Weak investment returns for Chicago pensions highlight the need to end broken pension systems

Chicago’s four city-run pension funds’ poor returns on investment in 2015 are a good reminder why defined-benefit pensions are a failure for both taxpayers and government workers.

Chicago’s four city-run pension funds experienced a bad year of investment returns in 2015 – highlighting once again why it’s important for Illinois to end politician-run pensions.

Moody’s Investors Service has said the four funds’ investment returns “ranged from -1.5 percent to +1.8 percent.” Moody’s noted that’s “far below assumed returns of 7.5 to 8 percent” that the funds need to achieve.

Pension investments are part of the same markets as private-sector 401(k) investments, and are subject to the same ups and downs everyone experiences with the markets. But because investment returns are key for funding pensions – and because these funds have so many participants – weak returns are an even bigger problem, and lead to increased funding deficits. This increases the cost to taxpayers because the government has to make up for the shortfall by paying more to the pension fund.

This is bad news for city employees, too. Achieving high investment returns is extremely important to Chicago’s pension funds, which are all massively underfunded. According to new government accounting standards, Chicagoans are on the hook for approximately $40 billion in pension debt for the city’s four funds, or more than $43,000 per household.

Moody’s also warned that more years of poor investment performance would throw Chicago’s finances into even greater crisis: “Additional weak investment performance would increase the city’s pension payments over current projections, creating additional operating stress and forcing Chicago to make difficult budgetary decisions.”

Unfortunately for Chicagoans, the city’s more recent “budgetary decisions” have forced residents to open their wallets again and again. The city has passed a record $700 million tax increase and a police and fire pension “fix” that will increase Chicagoans’ property taxes automatically in 2020 and beyond.

The pension funds’ latest investment failure is yet another setback in Chicago’s ever-escalating pension crisis, and it highlights the reasons why politician-controlled pensions fail:

• Not only are pension plans inherently broken, but they are also inherently political, opaque and void of accountability. As long as politicians maintain control over pensions, they’ll always find ways to exploit them – whether through payment holidays, picking up employees’ required contributions or borrowing.

• Politicians have granted pension benefits to government workers and government unions over the past several decades that are simply not affordable for taxpayers. Government workers can retire in their 50s, receive generous cost-of-living adjustments, and are living longer. That in turn allows many workers to collect over $1 million in lifetime pension benefits.

• Those unaffordable benefits, along with politicians’ underfunding have brought Chicago’s pension funds to the brink of total insolvency. The city’s laborers and municipal pension funds are 33 percent funded and 22 percent funded, respectively. Both the police and fire systems have less than a quarter of the funds they need on hand to pay out benefits.

If Chicago moved to self-managed plans such as a 401(k)s, politicians would no longer be in control of workers’ retirements. Both the city and its workers would contribute directly to portable retirement accounts owned and controlled by the employees. That would protect city workers from mismanagement by city officials and would protect taxpayers from having to pay twice for the games politicians play with pension dollars.

Every day Chicago fails to enact a real solution to its pension crisis, the city’s pension debt grows by over $4 million, and the four pension funds move closer to total insolvency.

Offering 401(k)s-style plans for new workers, with optional plans for current workers, is the only way Chicago will be able to both reduce the burden on taxpayers and protect workers’ retirements.