Defined benefit pension plans can’t work

From Ted Dabrowski at the Illinois Policy Institute:

The blame for Illinois’ pension crisis is often laid at the feet of state politicians who supposedly “skipped” payments and caused the state’s five pension systems to be underfunded. This has prompted legislators to add a “funding guarantee” to the current crop of pension reforms bills in order to stop any future pension underpayments and thereby solve the crisis. However, the numbers tell a different story.

Skipped payments are not the root cause of the state’s nearly $100 billion in pension debt. Overall the state – and by extension, taxpayers – have actually paid $8 billion more into the pension funds than was required under former Gov. Jim Edgar’s 1995 reform plan. This extra funding occurred despite the Illinois General Assembly’s two-year, $2.3 billion pension “holiday” in 2006.

The majority of the growth in the unfunded liability is due to the inherent flaws of defined benefit plans. Since the Edgar plan was implemented in 1996, the state’s unfunded liability has increased by nearly $80 billion. Missed investment returns, poor actuarial assumptions, overly generous benefits and structural underpayments have caused shortfalls in the pension funds. And underfunded pensions also mean less investment returns, as the funds cannot invest what they don’t have.

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