By Bill Zettler
The number mentioned in the title was actually $968 billion but that could easily be a conservative number as you will see when we analyze the calculations. About half of the trillion is the undisclosed health care costs for retired public employees that is buried in 2 paragraphs of the 350 page Illinois 2006 CAFR (Comprehensive Annual Financial Report). Another $173 billion is the result of an estimated 6.5% investment return on pension assets. 6.5% was used rather than the 8.5% projected estimate. We will discuss these in more detail later in this article.
That $968 billion is the cost over the next 39 years. We use 39 years for projected taxpayer costs because that is the number of years left in the 50-year pension-funding bill passed by the Illinois legislature in 1996. At that point we will theoretically be at 90% funding. Since we are using 39 years for pensions we decided to use it for health insurance costs too.
To put that $968 billion in perspective here's what it would mean:
- $25 billion/yr average in new taxes over each of the next 39 years.
- Over $5,000 in tax per year on every Illinois household for the next 39 years.
- Over $200,000 in tax per household for the entire 39 year period.
Strictly on a future pension actuarial cost basis, the 2007 result of $376 billion was $56 billion more than we projected in 2005. In other words the poor taxpayer owes $56 billion more for other peoples' pensions and has two years less to pay for it. This limits his chance for a secure retirement because if he has to pay for someone else's retirement that is money he doesn't have for his own.
The reason the liability went up was for the reasons we predicted last year:
1. Public employees' salaries, especially teachers, were rising faster than actuaries projected.
2. Retirees were living longer than actuaries projected.
3. More public employees were retiring than actuaries projected.
But the biggest potential problem with pensions is the projected 8.5% investment rate of return may not be met and in fact as of this June 30 the return over the last 8 years will more than likely be nearer to the 6.5% return Warren Buffet projected (read here). That's a difference of $173 billion over 39 years (see spreadsheet).
A big portion of the $968 billion, $419 billion, is the unaccounted for health care benefits for public employees. As of June 30, 2006 over 150,000 public retirees were covered by this plan at a 2006 cost of $700 million per year. Unlike pensions, public entities are not obligated to project costs for “Post-employment Benefits Other Than Pensions” but this will be required as of June 30, 2008.
So on the accompanying spreadsheet you will see projections for retiree health-care projected forward 39 years assuming an annual rate of increase of 11%. This 11% assumes the number of retirees growing at 4%/yr while medical costs increase at 7%, a number that is probably low since we are basically talking about health-care for seniors.
Why does this problem only seem to get worse? Well, to paraphrase Abe Lincoln, God must have loved public employees because he made so many of them. For example here are the top 7 employers in Illinois:
1. Public schools outside of Chicago – 190,000
2. State of Illinois – 57,000
3. Chicago Public Schools – 44,000
4. City of Chicago – 40,000
5. Jewel Osco – 34,000
6. University of Illinois – 30,000
7. Cook County – 25,000
It is a safe bet that all of the public employees listed above have a better wage and retirement package than the employees of #5 ranked Jewel-Osco.
In fact if you look at all 102 Illinois counties you will find the largest employer in 67 of them are public entities, mostly schools. In every county public institutions are among the top 3 employers and in six counties they are the 3 largest employers. Here's the spreadsheet by county. Check out your county.
Obviously all these employees have a big influence on local politicians, Democrat and Republican, and that is one reason it is so difficult to control public employee spending. For example we know from the state contribution website that teacher union contributions to politicians exceed $40 million since the mid 90's. To check that go to the Illinois Board of Elections and do the following five searches on “Last or Only Name”, “Contains”:
1. teach – $21 million
2. ift (Illinois Federation of Teachers) – $9 million
3. aft (American Federation of Teachers) – $4 million
4. IPACE (Illinois Political Action Committee for Education) – $6 million.
5. I.P.A.C.E (same as above just different spelling) – $4 million
You can see why the average Illinois taxpayer is fighting an uphill battle to influence politicians regarding this matter. We hear much about “Corporate Special Interests” but almost nothing about “Public Union Special Interests”.
Looking at these numbers, even in the best-case scenario, we can see that the bill about to be handed to us cannot be paid. Even in Illinois, citizens cannot be saddled with these kinds of taxes. The only question is when politicians will face up to the issue.
The longer political leaders wait the more people and businesses will leave the state for lower tax states – or not move here to begin with. Illinois will become another Michigan with high unemployment, decreasing tax base and those who can afford to move out of state doing so. The only people left will be the very poor, the very rich and the public employees, working and retired. The problem the public employees will face is a shrinking tax base pie that cannot pay them. You cannot get a piece of the pie larger than the pie itself.
So what is the solution to this problem? Put all public employees on Social Security and 401K plan just like most taxpayers are on. Social Security would cost taxpayers 7.65% plus 4% 401K matching contribution or 11.65% total. If that plan, the private sector plan, was in place now for public employees the savings over the next 39 years would be on the order of $800 billion based upon a 6.5% investment return and 11% health care increase per year.
Even using their number 8.5%, the savings would be in excess of $600 billion. In contrast to private employers contributing 11.65% of salary current actuarial figures for the TRS, SURS and SERS pensions are 25.2%, 30.4% and 26.5% respectively. That's if they earn 8.5% investment returns. If they earn 6.5% it's 35%, 43% and 37%, more than 3 times the retirement contribution private sector workers enjoy.
How do politicians justify taxing citizens, who have 11.65% employer retirement contributions, to pay for public employees' 25-40% retirement contributions?
Obviously there is no justification only the political inertia caused by undue influence of the public sector special interests. Only concerted effort by private sector interests, including taxpaying employees of the private sector, can overcome the pending financial catastrophe – a trillion dollars for other people's retirement.
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.
