Understanding Chicago Pension Crisis
Essay by jaraw22 • July 1, 2017 • Case Study • 1,066 Words (5 Pages) • 954 Views
Understanding Chicago Pension Crisis
Pension crisis in the United States has skyrocketed and many states are expected to run out of cash for paying retirees in the coming 10-20 years.[1] Economists, Politicians and lawmakers are scrambling to come up with the best solution to reform and uplift underfunded pensions, which are currently spiraling downwards. From past experiences, the only solution that state councils come up with is to increases taxes. Taxpayers seem to care less to pension crisis because it is something in the far future. But when lawmakers increase taxes, which will affect them today, they will be outraged. The state of Illinois is the worst when it comes to pension fund shortfalls, according to CNNMoney. As of 2015, the state of Illinois is only “39% funded,”[2] --- with a shortfall by more than 100 billion. Each year, the City of Chicago’s cost of pension fund is increasing leaving the nation’s third largest state dragging behind others. In order to overcome this crisis, the city council passed a bill that increases tax on water and sewer usage, “40-10 city council vote.”[3] The new implemented tax is projected to raise an estimated amount of $250 million each year.[4] Will this going to solve the problem? Before making judgments, we need to understand how the pension system works. The basic what pensions are, why the pension crisis created, and possible solutions to overcome the crisis.
Pension, for government employees, is a defined benefit in which the employees contribute a certain set amount and the government contributes some percentage of the employee’s salary into a pension fund over the life of the employee’s career. Then the contributed pension money will be invested in stock market. The stock market is expected to grow enough to meet future retirement payments. Politicians and state officials control the fund and guarantee the employees to receive annual benefits during retirement, which means the employees have no control over the pension fund. If the system fails to collect money enough for future payments, like city of Chicago, the taxpayer will bail them out.
There are several reasons why the system fails to meet future retirement payments and become a crisis. Illinois’s $100 billion deficit in pension fund did not happen at once or within short period of time. This is a result of years of accumulated shortfalls, which leaders fail to address timely. In 2008 and 2009, during the recession period, the entire pension fund invested in the stock market was nearly lost. But this time, the federal government bailout the financial institutions and they were able to be back up on their feet. But taxpayers remain footing up the bills.
Right after government bailout, Goldman Sachs and other commercial investment banks reported a considerable amount of profit that garnished the already rich executives with $9 million in bonus payouts. The average American retiree earns around $19,500 a year, according to American Federal State, County and Municipal data. That means the bonus payout could have provided for 23 public servants retirees for about 25 years. While all this was going, law makers and city governors of Illinois ignored to fill in the holes that were already hurt by the recession. Instead of fixing the problem, politicians started to grant government workers with generous retirement benefits for the sake of winning elections, until it reaches to a point where the taxpayers no longer afford such benefits. On top of that, the growing cost of pension fund left the state unable to catch up and contribute enough to meet future payments.
The other reason that contributes to the crisis is early retirement of government workers. The private sector retirees collect full social security benefits when they retire at age 67. In contrast, “…more than 63 percent of Illinois’ 200,000 government pensioners who retired at or before the age of 60.”[5] That means retired workers are collecting more retirement benefits for longer period than anticipated in the past. In addition, many of the retirees collect additional cost-of-living adjustments that grow about 3 percent compounded into their pension. Adding all this benefits together, most retirees collect over 200 percent of what they contributed to the pension fund. For example, Illinois’s state highest pensioner, Leslie Heffez, earns $540,000 annual pension and additional $16,000 in cost-of –living adjustments in 2015. The total contribution he made to his account during his career was 768,811 and he is expected to collect $17 million from the Universities Retirement System.[6] Compared to the private sector pensioner, where the maximum payout from social security is $25,200 annually, Chicago pensioners have lucrative compensation packages. Going forward, if these benefits are not cut, it will be difficult for taxpayer and the state to afford such a pension fund.
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