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No Evading Illinois Pension Woes

posted by Jason Kilborn

The Illinois Supreme Court issued its unanimous opinion this past Friday putting a stake through the heart of the legislature's latest attempt to evade its responsibility for woefully underfunding four of the state's five public pensions. Adam (among others) has discussed the pension issue in the Detroit bankruptcy case and the Michigan constitutional provision protecting pension benefits from impairment. The Illinois Constitution of 1970 has an identical provision (art. XIII, s. 5), which will have much more bite in the case of the state of Illinois--an entity that, unlike Detroit, is not eligible for bankruptcy protection. Long story short: the Supreme Court all but scoffed at the state's arguments that contracts can sometimes be impaired (and the state has a really, really good reason here) and that prohibiting the legislature from reducing vested pension benefits is an impermissible abdication of sovereign authority. The Court pointed out that it wasn't the legislature, but the people of Illinois, who imposed the pension protection restriction ... and it seems now the people will likely have to revisit the idea of vastly increased state income taxes and the like, as "[a]dherence to constitutional requirements often requires significant sacrifice, but our survival as a society depends on it."

I had long wondered why we still see defined-benefit pensions, in either the public or the private sector. It seemed obvious to me that defined-benefit plans are not sustainable and that every retirement protection system needed to switch to defined-contribution plans (like 403(b) and 401(k) retirement savings plans). It turns out that even this "obvious" switch won't necessarily fix the problem prospectively, as this paper reports.

Where's bankruptcy (or some other kind of restructuring) protection when you need it!?

Comments

I don't understand Jason's concern about the stability of defined-benefit pension plans. True, they have been unstable when administered by employers. But insurance companies administer an almost-identical product--deferred fixed annuities. They have been pretty successful with the product. The have made money and paid their policyholders. Indeed, some insurers have recently been assuming some pension liabilities.

I think that the failure of employer pensions has been a failure of regulation. There is no inherent reason why these contracts can't work. There is no need to invent a successful regulatory scheme out of whole cloth--just let insurers provide it.

This would also eliminate one of the worst problems of annuities--staggering sales costs.

The State's "really really good" reason is that they really really ignored the issue for nearly 100 years.

The pension clause was added in the hopes that it would stop their ignoring of the issue.

If "we don't have to pay that, we didn't fund that" is a "really really good" reason to ignore the Constitution's requirements, then the requirements are meaningless.

It's not like actuarial science suddenly ceased to exist. Defined benefit plans are "not sustainable" only if you constantly rob the participants! That is what underfunding is, really.

Based on the study cited at the end of the post, it appears that switching to a defined contribution plan "helps" only if you think it is OK to rape participants instead of robbing them, i.e. giving them less benefit at a higher cost.

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