The Economist UK - 16.11.2019

The EconomistNovember 16th 2019 65

1

P

erhaps it takesteachers to give politi-

cians a lesson. Any official who wants to

understand the terrible state of American

public-sector pensions should read the fi-

nancial report of the Illinois Teachers Pen-

sion Fund. Its funding ratio of 40.7% is one

of the worst in America, according to the

Centre for Retirement Research (crr) in

Boston (see table on next page).

Since it was established in 1939, Illinois

officials have not once set aside enough

money to fund the pension promises

made. As a result, three-quarters of the

money the state (or rather the taxpayer)

now pays in each year merely covers short-

falls from previous years. The situation is

getting worse. In 2009 the schemes’ actu-

aries requested $2.1bn, but only $1.6bn was

paid. By 2018 the state paid in $4.2bn, still

well short of the $7.1bn the actuaries asked

for. The trustees have warned that the plan

would be “unable to absorb any financial

shocks created by a sustained downturn in

the markets”.

Other schemes have attracted similarly

stark warnings. Illinois is the class dunce,

with six languishing schemes. Chicago

Municipal is just 25% funded and the actu-

aries warn that “the risk of insolvency for

the fund has increased”. The actuaries of

the Chicago police scheme warn that “this

is a severely underfunded plan” with a

shortfall of $10bn; the funded ratio is not

projected to reach 50% until 2043.

Offering workers a defined-benefit pen-

sion, where an income based on final sala-

ry is paid for the rest of their lives, is an ex-

pensive proposition, especially as life

expectancies lengthen. Pension shortfalls

are common across America, with the aver-

age public scheme monitored by the crr

just 72.4% funded. That adds up to a collec-

tive shortfall of more than $1.6trn.

When a scheme is underfunded, one of

three things can happen. More contribu-

tions can be made, by employers or work-

ers or both. Benefits can be cut. Or the

scheme can earn a higher return on its in-

vestments to make up for the shortfall.

Cities and states are paying more, but

still not enough. In 2001 public-sector em-

ployers contributed a further 5.3% of their

payroll to meet pension promises; now

that figure is around 16.5% on average (see

chart). Even so, in no year since 2001 has

the average employer contributed as much

as demanded by actuaries. Last year’s

shortfall was just under 1% of payroll.

This reluctance is understandable. Poli-

ticians dislike raising taxes—or cutting

services to pay for higher contributions.

Workers do not want to see their current

pay reduced by higher deductions, or their

future benefits cut. And in any case, in

Public pensions

State of denial

Police officers, teachers and other public workers rely on pension schemes with a

multi-trillion-dollar funding hole. A reckoning is coming

Thick end of the wedge

Source: Centre for Retirement Research

United States, annual pension contribution by

public-sector employers, % of payroll

0

5

10

15

20

2001 05

Fiscal years

10 15 18

Finance & economics

66 OPEC’s waning power

67 Snapping auto supply chains

68 Buttonwood: The dollar

69 China’s fake SOEs

69 The mood of the markets

70 Sentencing Italy’s bankers

70 How Jim Simons did it

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