Lessons from Puerto Rico: the problem with big pension debts and little solutions

Too bad Puerto Rico isn’t a state. If it were, Puerto Rico, and not Illinois, would have the nation’s worst-funded pension system and the country’s worst credit rating.

Too bad Puerto Rico isn’’t a state. If it were, Puerto Rico, and not Illinois, would have the nation’s worst-funded pension system and the country’s worst credit rating.

Puerto Rico offers Illinois a preview of things to come if the state doesn’’t pass real and sustainable pension reforms.

For decades Puerto Rico has done nothing to fix its pension crisis. Today, the commonwealth’s pension system is only 7 percent funded and may run out of money by 2018. That sounds awfully familiar to what the head of the Illinois Teachers’ Retirement System, Dick Ingram, said last year when he cited a forecast that declared the fund may run dry by 2029.

Puerto Rico’s near junk-status credit rating reflects its failed pension system, as does the massive penalty rate it pays to borrow money. Similarly, Illinois’ credit rating has taken a dive as the state fails to pass its own pension reforms. Its borrowing cost is now higher than any other state – and nearly three times that of troubled California.

These comparisons should make lawmakers in Illinois even more anxious about finding the right solution to avoid a similar mess.

Yesterday, Puerto Rico finally managed to pass some pension reforms. Its new law raises the retirement age, increases worker contributions and lowers monthly pensions and benefits. Unsurprisingly, the unions have strongly opposed these changes.

With a 15 percent unemployment rate and a five-year recession, it makes you wonder why it took so long to take on the unions.

“It has been a topic that has been avoided for the past 60 years. No administration has taken the responsibility of reforming the retirement system,” said Puerto Rico Gov. Alejandro Garcia Padilla.

Unfortunately, pension funds in real trouble don’t seem to be passing reforms that actually fix the problem. Instead, they simply kick the can down the road. Puerto Rico’s reforms are no different.

Illinois shouldn’’t become the next Puerto Rico, but the state is well on its way.

The Prairie State is still running the same failed system passed by the Edgar administration nearly 20 years ago. And most of the proposals coming out of Springfield seek to preserve the same defined benefit structure and pension repayment ramp that got the state into trouble in the first place.

Only by moving away from the defined benefit model can Illinois guarantee the fiscal stability of its pension systems. A defined contribution plan is the best option for both government workers and taxpayers. Through the use of these 401(k)-style plans, government workers gain retirement freedom by removing politicians from the process. And by eliminating the perennial risk of faulty assumptions inherent in defined benefit plans, taxpayers know they’ll no longer be forced to bail out a failed system.

Illinois should do what Puerto Rico hasn’’t done – end the pension crisis.