As Your Retirement Assets Plummet, Your Tax Obligations for Other Peoples Retirement Skyrockets

By Bill Zettler


“The events occurring on Wall Street will have no impact on the benefits provided by the Teachers' Retirement System of the State of Illinois. The Illinois State Constitution protects our members' annuities from being “diminished or impaired,” meaning retirement benefits cannot be reduced, regardless of investment losses, a state budget crisis, or for any reason.”

 —  TRS Website Memo, Sept 2008

That last clause “cannot be reduced… for any reasonis the reason we taxpayers are getting the short end of the stick when it comes to funding for state employee pensions. As a taxpayer you should assume “any reason” includes death of bread winner, personal bankruptcy, loss of job, or homelessness.


Even the winos on West Madison pay sales taxes on the cheap wine they buy thus contributing to state pension funds. None of those reasons are an excuse not to pay taxes to fund $10 million state employee pensions. The teachers union has zero tolerance for tax avoiders.


With difficult economic times your retirement nest egg and income in general, are going down but since state pension payments are guaranteed, the amount of taxes you have to pay for state employees retirement goes up. This is because any difference between 8.5% ROI (Return on Investment) assumed by the pension funds actuaries and the actual ROI (-5% last year) is made up by increased taxes. Public employees do not share in that risk.

As we have stated before the odds of an 8.5% return over the next 37 years is improbable because of significant changes in the world's demographics:

1. The human population will never double again.
This has never been true before but demographers say the world's population will level off at about 11 billion in 2100 from 6+ billion now. This is important because new workers are an important part of economic growth as they work, earn, consume and invest. By contrast, the population doubled between 1960 and 2000 the era of highest economic growth in history.


2. Major economic powers have birth rates below replacement rate.
Economic powerhouses China, Japan, Russia and Europe will all have decreasing populations in the next decades, another historical first. Economic growth will almost certainly slow from past decades.


3.  Life expectancy is growing.
Related to number 1 and 2 above, this means more senior citizens supported by fewer workers. For example China's life expectancy has gone from 45 to 80 in just the last 50 years. This means current actuarial assumptions for life expectancy are almost certainly too low, resulting in future pension obligations that will be larger than currently assumed.


4. People are retiring at an earlier age.
Earlier retirement age (Illinois teachers for example) plus longer life expectancy means slower economic growth and more taxes on fewer workers. See 1, 2 and 3 above.


5. All of the above.
All of the above means more income/wealth will need to be transferred via taxes from fewer working/productive people to more non-working/non-productive people thus greatly decreasing investment and economic growth. A given dollar cannot go two places, investment and tax, at the same time. Barack Obama, please take note.


6. Oil prices will never be as low as they were in the 1990's.
During the greatest economic growth period in history, oil prices were decreasing in real inflation adjusted prices from $80/barrel in 1973 to about $65 with most of that period below $25. This has enabled economic growth because there is a direct correlation between BTU per capita and GDP per capita. If the cost of BTU's goes up the rate of GDP growth will go down. In 1998, during the greatest stock market boom in history, oil hit $10 per barrel. In the coming years, is it more likely that we will hit $10 or $210?


7. The terrorist risk premium.

A handful of terrorists with dirty bombs (let alone nuclear weapons) could simultaneously shut down Manhattan, Toronto, London, Paris, Amsterdam and Berlin causing complete financial chaos and bringing the world economy to a halt. It would make the credit crisis look like a walk in the park. Unstable political entities Iran and Pakistan have nuclear weapons and who knows what they will do. I do not know whether the risk premium is one percent, two percent or more but I do know it is greater than zero.

Other knowledgeable sources think the ROI will be in the 6% range. Warren Buffet predicts 6.5% and the IRS requires private sector pensions to use 6.1% in their calculations for determining future pension costs.


So why do the state pension funds continue to use 8.5%? Because any lowering of that number would require actuarial recalculation of taxes due, driving the taxpayers contribution of retirement funding up by about $200 billion over the next 37 years. Add in the unfunded health insurance for 160,000 retired state employees and you have a $1 TRILLION bailout of the state retirement system entirely paid for by the taxpayers of Illinois. And if stock markets keep going down it will be more than $1 TRILLION. Here is the Trillion Dollar Spreadsheet.

If it is $1 TRILLION, each of Illinois 5 million households will be paying about $200,000 in taxes over the next 37 years for someone else's retirement plan. That means they won't have that $200,000 for their own retirement.


Faced with this undue burden on the taxpayer the Teachers Union has come up with a new plan. Instead of working 35 years and retiring on 75% of their salary they have decided the taxpayers should fund a plan that allows them to retire after 30 years on 80% of their salary. Their concern for the struggling taxpayer is touching.

The TRS, although officially part of the Department of Insurance, is really just a mouthpiece for the teachers union. That should be expected since 6 of the 11 members of the TRS board are active or retired teachers. Here's the TRS legislative agenda. Notice how everything they want will cost the taxpayers more money. Apparently $1 TRILLION is not enough.


Finally, why is that clause “cannot be diminished or impaired,” in the constitution anyway? What special deal was made to provide a certain group of citizens unique and special benefits, different from and paid for by all other citizens? Aren't governments formed and constitutions written to provide for the common good, “common” meaning everyone? What common good is provided by $10 million pensions?


And since pensions “cannot be diminished” does that mean we should expect to pay $15 million and $20 million pensions in the near future? There are quite a few right on the horizon. See projected high dollar pensions here.


All we see now are politicians supping at the teacher union's contribution trough (see Top Piggies here) while mouthing pension platitudes on HOW to fund the system when they should be talking about WHY we have to fund the system and its $10 million pensions. The taxpayers' only chance to correct this patently anti-taxpayer constitution is to vote “FOR” the Constitutional Convention on Nov. 4th. With its passage we have a chance to apply a tourniquet to the taxpayer's bleeding.


Without it pension reform is doomed and Illinois will soon see the economic tailspin downward being seen in California and Michigan. What business or individual in their right mind would move to a state with a trillion dollar tax bill hanging over its head?



 Bill Zettler is a free-lance writer and consultant specializing in public sector compensation. He can be contacted at this email address. Click here to read more by Mr. Zettler.