Pension Crisis

Illinois Is the Canary in the Pension Coal Mine, Says Adam Schuster 

Mike Riggs talks with Illinois Policy Institute's Adam Schuster about how to fix the state's pension debt crisis.


Illinois is running out of time to fix its public sector pension problem. A new report from Moody's Investors Service identified the Prairie State as one of the two most likely to suffer during an economic downturn. Illinois towns and cities are already paring back government services to pay for generous benefits packages for retirees, and Chicago's pension debt alone is larger than that of 41 states. That arrangement can't last forever.

"The worst-case scenario is there's another national recession, which would cause our pension funds to lose a bunch of their assets again," says Adam Schuster of the Illinois Policy Institute. "As the assets shrink, the pension funds go into a financial death spiral. We might end up with some kind of Puerto Rico–style pseudo-bankruptcy or federal bailout. Everybody in the nation is now on the hook for Illinois politicians' irresponsible decisions."

The best-case scenario would involve repealing an automatic 3 percent raise that pensioners receive each year of their retirement and requiring workers to pay more into their own plans. Democratic Gov. J.B. Pritzker would prefer to scrap Illinois' flat income tax and replace it with a progressive tax scheme, which could cause even more people to flee the state. In May, Schuster spoke to Reason's Mike Riggs about the pension conundrum.

Q: If somebody had been paying attention 30 years ago, could they have anticipated this pension problem? 

A: Thirty years ago would be just about enough time to stop some of the mistakes. We changed the state constitution in 1970 to add a pension protection provision, which essentially says that as of the day of hire, an employee's benefit formula cannot be changed in any way. So it doesn't only protect benefits that somebody has already earned. It protects the future growth rate of those benefits for life and gives the state legislature no flexibility to change them.

Q: What happened next?

A: In 1990, Illinois implemented a guaranteed 3 percent compounding cost of living adjustment. So a person's pension goes up by 3 percent every year regardless of how much inflation there is in the economy. It basically doubles the size of somebody's pension over the course of 25 years.

We also had a series of governors, both Republican and Democratic, who habitually shorted the system by putting in less than the required contribution. The reason they did that is that the required contributions were unaffordable and never would have been affordable because we overpromised the benefits.

Q: Do Illinois taxpayers know what's going on? 

A: I think there is pretty widespread knowledge about the problem, but there's also a defeatist apathy. We've had five straight years of population loss. We're losing our prime working-age adults, and poll results say that the No. 1 reason they're leaving is that the taxes are too high here. And the No. 2 reason they're leaving is job opportunities are better elsewhere, which is related to No. 1.

Q: What do public sector union leaders say about the pension crisis? How about union members?

A: I appreciate that you make that distinction, because I've found there is a huge disparity in how they react to this kind of thing. Union leaders, who are involved in politics and lobbying, are against having this conversation at all. But when I talk to regular rank-and-file union members, they actually think the plan we put forward is a very fair and very reasonable compromise.

Q: What is the short version of your plan?

A: It would amend our constitution so that instead of protecting the future growth rate, it would only protect the pension benefit that somebody has earned to date. So if you retired today, your annuity would be protected, but it would give the legislature flexibility to change retirement ages for younger workers and to change that 3 percent cost of living adjustment, for example.

Q: What happens if Illinois does nothing?

A: I don't know if you followed at all the story of Harvey, Illinois, but it's a South Chicago suburb, and they have one of the highest effective property tax rates in the nation. Even still, their police and fire pensions are so underfunded that in order to make their pension payment, they had to lay off dozens of current police officers and firefighters.

Q: That's what people pay taxes for: government services! 

A: Harvey was the canary in the coal mine. Down in Peoria, they've had to lay off municipal workers, people who plow the streets. In Rockford, they're being told they need to sell their city water system. Municipalities around the state are laying off public safety workers today to pay for yesterday's pensions.

This interview has been condensed and edited for style and clarity.

NEXT: A Violent Movie Satirizing America's Culture War Gets Canceled by America's Culture War

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  1. Illinois fully believes the federal government will bail them out and they will continue to do business as usual.

    1. If a democrat wins the election (a republican fed might also do it in recession -too big to fail), all of the high debt per capita states (includes Texas and some red/purple states) will be bailed out via the federal reserve purchasing muni bonds. Sorry, it’s not if, its when. It completely sucks for young hard working penny pinching savers. Short of pulling off some kind of Hong Kong protests and shutting down D.C., there isn’t a thing we can do to stop a runaway freight train.

      1. It completely sucks for young hard working penny pinching savers

        You don’t have to keep your wealth in dollars, you know.

    2. Yep, you are right TLOTS. I left Illinois a long time ago, as it was clear that the idiocy of its tax laws, and pension obligations would be shoved off on everyday tax payers because the money that was “put away” for pensioners was spent by the government the minute they got it. The feds are doing much the same with Social Security to the point that retirees will wish they had saved their own money for retirement (which I have) instead of depending on the lies of both Illinois ad Federal liars. As per the usual, government fucks everything up.

  2. Save your pension! Vote Democratic!

    (and why does everyone hate canaries?)

    1. Canaries became the proverbial “canary in the coal mine” when someone realized their bright yellow plumage was perfect for showing when excessive coal dust had collected, which was a warning that an impending tunnel collapse was imminent. They tried using doves with their white plumage, but they were too big; canaries are much smaller and could even fit in small cages attached to helmets where everybody could easily see them, which is what led to the invention of hard hats as a way of keeping bird poop at bay.

      1. Ummm… no.

        What public school taught you this crap?

      2. “could even fit in small cages attached to helmets where everybody could easily see them, which is what led to the invention of hard hats as a way of keeping bird poop at bay.”

        I also heard that they preferred the canaries because of the delightful warbling song as there was little to entertain the miners in the dreary confines of the coal mines. Hence the phrase “sing like a canary”
        Lighten up fellas. Life is too short to miss the humor in it.

  3. I don’t think there is a constitutional way for a state to declare bankruptcy, is there? At some point the money runs out…and then what? Has a state ever petitioned the federal government for a bailout, and is IL likely to do so.

    The People’s Republic of NJ is not far behind IL in pension woes. I refuse to purchase NJ state issued bonds or NJ municipal bonds.

    Is anyone really surprised by what has happened in IL? Such corruption.

    1. So is there a way to short NJ and IL bonds?

      1. Yes, as shown in the movie “The Big Short” you can buy insurance from an investment bank on individual bonds. But it requires a lot of money, and patience. They won’t be interested in writing a policy for $500, but you might find some mutual fund or hedge fund making those investments in which you could invest.

        Like in the movie, the people whose money is being used to buy that insurance see their capital decline and wonder if they’ll run out of money first before they get a payday.

    2. Since when do Democrats at the federal level care about the constitution?

    3. The fed will buy the muni bonds-see my comment upthread

  4. States have declared bankruptcy in the past.

    1. Seems the elephant (big donkey?) in the room they’re ignoring, is exactly what they do when they run out of money. Raising taxes just causes more residents to flee to where they’re better treated (i.e., don’t have to pay as much tax), making the situation worse. Cutting services makes the city less desirable, causing residents to leave.

      Will they then pay out pensions in proportion to what they can afford? They can’t pay out what they don’t have. Or will certain government employees get preference? The longer they wait to address this issue, the worse the pain will be, and I expect it’s mostly pain for government retirees, followed by pain of the taxpayer residents. Plus you’ll see a lot of welfare cut, because you know government employees will get priority, which is the big action they can take today, but won’t.

      1. Abolish the fed!!!

  5. I don’t think Illinois is really the canary in the coal mine since I’m pretty sure if you look closely at the canary, it’s an ex-canary that’s been nailed to its perch and Illinois is trying to claim it’s merely resting. And it’s really a dead pig. However dire Illinois’ pension problem may appear to be, keep in mind there’s a generation of crooked Illinois politicians who’ve been slapping layer after layer of lipstick on that pig to hide just how bad that pig really looks. Dig into the books a little and figure out that half the bad investments Illinois has made don’t even exist at all. It’s bad enough that a big chunk of the investment portfolio consists of a hand-written IOU from the governor’s brother – wait until you find out the governor doesn’t even have a brother.

    1. #DeadParrotSkit

  6. How about suing the all the parties responsible for demonstrably impossible pension agreements (at least the living ones, though the dead ones can probably still vote in Chicago)?

    Or is there a better way to prevent equally stupid and larcenous agreements by equally self-serving individuals in the future? Democracy is certainly not the answer, since public pension agreements are just a variation on people voting themselves free stuff.

    1. Democracy is only the best answer compared to every other form of collective coercive government. No one voted to take personal responsibility for any pension agreements; they only voted to put other people and other people’s kids on the hook for them.

      The only difference with “real” socialism is that the elites had to put their proposals up for a vote, whether that was a ballot measure or in the legislature.

      1. Democracy may be a better form of coercive government, but even better is a restraint on coercion. A majority is still not not above some more rational ethics, like not violating fundamental liberties. And majorities, no matter how often they try, can not repeal the laws of physics and economics.

        These overly sweet, if not unrealistic, pension deals were indeed crafted by individuals who can be held responsible–and in many cases flat-out lied. Since those individuals and their cronies likely benefited from their bullshit, why not claw it back?

    2. “How about suing the all the parties responsible …?”

      I supposed you could sue the voters, but that just enriches a bunch of lawyers, and many of those voters have no assets. It would be nice if you could make the voters who voted for the politicians that raised the pensions, but you can’t separate them from those who voted against.

      I say let the government employees take a haircut. That way they become incentivized to make sure it doesn’t happen again. Instead of promoting politicians who promise bigger pensions without bigger taxes, they’ll support politicians who promise to ensure the integrity of the pensions.

      Still, we should do to government what government has essentially forced most companies to do: put their employees on defined contribution plans that make them investors in the economy, rather than just being leeches sucking the public’s blood. Many companies converted their plans, so the government also can.

    3. >How about suing the all the parties responsible for demonstrably impossible pension agreements (at least the living ones, though the dead ones can probably still vote in Chicago)?

      Sue them? For what? Like, just suppose for a moment that they completely roll over and go “Sure. You’re right. You win. I concede.” Now what? You are going to extract money from them? Money that they don’t have? Money that they will never have because the reason you sued them is that they are broke an unable to manage their debts?

      One great weakness of the civil court system is you can’t meaningfully sue a person who is broke, even if they harm you.

  7. I guess Reason is going to completely ignore Jeffrey Epstein’s “suicide”.

    No real big surprise there, pretty much the most predictable thing ever in fact. The PFLs worship the Clintons almost as much as they worship Mofobama.

  8. “We might end up with some kind of Puerto Rico–style pseudo-bankruptcy or federal bailout. Everybody in the nation is now on the hook for Illinois politicians’ irresponsible decisions.”

    “The benefits that were dishonestly promised can’t be touched, so the rest of the nation will be taxed to provide them if necessary.”

    Fucking assholes.

    1. We’re all socialists now.

      1. I believe the term you’re looking for is “national conservatives”.

  9. The recommendations are pretty much nonsense – at best bailing wire and duct tape. On a real economic basis, discounting the liabilities at long term Treasury rates, 2% for 20 year bonds, instead of the mythical 7-8% used by most public pension plans, the Illinois system is even farther under water. Hopelessly under water in fact – about 50% more than they think (from the first order duration approximation). The taxpayers can’t cover this. There’s no investment strategy in the world that can dig them out. And the public employees are all going to have to take a hit including everyone that’s already retired. Everyone in Illinois is going to have to take a bite of a huge shit sandwich. And the feds can’t cover it for the same reasons – national taxpayers can’t cover this for all the states that are underwater. CA alone is $1.6T short on a real economic basis.

    1. Now do Social Security and Medicare.

    2. “CA alone is $1.6T short on a real economic basis.”

      And the oh-so-virtuous CALPERS divested itself of profitable positions in tobacco and firearms firms.

      1. What, they still invest in fossil fuel companies?!?

        Disgraceful, the lot of them. Where do they think we live, Illinois? Or Texas?

    3. Instead, have Illinois declare bankruptcy so the feds can seize all state assets, and sell them off to pay creditors what they can. We need a shitnado like that to serve as a warning to other states.

  10. I don’t think that there is any question that the rest of the country will be paying for the lucrative pension plans of IL, CA, NY, NJ, etc.

    1. There is no question, although I wonder why the voters on the right do not organize and demand of politicians a constitutional amendment on State bankruptcy? Once the fed starts bailing them out we reach the underdeveloped world shithole spiral.

  11. Thank you so much for the detailed information.

  12. That was one of the sad aspects of Donald Trumps election for Illinois. Obama was absolutely brilliant at getting Republicans elected at the state level. If the hag had been elected, we might have actually had a chance of solving this here.

    My state Senator, who was very good on the pension and property tax issues in Illinois was tossed out by a slim margin because “Orange Man Bad.” Now we have someone who hasn’t ever breathed a word about the pension issue. She dutifully votes with Cullerton.

    The state legislature gleefully voted to put the “progressive” income tax amendment on the ballot in 2020 because “the people’s voice must be heard,” but they refuse to do the same for the idiotic pension clause. Apparently the people don’t need to be heard there. They just need to obey.

  13. J.B Pigsters first order of business was raising taxes.
    Second, give all state employees a raise, hire his pals and double their salaries.
    Third, $45 billion in Pork barrel spending to his pals in the legislature.
    Fourth, Proposal to defer pension contributions.

  14. […]’s Mike Riggs talks with Illinois Policy Institute’s Adam Schuster about how to fix the state’s pension debt crisis… […]

  15. […]’s Mike Riggs talks with Illinois Policy Institute’s Adam Schuster about how to fix the state’s pension debt crisis… […]

  16. Looking back I really missed the boat. Had a chance years ago to take a job, different state, which would have given pension and full medical benefits. Way better deal.

  17. Homework for Mr. Higgs, because inquiring minds want to know.

    IL has 5 pension plans separately covering teachers, university employees, judges, state employees, and the general assembly. When are each estimate to run out of funds, and what do the IL treasurer, comptroller, legislature and governor plan to do about it? Will the first fund that runs out of money, use funds in the other pensions, will they reduce or suspend payments, distribute IOUs, or what? It’s going to be a good show, so let’s be ready.

    1. Your post, my dear friend, has an error. It’s where you ask what various elected individual in Illinois “plan to do about it”. Their planning extends only to the point of figuring out how long it is until THEY retire, take their own pensions, and high tail it to a fiscally-responsible state — if there are any remaining by then.

      I’ve been thinking about what can be done by the Federal govt should they do a bailout. How about applying an IRS-levied “bailout surcharge” to every taxpayer in Illinois (and other states that go belly up)? For example, stick an extra 1% Federal tax on Illinois residents for each $1Billion of bailout provided to the state. The people who put these nincompoops in office, then, would learn there is no free lunch. They might even teach that lesson to their children

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  19. Thirty years ago would be just about enough time to stop some of the mistakes.

    It wasn’t a “mistake”. Politicians knew they overpromised but they didn’t care because they wanted to buy votes.

  20. Here’s a way to solve a pension “crisis.”
    Get your own fucking 401k, assholes.

  21. And, pray tell, why aren’t public employees on defined contribution plans like the rest of us peons?

    Often the reason is that they are are defined benefit plans because they enter the public sector with lower salaries. Fine, then up the matching portion of their contributions, don’t promise them the benefits 40 years down the line that comes with the pension fund growing at “X”% per year when X cannot be guaranteed. C’mon it’s common sense.

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    Heres what I’ve been doing… ,,,


  23. The problem here is that those concerned have been crying wolf for 40 years, but nothing horrible has happened as yet. Sort of a global warming story.

  24. […] Mike Riggs de habla con Adam Schuster, del Instituto de Políticas de Illinois, sobre cómo solucionar la crisis de la deuda de pensiones del estado … […]

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