Illinois with an officially-reported pension shortfall of $129 billion. And a credit rating that’s just one notch above junk.

While Illinois may be the extreme, other states aren’t far behind.

It’s time to stop blaming taxpayers for the pension mess across the country.

In too many cases, it’s overpromising, and not underfunding, that’s the real cause.

More Illinois Pension Woe Links

The above courtesy of Wirepoints and authors Ted Dabrowski and John Klingner with some minor emphasis edits, subtitles, and chart trend lines by me.

Mike "Mish" Shedlock

Comments (33)
No. 1-14
hmk
hmk

The question is how is this going to end?

JonSellers
JonSellers

I have little doubt that the State of Illinois is both over-promising and under-funding their pensions. That's what you get when you live in a fundamentally corrupt state. I'm not personally opposed to pensions, public or private, but I am opposed to fraudulent behavior, which over-promising or under-funding is.

What I find unwieldy about the argument in this article is a lack of real understanding of the over-promising argument. Did the State's workforce grow faster than the private workforce? Did the average pay of a State employee grow faster than that of private sector employees? Did legislation pass increasing the total value of the benefit? Say from 50% of final pay to 75%? Any of these things (or combinations) would cause benefits to rise faster than GDP or aggregate State revenues.

Then if the total pension liability grew at a compounded rate of 8.8%, what was the compounded income from funding and interest on investments? How does that play into the issue? That's not discussed here.

I'd like to see a deeper dive to get a better understanding. Here's is my bet: the State's workforce grew faster than the private sector workforce, and average wages paid to State worker's grew faster than average wages in the private sector. General benefits didn't change. And, again I'm betting this is true, that growth in State employment and wages was very much in line with historical norms. But what really changed was a massive reduction in growth in employment and wages in the private sector over the same period of time. Which has left private sector workers wondering what happened and left them pretty jealous of their public sector neighbors.

I'm betting that stuff is true because the article didn't get into any details. And the information shouldn't be that difficult to find.

LawrenceBird
LawrenceBird

No doubt that there are problems but these charts are a bit of a statistical abuse to support an agenda. A far better chart would be to show cash flows each year (or decaded). How much needs to be paid out vs how much the states are taking in. It would also be helpful to see on such a chart how much of any mismatch is due to under/over funding of the plans.

And at the end of the day - don't blame the employees. They asked for something and your elected officials gave it to them.

Dsgn
Dsgn

For the "Makers", the crisis is perhaps 10% of their livelihood. For the "Takers" of all stripes, especially those who promised, it's a life or death battle. How it ends? The parasite always kills the host.

RonJ
RonJ

The new Los Angeles Police Chief retired from his previous position, was given a lump sump pension payout of $1.27 million, then was rehired.