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Home Publications Blogs Beat the Press Fun With Scary Pension Numbers in Chicago

Fun With Scary Pension Numbers in Chicago

Wednesday, 29 January 2014 05:58

I see they are playing the really big number game in my home town. The Chicago Tribune headlined a news story: "Chicago pension tab: $18,596 for every man, woman, child." That's pretty scary. Fortunately my Chicago public school teachers taught me about fractions and denominators. That is what is missing here.

The key point is that Chicago does not have to pay this money tomorrow or even over the next year. This is a liability over the next 30 years. The relevant denominator then is Chicago's income over the next 30 years. I don't have the time to check the city's income data just now, but if we assume that disposable (after-tax) per capita income is the same as for the country as a whole ($40,000 a year), we get that the discounted value over the next 30 years will be roughly $1.1 million. (This assumes 2.4 percent average annual growth and a 3.0 percent real discount rate.)

I also don't have time to review the basis for the $18,596 pension tab, which puts the unfunded liability at around $50 billion, almost twice the official figure. But taking the number at face value, we get a liability that is equal to 1.7 percent of the city's projected income. That amount is hardly trivial, but also not obviously a path to poverty.

By comparison, the slowdown in health care cost growth over the last five years has probably saved Chicagoans at least this much money, with costs close to 10 percent less than what had been projected back in 2008. You didn't see the big news articles touting the big dividends from lower costs? Oh well.

Anyhow, the unfunded pension liabilities are a big issue with some big villains. At the top of the list is Mayor Richard M. Daley who thought it was cool not to meet the city's pension obligations for his last decade in office. Surprise, that leaves a shortfall. The bond rating agencies also should be strung up from the bridges over the Chicago river. They signed off on accounting back in the 1990s that assumed the stock bubble would continue growing ever larger. This meant that the city didn't have to contribute anything to the pensions.

When the city got in the habit of not contributing in the boom, it became much more difficult to suddenly find the money in the bust. Hence we get Mayor Daley's decision not to cough up the money the city owed. (Yes, this was predictable, as some of us said at the time.) These are the villains in this story, not the school teachers, the firefighters, and the garbage collectors who worked for these pensions in good faith. Not paying them the pensions they are owed is effectively theft and if Chicago is going to get into the game of stealing, it makes more sense to steal from the people who have the money than retired workers who will be living on a bit over $30,000 a year.

Full disclosure: My mother is a retired employee of the state of Illinois, so she may be among the pensioners who are on the chopping block in this story.

Comments (8)Add Comment
written by Last Mover, January 29, 2014 6:37

Sock Puppets for the One Percent object to the biased claims in this pointy headed ramble by Dean Baker. It violates standards of inequality among journalists with math required beyond addition and subtraction of absolute amounts with no fractions.

Any journalist knows a discount rate is a sign of the free market at work, a reduction in price to get more sales, which proves of course why pensioners need less, to make themselves more valuable.

We demand a correction now, as long as it is made in whole numbers in bold caps with large arrows indicating whether they are moving up or down, presented by Count Dracula of Sesame Street in a video.
Cognitive dissonance
written by Squeezed Turnip, January 29, 2014 6:55
Apparently the Very Serious People have now decided that government doesn't need to honor contracts with labor. And these worthless contracts must be negotiated on an individual basis. On the other hand, government must honor monopoly contracts, especially those held collectively by clubs of economic predators kidnapping capital for sheer rent extraction.

Good luck, America.
written by watermelonpunch, January 29, 2014 7:04
who worked for these pensions in good faith

It disturbs me that particularly things like health benefits & pensions have now squarely been defined in the social conscience (including some HR professionals) as "bonus gifts" rather than actual pay that people are working for.

But then actual hourly wages are getting to be viewed that way. As if getting paid is a gift. Or being given a job is a gift.

Rather than a contractual agreement to get work done.

There's something really fundamentally flawed with this attitude that's become the norm it seems.
Annoying Pension Obligations
written by Bart, January 29, 2014 8:49

When these unfunded obligations become too much for a mayor to face, they can always be avoided by going through the increasingly less painless bankruptcy process.
written by kharris, January 29, 2014 11:13
Ooo, ooo! Do Floyd Norris! Do Floyd Norris! He's terrible this time.
written by Larry Signor, January 29, 2014 12:54
We are seeing a steady stream of government denying the legitimacy of contract law (mainly with labor). This is no way to right the ship.
Full numbers are much, much worse than that
written by WirePoints, January 29, 2014 7:10
But that $18k/ person is just for the Chicago pensions. Chicagoans are also on the hook for pensions for Cook County, CTA, Chicago teachers and more, plus their share of the state pensions. Adds up to $38k/year. If you assume that only the top ten percenters have ability to pay much more in taxes, you get astronomical numbers for them -- $340k/person. See http://wp.me/p2Oseh-1F6. They'll move before they pay. This is a horrific crisis.
excuse my bias
written by John Parks, January 29, 2014 7:12
I've been a union member, worked for a large multinational who fought against unions, and am now, (30+years)a small business employer. One of the few constants that I rely on is that a union will not exist unless it is needed. If a company, corporation, city, county, state has a union.......it is because they deserve it and I totally support the rights of the individual to form a union to protect themselves.

From the view of those in power:
Viable unions are one of the few and last vestiges of populism which must be destroyed to ease the peasants in their transition into accepting, by law, the servitude required by the owners of our global plantation.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.