Will Illinois Ever Really Deal With Its Unfunded Pension Liability?

As Illinois’s new governor and old legislative leaders start to grapple with Illinois’s problems, the first question is what are they going to do about Illinois’s pension debt.  Except, of course, that is not the first question they are going to deal with because it’s hard and they want to do fun stuff first.

Some people say that Illinois’s unfunded pension debt really isn’t really that big of a problem.  They argue that Illinois might not have enough money set aside to pay all of the pensions it owes, but that’s only a problem if Illinois shuts down.  As long as Illinois stays around, and keeps making contributions to its pension funds, there will always be enough money to pay the amounts owed to retirees that year.  Which is probably true.  It’s just that that’s not the kind of system we are supposed to have.  Because that’s not a funded pension plan.  In effect, it’s a pay-as-you-go pension system.  Which is a legitimate form of pension system.  Under a pay-as-you-go pension system, you don’t set aside money for pension payments in the future.  Instead, each year the government pays for the pensions for its retired workers, or for its senior citizens, out of the current revenues it has at the time.  Lots of countries have pension systems like that.¹  And it would be what Illinois would, in effect, have if it doesn’t do something about its unfunded pension liability.

What people who favor pay-as-you-go pension plans (or who say we don’t need to worry about Illinois’s unfunded pension liability) miss, though, is the inherent trade-off with such plans.  The idea with funded pension plans is that the money is there, and the pensions are not subject to being changed by future legislatures or being not paid because of a lack of money in the future.  With pay-as-you-go pension plans, however, future pension payments are always subject to the ability and willingness of some future government to pay them. 

While it is technically possible to have a guaranteed pension payment under a pay-as-you-go system (or a funded system with a huge unfunded liability), what you doing in that case is telling future legislatures that the pension payments have to absolutely come first.  They have to come ahead of police, schools, health care.  Everything.  Police officers can’t get paid.  Schools can’t open.  Poorer people can’t go to the hospital.  Until the pensions are paid.

I suppose that is one way to do things, but I don’t think it is right.  If pension amounts are to be guaranteed, then the only responsible way to do it is to set aside the money when the pension is earned.  If a legislator wants to promise a pension to a state worker, then he or she needs to set aside the money, right now, to pay that pension.  If that means raising taxes or cutting spending on something else, that’s what needs to be done.

This is true for state workers, too.  If they want the legislature to give them guaranteed pensions, then they need to vote for legislators who will raise taxes or cut other spending so the money can be set aside now to pay those pensions. 

Because if the money is not set aside, and if at some point, it comes down to a matter of having to choose between paying school teachers, police officers, and for healthcare or paying pensions, because we didn’t want to put aside the necessary money ahead of time, that’s not a state I want to live in.
----------
¹ This is pretty much what Social Security is, in spite of what lots of people think and what some politicians tell us from time to time.  But I have discussed that before.  Inter alia, see here, here, and here.