Are you paying attention to what is happening with the pensions in Illinois?
If you’re like most people who don’t live in Illinois, you’re wondering why you should care since it isn’t your state, right?
A judge just ruled that the State of Illinois has to use 100% of their (tax) income to pay for the pensions.
They are not allowed to reduce the pension amounts promised.
It would seem obvious that, if all the taxes are going to pay for the pensions, there is nothing left for “all the other services.”
So, what went wrong here?
And, why should you care?
Because Illinois is only the canary in the mine when it comes to just the state pensions.
Here’s what happened…
The State of Illinois made pension promises for all state employees during a time when there were 4-5 employees for every retired state employee.
Now that the “baby boomers” are retiring, the ratio is reversed. Now, one state employee is trying to pay for 3-4 retired employees.
Well, they saw this coming. So, they decided to get the laws passed so that they could invest in the stock market.
By their reasoning, they would only have to generate 5-7% return annually to be able to support the pensions.
And, being the self-proclaimed financial experts that they thought they were, what possibly could go wrong with this idea?
After all, everybody else is doing it, so it must be the right thing to do. They can’t all be wrong, can they?
Oye…how many times have we heard that argument?
Okay…so, how many state pension systems do you know who are invested in the stock market?
Try all of them, plus the counties, cities, and other special political districts.
This includes police, firefighters, teachers, and many more.
So…what’s the catch?
There is no way that you can guarantee a 5-7% return on investment in the stock market.
Just based on the history of the markets, it’s not possible.
And, the State of Illinois is finding that out right now when (take note here!) the stock market is at an all-time high.
And, it has just gone through one of the fastest value growth periods in history (from around 6800 in 2008 to 21000 in 2017…that’s more than tripled).
And, yet, the fund is not able to meet their obligations.
Illinois Pension Solutions
So, what are some of the solutions that they are floating?
One of the early ideas floated was to break up the state and attach it to the surrounding states, with those states picking up the responsibility for the pensions.
I guess you can easily imagine how that went over in the surrounding states.
So, what’s the latest idea that has been introduced into the State legislature?
Well, it’s the fallback to all budget problems.
Tax the rich!
Because they’re getting rich from the stock market, right?
And, how do they propose to do this?
Ahh…through pure genius!
Add a 20% transaction tax on every buy or sell order, of course.
Illinois Pension Fallacies
See any problems with that idea?
How about any unintended consequences?
You do recall that I said earlier that all the pensions were invested in the stock market?
So, let’s start with the fact that they are proposing to tax the very institutions that they are collecting the tax to support.
Oh, yeah, they could easily carve out an exemption for pension funds.
So, that leave the “rich,” which includes people in all levels of the economic structure.
Simple math says that, if you just did one transaction per year and were lucky enough to make the 7% return on your investment, you’d still lose 13% that year because of the tax.
Well, since you will lose money in Illinois every time you invest, what are you most likely going to do?
Hmmm…if everyone, or even a large percentage, of the people with money to invest move, what happens to the economic base of Illinois?
It crashes, right?
And, how does that help with the requirement to pay pensions without a reduced payment that the court just demanded they do?
It doesn’t, does it?
So, now what?
Well, the obvious answer is that you kick it up to the Federal level and make everybody pay for it because, of course, Illinois is to big to fail.
And, where’s the money coming from at the Federal level?
The printing press, of course!
Venezuela economics…here it comes!
And, that’s just the results from one state, Illinois, failing to meet their obligations.
What happens when the rest of the states, plus all the counties and cities and special political districts, fail to meet all their obligations?
Yeah…it’s not a pretty picture.
Get yourself and what money you can out of the USSA while you still have some options.