Highland Park, Illinois, is an affluent north-Chicago suburban community of about 30,000 people. If you live there and dream of achieving the good life in retirement, you should work for the public school system.
In this one zip code (60035), there are more than 200 former public school employees who collect annual pensions above $100,000 from the Illinois Public School Employee Pension system. We know this because of data made public by the Open the Books project.
Although it's not known how many retired educators continue to live in the community and support the local tax base, New World Wealth recently reported that millionaires are leaving the Chicago area at a faster rate than any other city in the U.S.
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In 2015 the Illinois Supreme Court unanimously ruled unconstitutional a new state law that aimed to scale back pension benefits of the state's workers and retirees, including teachers in the pension system. The court said that once pension benefits are earned by public employees under contractual agreement, they can't be diminished or impaired.
In March, the same court again unanimously upheld this finding for two Chicago pension plans.
With the legal impasse, it's now possible that several Illinois and Chicago public sector pension plans will continue to pay out all scheduled benefits until they finally run out of money, 10-15 years from now.
Then, there are the 400,000 participants in the Central States Pension Fund, including 220,000 retirees, who are facing pension benefit cuts of 50 percent or more under a 2014 law designed to protect the multiemployer plan program of the Pension Benefit Guaranty Corp.
Even with benefit cuts, the Central States Pension Fund is expected to go broke in 10-15 years, dragging down with it whatever is left of the PBGC's multiemployer program. There just aren't enough workers contributing to multiemployer plans to fund benefits for all retirees promised pensions.
In the private sector, several large companies, led by General Motors, have met pension funding obligations by selling long-term bonds at low interest rates. The New York Times reported that at the end of 2015, GM's plan, covering 360,000 pension recipients, was underfunded by $10.4 billion.
There are three sectors of the U.S. pension complex – public, private, and multiemployer – and some plans in all three sectors are facing intractable challenges.
In many cases, the most likely outcome will be that troubled plans simply run out of money at some point in the 2020s. So, while retirement life may be good for the Highland Park teachers retiring right now, it may get significantly more challenging when they are in their mid-70s.
Advisors can use vignettes like the ones in this article to help clients recognize future challenges now, while there is still time to plan and adjust.
It's a pipe dream to believe the pension benefits of already-troubled plans can be sustained through 30+ year retirements, as tax bases and funding sources keep shrinking.
Help your clients have a back-up plan for maintaining their retirement lifestyles, when the day finally comes that the pension money is gone.
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