The American Pension Crisis: CA, IL Among the Worst

Alarming New Data Shows Record Pension Deficits

America is dealing with a pension crisis.Pensions, once a hallmark of the American dream, have now become a burden for many states, especially California and Illinois. These states are grappling with a massive pension crisis, which has the potential to affect not just the current generation but future generations as well.

With a combined unfunded liability of over $500 billion, both states are in a precarious financial situation and need to take drastic action to address their pension crisis.

California and Illinois have the highest unfunded pension liabilities in the U.S., accounting for a staggering one-third of the nation’s pension deficit.

This is largely due to the fact that both states have large public employee pension systems, and over the last several years, they have not been able to keep up with the rising costs of providing benefits and ensuring that the system is fully funded.

The Great Recession’s Lasting Effects

Since the 2009 financial crisis, both states have taken on more debt, and their pension systems have become significantly underfunded – both are now facing a situation where they may become unable to meet their financial obligations to their retirees.

According to a report from the New York-based nonprofit Equable Institute, U.S. state and local pension unfunded liabilities climbed to $1.45 trillion in 2022. This is an increase from $986.6 billion in 2021.

After a year of investment volatility and record inflation, the Institute says public pension plans averaged a -6.14% return on average in 2022, dramatically underperforming the 6.9% average assumed annual rate of return.

Despite a year of significant losses, the overall funded status of state and local retirement systems actually remained stronger nationally in 2022 than it was heading into the Covid-19 pandemic in 2019.

However, based on Equable’s outlook for 2023, most pension funds are not on track to meet investment return targets.

California & Illinois Hit the Hardest

According to Equable’s figures, California’s public-sector pensions have an accounting hole of $274 billion.

The pension crisis was exacerbated by the economic downturn in 2022, with California’s Public Employees’ Retirement System (CalPERS) losing almost $30 billion.

Additionally, the Los Angeles City Employees’ Retirement System lost 7% this past fiscal year, shrinking its portfolio to $20.6 billion.

In California alone, the unfunded liability has grown to over $400 billion, while Illinois’s unfunded liability is a quarter of that, but still significant.

According to The Policy Circle, Illinois currently has an unfunded pension liability of over $111 billion.  These liabilities are a major concern, as they represent a huge burden on the states’ budgets.

In response to the crisis, Illinois is attempting to amend its pension system, which is currently one of the worst in the country at 39% funded according to Pew Charitable Trusts.

Both states are major contributors to the nation’s worsening retirement crisis which was further exacerbated by the stock market rout in fiscal 2022, which caused pension debt to rise 7.5% to $139.7 billion.

The Roots of the Pension Crisis

The pension crisis in California and Illinois can be traced back to several factors, including:

  1. Underfunding: Both states have underfunded their pensions for years, which has resulted in a massive shortfall in the funds available to meet future obligations.
  2. Benefits increases: Both states have increased benefits for public employees without adequately funding those increases, further exacerbating the shortfall in their pension funds.
  3. Market downturns: Both states have been hit hard by market downturns, which have reduced the value of their pension funds and made it even harder to meet their obligations.

The Impact of the Pension Crisis

 The pension crisis in California and Illinois has far-reaching consequences, including:

  1. Budgetary constraints: As states struggle to meet their pension obligations, they are forced to divert money away from other important services, such as education, healthcare, and public safety.
  2. Debt: States are forced to borrow money to pay for pensions, which increases their debt and makes it harder for them to fund other services.
  3. Service cuts: As states struggle to meet their pension obligations, they may be forced to cut services, lay off employees, or raise taxes, all of which can have a negative impact on citizens.

Potential Solutions Ahead

To address the pension crisis, both states have enacted reforms to try to reduce their pension liabilities.

In California, the state has implemented a series of reforms, including increased contributions from both employees and employers, as well as changes to the retirement age and eligibility requirements.

In Illinois, the state has enacted a series of reforms, including a reduction in cost-of-living increases and a shift to a hybrid retirement system that combines a traditional defined-benefit pension with a 401(k) plan.

While these reforms may help to reduce their pension liabilities, they are unlikely to be enough to fully address the issue.

Both states are facing a daunting challenge, and they need to take further action to ensure that their pension systems are fully funded. This could include further reforms, as well as increased contributions from both employers and employees.

Additionally, analysts and policymakers have said that both states should look into other sources of funding, such as bonds or other investments, to help close the gap.

State Governors Take the Helm

Governors Gavin Newsom of California and J.B. Pritzker of Illinois have both pledged to explore potential solutions that can help address the crisis and ensure a stable future for public employees and their families.

Many are calling for an overhaul to institute reforms to ensure emergency injections of cash are set aside to meet the budgets of all states’ benefits programs during future down years.

In order to address this issue, Governor Pritzker has proposed a plan called “Illinois Forward 2023” which relies on common-sense pension reform and diverting wasteful administrative spending to classrooms in order to right size taxpayer costs for state worker health.

Meanwhile, Governor Newsom has taken steps to address California’s pension plans, which were heavily impacted in 2022. In his budgets, Newsom has included additional deposits to CalPERS and the state’s teacher retirement system.

Earlier this month, Newsom reappointed William Prezant to a four-year term on the California State Teachers’ Retirement System Board of Directors as part of his efforts to ensure that the state’s pension plans are secure and well-managed.

The Bottom Line

Partly due to inflation, the rising cost of living adjustment (COLA), and the falling stock market, nearly all state pension plans were hammered in 2022.

Although some analysts warn of more financial carnage ahead, it’s also a hopeful possibility that the strain on budgets could ease in the coming months.

As February gets underway, global inflation appears to be cooling a bit, so if interest rates level off (or better yet, drop), the markets could steady themselves as the year continues and that would be a great thing for state pension plans.


The views expressed in this article are not to be construed as personal advice. You should contact a qualified and ideally regulated adviser in order to obtain up to date personal advice with regard to your own personal circumstances. If you do not then you are acting under your own authority and deemed “execution only”. The author does not accept any liability for people acting without personalised advice, who base a decision on views expressed in this generic article. Where this article is dated then it is based on legislation as of the date. Legislation changes but articles are rarely updated, although sometimes a new article is written; so, please check for later articles or changes in legislation on official government websites, as this article should not be relied on in isolation.


Chris Lean

Chris is a Chartered Financial Planner who writes blogs and articles to simplify and explain some of the financial issues that affect UK expats. Subjects include; hot topics, regulation and the ever-changing world of finance.

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