[This article was first published by Maureen Bader on December 22, 2011. And the amusing thing is that the Illinois policy group didn't make the Conference of Public Employees Retirement System's Naughty list.]
Illinois' government pension plan disaster provides a lesson for Wyoming.
Companies were talking about leaving
the state of Illinois. Chicago Mercantile Exchange and Sears’ corporate
headquarters were among the companies looking to head to states farther away —
from fiscal collapse that is. Indiana governor Mitch Daniels is busy promoting
his state as a place with an attractive business climate. Wyoming is likely
doing the same. However, Wyoming suffers from the same problem that is tanking
the Illinois state budget – an unsustainable pension plan for bureaucrats.
Wyoming’s bureaucrats have it made –
for now. When they retire, they’ve been promised a pension most people in the
private sector can only dream about. Bureaucrats get a defined-benefit pension
plan, one that pays a sum of money defined by the bureaucrat’s last
five-year-average salary and the length of time in government, whether there is
enough money in the pension fund or not.
Neither the Illinois nor the Wyoming
pension plans have enough money to pay their promised benefits. Wyoming’s
public sector pension plan is 84 per cent funded. That means, should it close
down today, the government would have enough money to pay for 84 per cent of
its promised benefits.
Technically, these types of funds are
considered beyond recovery when they fall below 71 per cent funded. Illinois’
public sector pension plans are 51 per cent funded. Illinois’s pension plans do
not have enough money to pay the promised benefits and are too far gone to
recover.
The Illinois government is in a state
of denial. Instead of reforming its pension plan it hiked corporate income tax
rates from 7.3 per cent to 9.5 per cent and personal income tax rates from
three per cent to five per cent to try to Band-Aid over the problem. These tax
hikes were sold to businesses and individuals as a temporary tax measure, but
with an aging bureaucrat population, the drag on the state’s budget will only
get worse.
Businesses, not wanting to get stuck
paying for politician’s unaffordable promises, responded by looking for greener
pastures until the governor backed off and cut the tax hike. Of course, none of
this changes the reality that Illinois’ pension plan is bankrupt so these cuts
will likely only keep business in the state until the next budget crisis.
Wyoming has no corporate or personal
income tax so would be a good place for these companies to relocate to, on the
surface. That’s because Wyoming’s bureaucrats enjoy the same type of pension
plan as those in Illinois. Some Wyoming legislators have faced reality and a
bill is heading to the Wyoming legislature to reform the Wyoming bureaucrat
pension plan before the state has the same problems now sinking Illinois. But
will enough Wyoming legislators take the necessary steps to reform the plan?
All Wyoming legislators must face reality now and reform this pension plan.
These defined benefit pension plans
are a relic of bygone times. That’s why almost all companies in the private
sector have moved employees to the type of plan outlined in the new Wyoming
bill — a defined contribution pension plan. In this type of plan, retirees’
pensions are determined by how well their investments did over time. The money
is in an account a person owns and controls. People don’t depend on false
promises and taxpayers aren’t on the hook to support pensions far grander than
anything they could ever hope for.
Businesses and private-sector
taxpayers, many who do not even have a pension, cannot be expected to fund the
retirement bliss, even if illusory, of bureaucrats. As defined benefit plans
become a bigger ball and chain on the economy, they drive taxes up which drives
business out of the state. By empowering all people to control their own
retirement future, Wyoming can avoid this fate.
Let’s not be Illinoyed!
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