With the first of the Baby Boom generation having reached the traditional retirement age of sixty-five in 2011, the number of retirement age individuals is expected to grow by 10,000 each day for the next fifteen years.
By 2030, when the last of the Baby Boomers will have turned sixty-five, an estimated 18% of the US population, or sixty-five million Americans, will have reached retirement age.
Up In Smoke provides a startling examination of the status of each of our nation’s retirement systems and explores how a pending retirement crisis could threaten the US economy. Those nearing retirement, as well as generations to follow will increasingly be seeking an understanding of how we arrived at this difficult place and what hope lies ahead. Up In Smoke provides those insights.
Richard DeProspo is an investment professional with over 30 years’ experience advising state and local governments throughout the country. An expert on public employee pension management, he has lectured widely on the topic and advised numerous municipalities and public pension funds on the proper management of employee retirement liabilities.
Mr. DeProspo holds B. A. and M.B.A. degrees from the State University of New York. Up In Smoke in his first non-fiction work.
The Chicago Public School System made the headlines again last week, this time the subject of a downgrade by Standard
Up in Smoke
According to a recent article by Bloomberg News, the State of Illinois currently tops the list of US public pension funds with the greatest funding gap. This is something of an understatement. As of the end of the state’s fiscal year 2014, the Illinois Public Employee Retirement System had assets on deposit in the system of just 39.3% of what is needed to cover projected pension obligations to current and former employees. The state’s credit ratings remain among the weakest of all states in the nation, as those monitoring the credit-worthiness of the State of Illinois scratch their heads to figure out where in the world the state can possibly come up with the estimated $167 billion in funding needed to close the gap80. Yes, that’s billion, with a “b”.
Now, let’s take a moment and put that number in perspective. In fiscal year 2012, the State of Illinois took in total revenue from all sources of just over $36 billion, or just 21% of its unfunded pension liability. If the State of Illinois continued to take in revenue at this rate, and spent not one dime of it on salaries, programs or services – in effect, the business of running the state government – it would take the State of Illinois 4 ½ years just to pay off its unfunded pension liability, or the difference between employee pension benefit accrued liabilities (or, technically, the actuarial value of accrued liabilities) and the actuarial value of the state pension fund’s assets available to meet that liability. In other words, it is an attempt to quantify the value of total future employee benefits that have accrued to date, relative to the projected value of assets and the income these assets will generate in the future.
This may leave the reader wondering where the money will come from for Illinois to actually fund what it is so committed to pay. It turns out the state’s options for raising revenue are actually quite limited. Yes, there are a variety of sources of tax revenue, including taxes on gaming, utilities, motor vehicle fuel, beverages, etc., but the big enchilada is the personal income tax, accounting for over one-third of the state’s budget, with sales taxes - also largely a tax on individuals - accounting for an additional 20%. In fiscal 2012, the state legislature in fact turned to its taxpayers, substantially raising the personal income tax rate (following a 30% rise in corporate income tax rates the year prior). With greater tax revenue, 2012 turned out to be a record year for the state’s income, with revenue increasing by $5.8 billion. Despite the tax windfall, though, Illinois still recorded a budget deficit, as it has by the way in every year since 1999. It is from this platform of rising taxes and budget deficits, not unlike that of many other states, that Illinois faces the greatest challenge to its solvency yet - an unfunded pension liability that is 260% of its annual revenue.
As if pension funding for public employees were not enough of a burden for the residents of the State of Illinois, their cost of retiree health care adds an estimated $54 billion of additional liability to the state’s woes. According to the Illinois Policy Institute, the state spent $1 billion in retiree health care costs in 2013, more than double what it spent just ten years prior. Typically funded on a pay-as-you-go basis, these added liabilities are now growing at twice the rate of the state’s tax revenues81.
The alarms began to sound as early as 2012 about the pending insolvency of the State of Illinois. An op-ed piece in the Washington Post pointed to the problem and detailed the state’s ill-fated attempts to address its budget imbalances through tax hikes82. Crain’s Chicago Business reported as far back as 2010 of several civic groups and even gubernatorial contender, Andrew McKenna, as having raised the specter of the state’s looming insolvency83. The most troubling part of all of this, however, is that few have heeded these warnings, because truthfully no one – and I mean, no one - knows what can be done about it.