By: Mark Glennon*

The City of Chicago is crafting a buyout program to help address its monstrous pension crisis– a $36 billion combined, unfunded liability owed by its four pensions. The idea is to cancel pension obligations in exchange for a single, lump sum cash payment to pensioners who opt in. It would require state legislation. The concept is inspired by the State of Illinois’ buyout program for its own pensions, as reported Thursday by the Chicago Sun-Times.

Buyouts might be a good idea, if done correctly and transparently. But, so far, there’s one thing we know for sure that the Chicago discussion has in common with the Illinois program: flimflam. We’ve begun hearing some of the same claptrap in Chicago that we’ve long heard about the Illinois program.

The main question is how much, if anything, the government saves through buyouts. Answers have been wrong or dishonest, and those who are supposed to know provide no evidence behind their claims. We do know, however, that savings from the state program – if any – have been tiny.

“Just look at how much the unfunded pension liability shrunk as a result of buyouts.” That, in a nutshell, is the boast routinely made by politicians who take credit for their prowess addressing pension problems through buyouts.

That framing is utterly misleading but was repeated to support the Chicago idea by Sen. Robert Martwick (D-Chicago) in the Sun-Times column. Citing the Illinois program as precedent, Martwick said it has reduced Illinois’ pension obligations by approximately $2 billion. Martwick chairs the Illinois Senate Pension Committee and nobody in Illinois government, in our view, is a more villainous figure in the pension crisis. He was the lead proponent, for example, of last year’s legislation increasing benefits paid by two of Chicago’s pensions.

Here’s why that framing is so wrong:

It’s true that, when a pensioner chooses a cash buyout, the pension itself is able to report a reduction in its liability to reflect cancellation of the regular, lifetime annuity payments the pension would otherwise have to make.

But here is what’s ignored: The state itself has to pay the cash lump sum. You have to look at both sides of ledger. Still worse, in the case of Illinois, the state doesn’t have that cash so it borrows the cash through a bond offering. The net result is that the pension liability goes down but the state’s bonded debt goes up, together with interest costs.

Importantly, however, state pensioners who opt for buyouts take a haircut. They get a cash payment of just 60% or 70% (depending on which of several programs they are in) of the present value of their expected lifetime pension benefits. That’s good for the state. Potentially, that’s how the buyouts could save the state money.

But it’s questionable how much of that discount for the state is real.

First is what’s called the “adverse selection” problem: The state does no personal health analysis on who takes the buyouts. An overweight individual with cancer and a heart condition gets treated the same as a fit person of the same age and gender. When the state buys out a person less healthy than normal according to age and gender, the state is overpaying.

There is plenty of empirical evidence that pension cash-out takers tend to have shorter true life expectancy than those who keep their annuity. For example, a frequently cited 2012 study by Boston College researchers, “Dying to Retire: Adverse Selection and Welfare in Social Security,” found “robust evidence” that people who live longer choose larger annuities by delaying benefit claims, while those who claim early are those who actually do die sooner.

Not all the evidence on that is consistent, which I leave to the actuaries to sort out. However, it appears that the bulk of the studies show that adverse selection is a real problem, and we know for sure that it’s an issue ignored by the State of Illinois.

The second issue, also raised by the adverse selection problem, is that it may be invalidating the rest of the actuarial tables on which cost of the pension system is based. Specifically, if you take the short-lifers out of the pool of pensioners, the average pensioner left in the system is going to live longer than the averages on which costs are calculated. In other words, paying for the remaining annuitants will cost the state more than it’s reporting to the public.

Third, nobody knows what other assumptions are used in calculating the pension buyout amounts. The discount rate is particularly impactful. It’s used to reduce the value of projected monthly pension payments when coming up with a buyout number to reflect the reality that payments later are worth less than payments today. The state has never provided an analysis that includes that or other details about how it calculates the effect of its buyout program on its overall fiscal situation.

Most importantly, the impact of the state’s buyout program is tiny no matter how you look at it. The unfunded liability of the state pensions is about $144 billion. Even if you used Martwick’s approach and looked only at a $2 billion reduction in unfunded liability, the improvement is less than 1.4%.

You’d never know any of that if you’ve been listening to the state’s grandiose claims about its buyout program.

Gov. JB Pritzker said in 2019 that a study was done of what the savings would be and “it’s billions and billions, potentially $25 billion of savings.” He often repeated that claim.

We asked for that study over and over again, directly and in our many articles on the matter, some of which are linked below. We also filed a with a Freedom of Information Act request.

We got nothing. There was no such study, we concluded, and the state had no sound basis for the numbers it was claiming.

The Illinois Answers Project watchdog group was also stonewalled when it asked about the study. They concluded that Pritzker’s claims about the study and buyout savings were “mostly false.”

That hasn’t stopped Pritzker and Martwick from continuing to brag about the program by ignoring the cost side of the ledger. In 2022, Martwick said “The savings generated by the pension buyout program is big point of pride for me,” and Pritzker cited just the liability side of the ledger as proof of success.

As Chicago considers a buyout program it should provide what the state has never provided. That’s a full analysis showing all costs of the program, including borrowing costs for the cash needed to make the buyouts, and all the assumptions made in the analysis including a review of the adverse selection issue. Without that, we will see the same hot air from politicians trying to look like they are addressing the pension crisis that they’ve long ignored.

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If you’ve jumped down to this conclusion because this article got too long and wonky with math, take heart, because that’s the broader lesson in this. Our pension system is, as we’ve said for years at Wirepoints, hopelessly opaque, far too easily corrupted and impossible for most voters to assess. Buyouts are just another example. As Chicago proceeds to consider replicating the state’s buyout problem, be skeptical, because the politicians are likely to repeat the same deceptions and evasions they’ve used before.

*Mark Glennon is founder of Wirepoints.

Earlier relevant Wirepoints columns:

• Four reasons why the state pension buyout program is problematic for taxpayers
• Sham Buyout Solution For Illinois Pensions Now Being Exposed – Wirepoints
• Governor Pritzker, we’re still waiting for the proof you claimed on supposed savings from pension buyouts 
• Stonewalled Again on Savings Claimed from Illinois Pension Buyout Program
• Pritzker’s Latest Pension Flimflam And Contradictions With Illinois Bond Documents
• The whopping lie behind huge, new pension liability imposed by Springfield on Chicago
• Senator Martwick At It Again, Leading Move To Increase Chicago Pension Liability By Billions