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Economy

Emperor has no clothes: Pensions are short cash

2010-02-16

Illinois politicians are at it again. They're borrowing from the future to make state pension contributions today. Illinois has one of the most underfunded public pension plans in the nation.

When boomers start retiring, there won't be enough money to pay those pension promises. Both political parties are still trying to hide the magnitude of the problem.

In early January, while everyone was busy watching the nasty campaign commercials, the State of Illinois pulled an end-run on the budget process. On Jan. 7 the state sold $3.5 billion of "pension obligation notes." In simple English, the state borrowed money to finance the state's contribution to its five retirement systems.

These five-year debt securities carry an interest rate of 3.84 percent, tax free to bondholders. It's a much higher yield than you could get in the bank because of the risk involved. Moody's and Standard and Poors rated them at least 6 notches below the top AAA rating. In fact, all the rating agencies characterized the outlook for Illinois finances as "negative."

The money raised will go to shore up the Teachers Retirement System, which is scheduled to receive $2.08 billion of the proceeds, and the Illinois State Universities Retirement System, which will get $702.5 million from the bond offering. The Illinois State Board of Investment gets nearly $813 million for funds, including the Illinois State Employees' Retirement System, and the Judges Retirement System, and -- big surprise -- the Illinois General Assembly Retirement System.

But what happens in five years when those bonds must be repaid? Where will the state find $3.4 billion -- plus the interest that must be paid along the way? Will investors be willing to lend to them at any yield? Will the next governor return to Blagojevich's plan to lease out the state lottery and sell the toll roads? Or will this "Ponzi scheme" finally be exposed?

On that day, the war between the taxpayers and the public pensions will officially begin.

Posted by:Fred

#9 Lest we fergit, D *** NG IT MORIARITY, AT LEAST UNDER SOVIET COMMUNISM THE PEOPLE WERE PERMANENTLY POOR BUT OPTIMISTIC - WE WERE "OPTIMISTIC", D *** YOU!

Posted by: JosephMendiola 2010-02-16 21:59

#8 A 77%-To-88%-US-DEBT-To-GDP-RATIO come Year 2020 = EVEN IFF YOU RETIRE TODAY OR IN NEAR-TERM AT FULL BENEFITS, DOESN'T MEAN YOUR PENSION, ETC. IS SAFE AS NATIONAL ECON INSOLVENCY = FED-LOCAL GOVT INSOLVENCY ALSO.

The OWG + NATIONAL-GLOBAL SOCIALIST ORDER + "PAY FOR THE REST OF THE WORLD" US = GLOBAL TAXATION, etc which Amer Voters didn't vote for, either to begin with nor in the present nor in the near future.

YOU KNOW - BEING-A-GOOD-LEADER-IS-BEING-A-GOOD-FOLLOWER, JOHN PAUL JONES + JOHN WAYNE + REAGAN, "LEADERSHIP"!

Posted by: JosephMendiola 2010-02-16 21:56

#7 Defined benefit (aka pension) plans have all but been eliminated in the private sector. The funds are typically rolled into the workers' 401(k), so they no longer are guaranteed a life-long post retirement income stream.

Posted by: regular joe 2010-02-16 17:59

#6 Please elaborate. My working theory is that defined benefit plans are not sustainable, due to the key assumption I mentioned in my first post. Posted by Anguper Hupomosing

Your theory is spot on. The number of corporations or firms offering funded pension and retiree insurance plans has been dwindling precipitously for decades. I doubt the trend will reverse itself. We've simply "lost" them. Much cheaper foreign labor is the route being taken. The seed corn has been consumed.

Posted by: Besoeker 2010-02-16 11:45

#5 The war over corporate pension plans has already been fought. We lost. Please elaborate. My working theory is that defined benefit plans are not sustainable, due to the key assumption I mentioned in my first post.

Posted by: Anguper Hupomosing9418 2010-02-16 11:20

#4 A war between taxpayers and public pensions seems inevitable. Anguper Hupomosing9418

The war over corporate pension plans has already been fought. We lost.

Posted by: Besoeker 2010-02-16 10:51

#3 This is not just a problem in Illinois. As far as I can tell, this is the situation for all public pension plans nationwide, including Social Security. Pensions all depend on future revenues being used to pay future obligations. Pension obligations may be predictable, but future tax revenues ARE NOT. The states are learning this, one by one.
Some financial disasters can be predicted mathematically, and this was one of them.
The only public pensions that make sense to me are for retired military, due to the special natures of their work. All the other public officials can fund their retirements the old-fashioned way, by saving for it, like the rest of us have to. Unfortunately, all dollar-denominated savings are subject to devaluation of the dollar, which the federal government is hell-bent on doing.
A war between taxpayers and public pensions seems inevitable.

Posted by: Anguper Hupomosing9418 2010-02-16 10:31

#2 Wow. Sounds like Oregon's 'PERS', public employee retirement system...

Posted by: logi_cal 2010-02-16 09:46

#1 You, the "Public Servants" are who makes more than those that pay for your "service". Your unions, your pay rates, your state programs, and YOUR PENSIONS will bankrupt the nation.

Very few "public servants" are worth the cash they are paid. The idea was you took a pay cut to have job stability and all that government junk bond you can get.

Well, that used to be. Now this is out of control and must be stomped out.

I do not believe it is always Patriotic to work for the government. I think it more Patriotic to work yourself out of a job when in government. Not to make more.

Learn the definition of Patriot also, democrats. You idiots.

Posted by: newc 2010-02-16 00:26

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