When funding our public pensions, what is the difference between paying the statutory amount and the actuarial amount?
This is an important question when discussing the huge Illinois pension liability of over $140 billion because it goes to the heart of how we got here.
The statutory amount sometimes paid by the Illinois legislature to our pension fund is a number based on nothing more than what the politicians decide on.
The actuarial payment would be decided by actuaries that calculate the amount the state must pay if it is to cover its pension expenses.
Actuaries take into consideration an employee’s salary, the number of years they have until they retire and start receiving benefits, the annual rate at which the employee’s salary increases, the percentage of the final salary the employee will receive on a yearly basis when they retire, and the probable number of the years the individual will live to continue receiving those annual payments. Any cost-of-living adjustments (COLAs) are also built into the equation.
For the statutory amount politicians just pick a number.
Some years the legislature didn’t even pay the statutory amount.
The words they used to describe what they did those years was taking a “pension holiday”.
Over the decades the practice of taking pension holidays and paying only the statutory amount into the pension funds got us to the point where we have a $140 billion state pension liability.
Yesterday when I was at a luncheon with local legislators and a local chapter of the Illinois Retired Teachers Association, a state senator got up and announced how proud she was that the most recent budget “fully funded the pension systems”.
This was also reported at the time by the Chicago Tribune.
The spending plan also would pay off a $2 billion emergency loan the state took out from the Federal Reserve in December and meet the state’s obligations to fund schools and make its required annual contribution to its severely underfunded pension plans.
But the statutory payment was two billion short of the actuarial number.
The underfunding continues.
And, no senator. You didn’t fully fund our pensions.