Anatomy of a State Pension Crisis

Illinois pension systems have been underfunded for SEVEN decades. When the crisis began, World War II was raging, Republican Dwight Green was in the Governor’s Mansion and the current Governor – Pat Quinn – wasn’t born yet. Since then, 12 Illinois Governors, 13 House Speakers and 12 Senate Presidents of both parties failed to fix the problem.
The funding crisis is the result of the deliberate underfunding of pensions year after year, a practice as old as the pension funds themselves, dating back to the creation of the first pension fund: the Teachers’ Retirement System in 1939.
Illinois did not have a formal plan for funding the State pension systems until 1995.
Even after the State created a formal plan for funding, payments were not enough to curb the funding problem.

There have been decades of chronic abuses by “spikers”, “double-dippers”, “tackers” and others who gamed the system.

Collapse of the dot-com bubble, accounting fraud and NASDAQ crash;
Funding level of the State pension systems dropped from 75 percent to 53 percent;
State borrows $10 billion in 2003 to help fund the systems.

Subprime mortgage crisis, falling housing prices and foreclosures, collapse of large financial institutions, and stock market crash;
Pension systems lost $22 billion in assets as the funding level fell to 38 percent;
Earnings plummeted on pension investments which account for $6 of every $10 in benefits paid to retirees;
Tax revenues the State was counting on fell by 16 percent.

When Social Security was enacted in 1935 and set the standard for retirement age at 65, the average life expectancy at birth was 58 for men and 62 for women. Now the average life expectancy is 76 for men and 81 for women!
In 2012, for the first time, there are more state employee retirees receiving pension benefits than active employees, meaning there are more people currently receiving benefits than paying into the state employee pension system.
The baby boom generation began to retire in 2010, leading to greater proportion of retirees to workers.
Under State pension law, teachers who meet certain service requirements are eligible to retire as early as age 55.
COLAs (cost of living adjustments) are provided in public pension plans to help protect the purchasing power of benefits against inflation. However, for most employees and retirees there is currently no check against COLAs exceeding inflation. Longer life expectancies and the compounding nature of the COLA has made it the largest cost driver.