Illinois’ Financial Problems: Should your personal finances be adjusted to cope with the impact on government pensions?

Unions are an important part of our society. They were created to protect workers from unfair treatment and to give them a voice in the workplace. However, over time, unions can become considered to be a burden on local governments. This is particularly true in Illinois, where the pension crisis has been exacerbated by the State Supreme Court's 2015 ruling against bipartisan pension reform. Unfunded pension commitments caused by government employee unions are an issue in every state, not just Illinois, and it is having a profound impact on every taxpayer involved.

The nationwide scope of the problem was brought into view by a recent report from the Urban Institute. The report found that there are more than 5,500 state and local government pension plans in the United States. Almost 21 million workers and retirees participate in these plans. And they are underfunded by an estimated $1 trillion (although depending on the model used, estimates run as high as $3 to $4 trillion).

The decline in coverage is due in part to the increasing cost of pensions. As more and more baby boomers reach retirement age, the cost of pensions has been ramping up. In fact, pensions now account for more than 5% percent of all state and local government spending, and an estimated 6.97 percent of the GDP in 2022. This increase in spending comes at a time when many states and localities are already struggling to balance their budgets. The result is that pensions are crowding out other critical priorities like education, infrastructure, and public health.

The problem is compounded by the fact that many state and local governments have promised retirees benefits that they cannot afford. This is often due to overly optimistic assumptions about investment returns or unrealistic estimates about how long retirees will live. As a result, many pension plans are dangerously underfunded. In 2019, Illinois pension obligations were only at a 38.4% funded level, making it the 3rd lowest in the nation.

The implications of this pension crisis are far-reaching. For one, it threatens the financial security of retirees who depend on these pensions for their livelihoods. It also puts immense pressure on state and local governments, which are struggling to find the money to fund essential services. In addition, inflation reduces the purchasing power of retirees, and most state and local government pension plans do not keep pace with COLA (unlike Social Security), often to the surprise and detriment of future retirees.

The pension crisis also has implications for the economy. When state and local governments are forced to cut back on spending, it can lead to job losses and slower economic growth. In addition, the pension crisis is likely to cause a tax increase which would further depress economic activity.

The funding shortfall has left retirees in a difficult situation. In some cases, retirees have seen their benefits reduced to levels far below what they were expecting. In other cases, they have been forced to return to work or strategically delay their retirement date. And in all cases, they have had to grapple with the uncertainty of not knowing what their financial future will be.

The solution to this problem lies in bipartisan pension reform at the State and local levels. Such reform would require all stakeholders—employees, retirees, taxpayers—to make sacrifices to put pension plans on sound financial footing. It would also require State and local governments to be more transparent about their pension liabilities so that participants can make informed decisions about how much they are willing to contribute to these plans versus 401Ks or other investment options like stocks, bonds, real estate, cash equivalents, or other life priorities.

In the meantime, individuals facing retirement can take steps to adjust their personal finances to cope with this problem. One option is to delay retirement until you are eligible for Social Security (if applicable) and maximize those benefits by waiting until age 70 to claim them. Another option is to downsize your lifestyle in retirement so that you can live on less, or consider working part-time during retirement to supplement your income. Finally, you can make sure that you are saving enough for retirement on your own, through a 403(b), 401(k) or IRA, so that you are not as reliant on your pension.

While there is no easy solution to the pension crisis, something needs to be done. The longer we wait, the more difficult it will be to fix the problem. If you are a retiree or nearing retirement, what steps have you taken to adjust to the new reality of pension shortfalls? If you are still working, what are you doing to prepare for retirement in the face of this challenge?

When it comes to retirement planning, you need to think about how much money you will need to live on, when you want to retire, and how you will fund your retirement years. You also need to consider a retirement plan that considers the possibility of a reduced, or terminated, pension plan. Many people find this prospect daunting and turn to financial planners for help.

But not all planners are created equal or put your best interests first. So if you need help with your retirement, be sure to choose a fee-only planner because we meet the following criteria:

If you're concerned about the pension crisis, contact us today. We'll work out how much you will need in retirement, and what investments will give you the best return. We can also help you stay on track with your savings, as well as ensure that you're not paying too much in income tax. And because we're fee-only, you can be confident that our advice will always be in your best interests.

Together, we'll develop a retirement plan personalized to your circumstances and goals, so you can reach retirement with the peace of mind that comes from planning for a comfortable future.