Several factors offset pension liability

Mike Riopell’s article titled “Do pension ads tell the real story?” was enlightening. However, like every article written about the Illinois pension problem, it misses a key issue: What is an unfunded liability? Perception is that there is some unpaid invoice sitting in Springfield for $85 billion. In fact Illinois could not pay the $85 billion under current IRS guidelines even if we had the money.

Unfunded liability represents the total liability for all plan participants assuming everyone in the plan works until retirement, receives a raise of X percent every year and lives for an actuarially determined number of years after retirement. That can represent 50 to 60 years worth of liability for a given plan participant.

Yes, the liability is discounted to a current value, but it represents so much more than a current amount due. To offset this liability, we have years of contributions by plan participants, earnings by the fund itself and of course the state’s contribution, not to mention forfeitures (participants who die before collecting benefits or participants who leave the plan before becoming fully vested).

Each year actuaries determine a maximum and minimum contribution by the state to be IRS compliant. A key issue is whether the state has been making the minimum contributions. That represents our immediate liability, not $85 billion.

Every pension plan similarly designed, whether public or private, probably has an unfunded liability. It is an important number to be sure, but only if one understands what it represents. It is not easy to explain actuarial jargon, but surely one of your creative writers can find a way to explain this complex subject so we can all deal with facts instead of emotion.

Bob Pinion

Rolling Meadows