lessons from the edgar plan: why defined benefits can’t work

7/30/2019 Lessons from the Edgar plan: why defined benefits cant work

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illinois Policy institute APRil 23, 2013

Pension ReoRm

Lessons rom the Edgar plan:

why dened benets cant workTed Dabrowski, Vice President o Policy

Introduction

o h arrav rgardg h p r i ha h a v p ar drddba pa kppd p pa. th arravha prpd gar add p rr prpa adg gara h a w prv h p r rrpag h r.

Hwvr, h br a dr r.

ovra h a ad b x axpar ha aapad $8 b r h p d ha wa rqrd

dr aw pad 1995. th xra dg rrd dph i Gra Ab w-ar, $2.3 b phda 2006.

skppd pa ar h r a h a ar$100 b p db. th a h vr ar h a dd b : aagab,ardab ad prdab.

The problem

th sr ad exhag c r d i r r rad rvad h rra ar

i p ad rrpb pa rap.1 thsec rqd h a rr p h, dbbdh edgar rap ar h dgr h 1994 rr pa,rr Gv. J edgar:

th ar pa rra drdd h ap bga ad bakadd h ajr p rb ar h r. th rrpd ga r h p adh a ab pg bga ad ha wrd vr .

th sec h a d i p, wg rd dwgrad b bh sadard & PrRag srv ad md ivr srv.2

lgar ar a rag a ad pa prrb rdg var rr pa. ura, x rg r sprgd ra h a dd brr a h rr ad ahr pa rap.th pr h rr h cr-nkrz b.i h edgar pa a vr aga.

Additional resources:illinoispolicy.org/pensionreorm

190 s. lasa s., s 1630, chag, il 60603 | 312.346.5700 | 802 s. 2d s., sprgd, il 62704 | 217.528.8800

cr-nkrz rr; h b d ar h ar hp r d h r. Rahr, dg h hha kppd pa ar h a h p rad ha a dg gara w v h prb.

th a dd xpr h a p r h ar r ph r ra rr.

t drad wh, pra rgz h ar hedgar pa.

The Edgar ramp

i 1994, h-Gv. J edgar prpd h rr ha waa d h a p r. th rr, whh hadbpara ad gvr ppr, ad rah a 90pr dg arg ad pa dw h ddp ab, h a ab $20 b, b 2045.3

edgar pa rap rqrd h a, ad b xaxpar, pa vr-rag rb h p ah ar. th pa r hdd pa ad$607 1996 ad dd wh a $16.8 b rb 2045.4

sPeciAl RePoRt

Graphic 1. The Edgar ramp: A plan with skyrocketing

taxpayer pension payments Original 1996 projected employer

contributions to all fve state retirement systems (in millions o dollars)

0

5,000

10,000

15,000

20,000

2044204020362032202820242020201620122008200420001996

Source: Commission on Government Forecasting and AccountabilityIllinois Policy Institute
http://illinoispolicy.org/blog/blog.asp?ArticleSource=5590http://illinoispolicy.org/blog/blog.asp?ArticleSource=5590


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B kpg a rb w h ar ar, h edgarrap k da prr h bdg. B hg r, h rap rad prb b phg b p pa h bak r gra. Adj k h pr-hg r hbr wh agrd wa pa adjab ra rgag, i ha b

krd a aab a.idd, h a ha arad rahd h p h edgarrap whr p pa ar bg ardab.

i a ar 2010, h a brrwd $3.5 b pa rp. th wg a ar, h a brrwd $3.7b r. Ad a 2011, h a pad a av $7b ax hk. egh vr dar rad rha ax hk w pa dw p ab.

The core problem: the dened benet system

Wh a b a pa a h ba r h a rrp w h edgar rap, wd b wrg d th edgar rap j a pa hd; aarpb r h p krkg ddab. iad, h faw h rr dd b

ar ra a h r h a p prb.

th r h faw vb h av ddab ra ha ha rrd h edgar pa wapd 1996. Graph 2 hw ha dp h arbg $8 b r h p ha hedgar rap rga ad r,5 h dd ab grw b$76 b vr ha prd.6 tda h dd aba $97 b, ar v hghr ha wa 1996.7,8

Graphic 2. Taxpayers contributed $8 billion more to pensions than required over 16-year period, but shortall jumped by$76 billion* Annual state pension contributions and ununded liability 1996 2012 (in billions o dollars)

0

2

4

6

8

10

201220112010200920082007200620052004200320022001200019991998199719960

20

40

60

80

100

Dot-com bubble bursts20

43

FY 2004 state appropriations include $7.3

billion from sale of pension obligation bonds

Financial collapse begins

97

Edgar ramp projected payments Actual payments Unfunded liabilities

*Increase not equal to $77 billion due to dierences in COGFA reportsSource: Commission on Government Forecasting and Accountability, Illinois Policy Institute


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i pa g h ba r h ra, adra hr wg addr rr ha rbd.B ra, h dd b ha a h r h p r.

The faws o the dened benet system

Pa a aag dd b r h ara rpra a hr p aagab.nar 85 pr h prva r9 arad ha abaddh pa ba hr prdab ad ab.

Ad h prb h dd b p ar q i: a p ar h a ardrdd b r ha $2.5 r, wh a paar a h brk v.10 i a aa r, ad i h a wh h arg prb.

Dd b pa r gvr ak pr rr bad ap pa p a dvr.Wh h ap a, h r a drdd

p .Hr wh brara a r a p :

1.They cant predict what investment returns will be in theuture though they optimistically assume returns willaverage 8 percent a year. shra v rrra av h h p d. i a ar 2012a, ar-zr v rr rad h ddab b r ha $5 b.11

2.They have no idea how assumptions like mortality rateswill change in the uture. Pp ar vg gr adg r b ha rga pad r. chagdaara ap hav rad h dd abb ar $9 b 1996.12

3.Todays bureaucrats cant control what salary and benet

increases will be given away by uture legislatures. xap, 2003 h i Gra Ab bdb r gvr wrkr wh pg addad h pa r h. tha b arad h dd ab b $2.4 b.13

4.Its dicult to predict the reasons or and amounts outure pension underunding. But once the unundedliability starts snowballing, it becomes difcult to stopShortalls in the pension system due to missed investmenreturns, poor actuarial assumptions, overly generousbenefts and structural underpayments means the state alsoloses out on uture investment income it cant earn money

on investments it doesnt have. Wh $97 b g rh p d v p, h d $21 pr da14 h r rg v tha a vr a r ar, h a drdg wgrw b r ha $7.6 b.

a ap ad a rr ha pa aaag ad h a jp dd ab h edgar pa wa pd. s 1996, h add ab ha rad ar $80 b. Graph 3hw ha h ajr h grwh h dd aba r ar rad kppd pa r prrb hra.

Graphic 3. Underunding not the major cause o Illinois ununded pension liabilities

Nearly 60% due to faws o dened benet plans 1996-2012 (in billions o dollars)

$76 billion*

06-07 Pension holiday $2.3

Poor investment returns $17.2

Benefit increases $5.8

Changes in actuarial assumptions $8.8

Other factors $12.9

Edgar plan & unearned interest $30.4

42% Employer contribution shortfalls

58% Other

*Salary increases less than assumed reduced the ununded pension liability by $1.5 billion * Totals are or the states fve retirement systems*Increase not equal to $77 billion due to dierences in COGFA reports. Source: The Commission on Government Forecasting and Accountability.


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th rr p rr ha arad rqrd h a,ad b x axpar, rb 25 pr r h a p ha edgar rga prjad r. Wh edgar rap prjd rb $32b r 1996 hrgh 2012, axpar hav p rha $40 b.15

Wha wr, rr aw prj ha axpar w rbar $105 b r drg 2014 2045 ha h edgarpa rga prjd.16 Ad ha a h a aarg hr ap rgh gg rward. i , h rqrdpa w g p, j a hv d h pa.

Illinois cant aord another ailed reorm

th edgar rr wa a ar ba ad hag h daa brk dd b . ura,cr-nkrz, k a hr pa rr b, kph dd b a h r pa.17 Ad h

pa prpd rap, hgh p, w h apar a h edgar rap. th b a rpa h arr ha ha ad h a r h pa 20 ar.

Graphic 4. The Cross-Nekritz plan still centered on apayment ramp and dened benet system*Projected employer contributions to the three main state retirement systems

2013-2043(in billions o dollars)

0

2

4

6

8

10

12

20432040203720342031202820252022201920162013

*Note: Numbers based on original Nekritz-Biss proposalSource: Commission on Government Forecasting and Accountability,

Illinois Policy Institute.

th daa prb ha pagd h edgar rr paar a hr h cr-nkrz pa.

tha wh pr h cr-nkrz pa a garaha i dd ab w grw rab har r. th a pr v rr w ahr r ha ahr ark r w r. th a br aara ap w hag h dd abr h wr. Ad h pa rap a ha h ar wrg,axpar w b akg v argr pa h r.

A g a h dd b d h hp ha rr , h p pa dd abw grw j a h dd dr h edgar pa.

Cross-Nekritzs new eature: The dangerous

unding guaranteethr a adda ar h cr-nkrz b ha ak r dagr ha h edgar pa: a dg garaA dg gara wd r h a p ppa a h r h r a dg. P a wrkr wd b prrzd vr dg r damdad, pb a ad a hr r rv. th wdra a prvgd a bar a h xp ahr ia, pa h pr ad dadvaagd, wh arh r wh r rv ar .

A gara a d hra r p rr. thr a rpr h dg gara a dra

a b rr pad cr-nkrz, hrb prhbgr rr k p a p.

i a q whhr i shouldd h p; a q whhr r can d h p. i rrpb r h a gara a bgavr whh ha ra r. i k prvdg a bak hk pa ha axpar w hav pa gg rward.

Ad a g a i aa h ardab, prdabad aagab dd b p rr, ip w ra rab.

The solution: A dened contribution plan or

all uture work

H B 3303, prd b a Rp., t mrr(R-Paa) ad Ja iv (R-Wha), pr rarr b pg a dd rb d bad h 401(a) pa h sa uvr Rr swhh arad rv ab 10,000 a wrkr. A ddrb pa h b p r bh gvr wrkrad axpar.

thrgh h 401(k)- pa r rr wrkrHB3303, wh prrvg b arad ard, d

h dd b pa gg rward ad a hrrpb p rap. th pa aag d ha whrrg a dg gara.

th rr pa h p dd abb ar ha18 ad av h a ar $230 b hrgh2045. HB 3303 h pa ha kp i r rpagh ar h pa 20 ar.


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A dd rb pa i a ha:

th dd ab w gr grw raba h d dr a dd b . i a, wad aagab dd b ab w b rad r ar.

Pa w gr hav hr had a wrkrrr gg rward. th w hav h ab r r p wr ad d--arr aarpk, ak r a v ap r akg pa h p d.

A dg gara, k h prpd b cr-nkrz, dd. A br dga wrkr rr ha a b vrpahk a pr ah a dd rbrr avg pa.

taxpar w gr b rpb r bag a ad dd b .

th h prpa ha a v i pr. ua, h rr HB 3303 a rr ardr h a b ag aab p addd ab. th pav h wa r h frh, rg a vr whr b a hrvad ra h jb ia d.

Conclusion: Illinois needs undamental

retirement reorm

th h ha pa drdd h p vg h dba sprgd ward dagr dggara.

th ra, a h a ad wh h rrdd b , whh prdab, ardab adaagab.

A g a i pa p rh pa kcr-nkrz, whh prpa h faw h rr ,h a p r w dp.

th a , a daa rara r h ddb d a dd rb pa w a p a

d i p prb.


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1 td Dabrwk, sec harg i wh r rad, i P i (marh 15, 2013),hp://p.rg/bg/bg.ap?Arsr=5609.

2 td Dabrwk, Wh ra rr, i rd dwgrad w j kp g, i P i. (Ja. 28, 2013),hp://p.rg/bg/bg.ap?arr=5470.

3 Rpr h 90% dg targ Pb A 88-0593, c Gvr rag ad Aab

(Jaar 2006), hp://ga.ga.gv/upad/dg_PA_88-0593.pd.Pa Kr, lag ba b a pab r p r, i P i (marh 21, 2013),hp://p.rg/bg/bg.ap?Arsr=5647.

4 ibd.

5 th 1996-2012 a p rb dd adda dg drvd r Gv. Rd Bagjvh y 2004 $10b a p bga bd. th bd a, whh brdd i wh adda g r db, rbd $7.3b adda dg h p y 2014.

6 Jaha igra, i p: a dagr ga gwrk, i P i (D. 19, 2012),hp://p.rg/bg/bg.ap?Arsr=5360.

7 $96.8 b coGA aad 2013 dd ab a ark va wh a hg. coGA a aadd ab a aara va wh a hg, whh qa $94.6 b.

8 aa cd h i sa Rr s, c Gvr rag ad Aab (J30, 2012), hp://ga.ga.gv/upad/cdilsaRrsy2012b2013.pd.

9 sa ad la Gvr P Pa: e Dwr spr er Addr c ad saab,Gvr Aab o (marh 2012), hp://www.ga.gv/a/590/589043.pd.

10 J. s md a., A dra ba a p w rward ar, i P i (sp. 20, 2012),hp://d.drpbxr.//67671012/n_ba.pd.

11 Jaha igra, tw i v p 2012, i P i (b. 19, 2013),hp://p.rg/bg/bg.ap?Arsr=5546.

12 aa cd h i sa Rr s, c Gvr rag ad Aab

(J 30, 2012), hp://ga.ga.gv/upad/cdilsaRrsy2012b2013.pd.Rpr h 90% dg targ Pb A 88-0593, c Gvr rag ad Aab (Jaar2006), hp://ga.ga.gv/upad/dg_PA_88-0593.pd.

13 ibd.

14 Jaha igra, th i p p: h p , h ar, i P i (D. 27, 2012),hp://p.rg/bg/bg.ap?Arsr=5367.

15 Jaha igra, i p: a dagr ga gwrk, i P i (D. 19, 2012),hp://p.rg/bg/bg.ap?Arsr=5360.

16 aa cd h i sa Rr s, c Gvr rag ad Aab(J 30, 2012), hp://ga.ga.gv/upad/cdilsaRrsy2012b2013.pd.

Rpr h 90% dg targ Pb A 88-0593, c Gvr rag ad Aab (Jaar2006), hp://ga.ga.gv/upad/dg_PA_88-0593.pd.

17 Aara vaa pa HB6258 prpard r tahr, ep ad uvr Rr s, (Db2012)

18 Daa bad r a xrapa c Gvr rag ad Aab (coGA) rg h i P i tahr Rr s (tRs) rr d h hr w a p , h saep Rr s (seRs) ad h sa uvr Rr s (suRs).td Dabrwk a., Bdg s 2014: P rr ad rpb pdg r a ad a gvr, iP i (marh 13, 2013), hp://p.rg/bg/bg.ap?Arsr=5590.
http://illinoispolicy.org/blog/blog.asp?ArticleSource=5609http://illinoispolicy.org/blog/blog.asp?articlesource=5470http://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://illinoispolicy.org/blog/blog.asp%3FArticleSource%3D5647http://illinoispolicy.org/blog/blog.asp?ArticleSource=5360http://cgfa.ilga.gov/Upload/FinCondILStateRetirementSysFY2012Feb2013.pdfhttp://www.gao.gov/assets/590/589043.pdfhttps://dl.dropboxusercontent.com/u/67671012/No_bailout.pdfhttps://dl.dropboxusercontent.com/u/67671012/No_bailout.pdfhttp://illinoispolicy.org/blog/blog.asp?ArticleSource=5546http://cgfa.ilga.gov/Upload/FinCondILStateRetirementSysFY2012Feb2013.pdfhttp://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://illinoispolicy.org/blog/blog.asp?ArticleSource=5367http://illinoispolicy.org/blog/blog.asp?ArticleSource=5367http://illinoispolicy.org/blog/blog.asp?ArticleSource=5360http://%20http//cgfa.ilga.gov/Upload/FinCondILStateRetirementSysFY2012Feb2013.pdfhttp://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://illinoispolicy.org/blog/blog.asp?ArticleSource=5590http://illinoispolicy.org/blog/blog.asp?ArticleSource=5590http://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://%20http//cgfa.ilga.gov/Upload/FinCondILStateRetirementSysFY2012Feb2013.pdfhttp://illinoispolicy.org/blog/blog.asp?ArticleSource=5360http://illinoispolicy.org/blog/blog.asp?ArticleSource=5367http://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://cgfa.ilga.gov/Upload/FinCondILStateRetirementSysFY2012Feb2013.pdfhttp://illinoispolicy.org/blog/blog.asp?ArticleSource=5546https://dl.dropboxusercontent.com/u/67671012/No_bailout.pdfhttp://www.gao.gov/assets/590/589043.pdfhttp://cgfa.ilga.gov/Upload/FinCondILStateRetirementSysFY2012Feb2013.pdfhttp://illinoispolicy.org/blog/blog.asp?ArticleSource=5360http://illinoispolicy.org/blog/blog.asp%3FArticleSource%3D5647http://cgfa.ilga.gov/Upload/Funding_PA_88-0593.pdfhttp://illinoispolicy.org/blog/blog.asp?articlesource=5470http://illinoispolicy.org/blog/blog.asp?ArticleSource=5609


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Guarantee o quality scholarship

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lessons from the edgar plan: why defined benefits can’t work

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