State and municipal pensions for government employees are underfunded across the country. Government payments into pension funds are predominantly based upon the investment return the fund expects to earn. If the fund earns a lot, then required payments into the fund can be much smaller. However, new accounting rules prevent governments from using overly-optimistic investment return forecasts anymore. As a result, real pension liabilities are far higher than many government officials have been claiming to the public.
For example, the pension for the city of Chicago serves 70,000 workers and retirees. Its pension is in a death-spiral because it is only 32% funded when 100% is required. The new accounting rules increased that shortfall to $18.6 billion, an instant 162% increase in unaffordable pension liabilities for the city. The Chicago pension system (4 different plans) is so underfunded that they have to sell 12-15% of their assets each year to pay out retirement benefits. Using the new rules, Chicago’s pension is currently expected to be broke within 10 years, leaving pensioners without the income they were promised and were relying upon.
Can the state of Illinois raise taxes enough to pay for the state pension shortfall? I don’t think so. Can the city of Chicago raise taxes enough to pay for their municipal pension shortfall? I highly doubt it. Although few states and municipalities are in as bad a shape as Chicago and Illinois, a dozen or so aren’t in much better condition.
Once again, the financial lesson is:
- Financially, you are always on your own.
- It is up to you alone to plan and fund your own retirement.
- When a company or government says that they will provide retirements, it is never a promise that you can rely upon.