December 19, 2013 By: Mark Glennon
This year’s winner of the Nobel Prize in Economics, Eugene Fama from the University of Chicago, recently made some blunt, grim comments about Illinois pensions that our media ignored. You can’t assure payments of fixed amounts to retirees, he said in a recent interview, through a system built on the assumptions Illinois uses. Not by a longshot, and the consequences are huge. His words:
The [state’s] pension liability is much worse than [the reported $100 billion that] people think…. You’ve made a promise to your employees that you’ll pay them a certain fraction of their income that is usually indexed. Which means it’s a risk-free real outcome. What’s the risk-free real rate? Is it anywhere near 7.5 percent [the approximate rate Illinois assumes]? It isn’t. Historically, it’s like 2 percent. A 2 percent discount rate would approximately triple Illinois’s pension liabilities.
The system is fundamentally unsound, in other words. That pensioners and taxpayers were ever lead to believe otherwise is the primary dishonesty in our pension fiasco.
Frighteningly, however, eyes stay shut. The media incessantly use the state’s official $100 billion pension deficit number with no warning that maybe it’s three times that bad. Unions cling to their faith in defined benefit plans. Lawmakers pretend the system can be fixed, some even claiming the recent pension bill already took care of it. (Even the bill’s authors, however, say it will reduce the unfunded liability by no more than 20%,– too small to meaningfully impact Mr. Fama’s point.)
Note that last line in Mr. Fama’s comments: Proper numbers would roughly triple Illinois’ pension liabilities. If Mr. Fama is even close to being right, can anybody say with a straight face that Illinois could somehow fund that? Mr. Fama isn’t alone on this. A growing list of other credible, outside experts have long said similar things, some of which we listed here a year ago. Not one credible, neutral expert says the state’s official numbers are rational.
Illinois remains in denial. It should dump this rotten system and get politicians out of the retirement business as rapidly as feasible. Because further large cuts to benefits are unavoidable, and because some pensioners need and deserve much more protection than others, means testing should be central to all further pension debate.