Pension Math

Last year I saw the graph below detailing the funding level for the pension plan for the teachers in Illinois:


What surprised me was that the funding level hadn’t improved that much since 2009 even though the stock market had more than doubled during that time.  Earlier this week I saw a few articles about pensions in Illinois and wondered if the 2015 report had come out yet. It had:

The Financial report as of June 30, 2015 for the Teachers’ Retirement System in Illinois

The report has lots of information about the pension plan. This summary chart below caught my eye.  The total contributions in the last 10 years growing from roughly $600 million to $3.5 billion is surprising.   I don’t see how growth like that can continue.

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Even with that growth in how the pensions are funded, though, the shortfall in the pension has grown to just over $65 billion.  That means the pension plan holds about $46 billion of assets and calculates their total liability to be $112 billion as of June 30th, 2015.

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However, the information in the presentation that jumped off the page when I read it was in the chart below.   The total pension liability of approximately $112 billion (and shortfall of $65.5 billion) was computed using a discount rate of 7.47%.

For simplicity, that means all  of the estimated future liabilities have been discounted to June 30th, 2015 using a rate of 7.47%.   So, for example, a payment of $100 due in 10 years would have a value of $100 / (1 + 7.47%)^10 = $48.66.

If, instead, the liabilities are discounted at a rate of 6.47% the shortfall grows from $65.5 billion to $81 billion.  Just glancing at a chart of the 10 year treasury interest rate, at June 30, 2015, it looks like that rate was around 2.3% and the rate on the 30 year treasury bond was about 3%.

As the sensitivity chart below shows, the higher the discount rate, the smaller the liability.  There are ways to use the information provided in the report to estimate the value of the liability for lower discount rates, but I don’t want to go into too much detail and guessing here.  Suffice it to say that if a 1% change from 7.47% to 6.47% increases the liability by $15 billion, changing the discount rate closer to the 3% 30 year treasury rate at June 30, 2015 will increase the liability by more than $15 billion.


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So, I’m glad that Illinois publishes such a comprehensive report.  For a few other State pension plans I looked at the reports were not nearly as easy to read.  I’m pretty concerned about the health of these plans and by what could happen to them (and to the people who rely on them for retirement) if their health doesn’t improve.