Funding pension (and Social Security) promises when the promise is too generous

Consider this item about Illinois public pensions contained in a Wall Street Journal article January 8th. The story is about trying to deal with the underfunded pension trust. Illinois has only 45% of the money needed to meet the pension promises.

Two competing plans are working their way through the legislature. The House is debating a six-year freeze in the cost-of-living increase for retirees and an increase in employee contributions, among other changes. The Senate last year passed a bill requiring those in the pension system to choose between a diminished cost-of- living increase and retiree health benefits.

Why does the Illinois pension trust have only 45% of the money needed to fulfill promises … because the state failed to make adequate contributions to the fund. One must assume that competing expenses made funding impossible. This also means that unaffordable promises, such as in the form of annual cost of living adjustments, were made.

Shouldn’t a state or any other entity be required to meet its commitments? The easy answer is yes. The tougher question is how. In this case and many others you have generous (especially when compared with non-government workers) benefit obligations negotiated between politicians and public employee unions and the failure by both parties to address or be concerned about the long term cost of the obligation. The union solution is to simply raise some taxes to help fund the plan.

The result of this type of behavior is workers and taxpayers left with the short end of the stick. In reality of course taxpayers pay no attention to these matters while they are happening and may even support the union demands. Workers quite naturally welcome every benefit improvement they can get.

Now, if you think none of this affects you, think again, think Social Security. In a relative few years without changes Social Security will only pay 75% of the “promised” benefit, analogous to a 25% funding shortfall. Why? Because the promises, in part the COLA formula, are more generous than the funding will support. The solution is the same as in Illinois, trim benefits or increase the funding; think higher FICA payroll taxes.

In the final analysis the proverbial free lunch never exists. Now we are faced with deciding who assumes the burden of paying for lunch. Shall it be current beneficiaries who also benefited from lower than required taxes in the past or current taxpayers who must pay more to fund both the promises to current beneficiaries and to themselves?

Why not ask your representatives in Congress, they created the promises.