Chicago Has a Pension Crisis, but It’s Not Progressives’ Fault

Bloomberg ran a piece last weekend surveying the dire situation of Chicago’s public employee pension fund. The main point was that the city’s unfunded pension liability will pose a huge problem for Brandon Johnson, the city’s newly elected progressive Black mayor.

To illustrate the severity of the problem, the piece included a graph that showed that both the city’s annual pension payments and its unfunded liability are much larger relative to its budget than is the case for a number of other major cities. The picture does look pretty bleak.

However, an important fact was missing from this discussion. Chicago’s public-sector employees are not enrolled in the Social Security system.

While the vast majority of workers in the United States are covered by Social Security, it is still not quite a universal system. When the program was established in 1937, important groups of workers were excluded, most notably domestic workers and agricultural workers. The excluded workers were disproportionately women and Blacks. The exclusion of many Black workers helped to make the program palatable to Southern Democrats, who were not happy about Black workers getting the protections offered by Social Security.

While the program initially only covered around half the workforce, the categories of excluded workers were gradually reduced, so that it is now the near-universal program we know today. The one major category of workers that is still outside the system is state and local government employees. Roughly 25 percent of these workers are still not covered by Social Security. Chicago’s employees fall into this category, as do many public-sector employees in Illinois as a whole.

Why does all this matter? Most immediately for this piece, it matters because it means that the Chicago system’s liabilities effectively include money that would be paid by Social Security to public-sector workers in other cities. That hugely inflated the size of its liabilities relative to cities where workers do get Social Security benefits in addition to their pensions.

The fact that public-sector workers are not in the Social Security system also raises another important point. For most workers, of course, employers contribute their share of employees’ wages to Social Security—under current law, 6.2 percent. The city of Chicago does not have to make those employer-side contributions. This 6.2 percent employer contribution is money that other city governments must send to the Social Security program every year. But Chicago, since it doesn’t have to make these payments, can instead use this money to meet its pension obligations. If we adjust for these differences, the Chicago system doesn’t look as out of line with the other cities as the Bloomberg graph indicates.

The graph shows that pension expenses in Chicago are equal to 30.1 percent of total government expenditures. In San Jose, the city with the second-most expensive pension contributions, payments are shown as being 18.7 percent of total expenditures. Assuming that payroll makes up the bulk of the budget, if we add in the 6.2 percent of wages paid as Social Security taxes in San Jose, it would take its payments for pensions to over 24 percent of expenditures, closing roughly half the gap with Chicago.

There is a similar story when benefits are discussed. The average pension for a retired Chicago employee was $44,700 in 2022. That sounds very generous if it is in addition to a worker’s Social Security benefit. But it appears considerably less generous when we recognize that most city employees will not be collecting Social Security.

Unfortunately, news stories on Chicago’s pension situation sometimes ignore the fact that its workers will mostly not be getting Social Security when discussing the size of their pension benefits. This leaves readers thinking they are far more generous than is actually the case.

There is one other aspect to this issue that is often overlooked in public discussions. State and local workers on average get lower pay than their private-sector counterparts when adjusting for age, education, and other factors. This is offset by higher benefits, but just considering the benefits in isolation gives a misleading picture.

This matters not only in how people think about the generosity of public employee pensions but also how they think about potential solutions. If higher pensions for public employees help make up for lower pay while people are working, then any move to reduce the generosity of pensions will likely require that state and local governments increase the pay of their workers if they want to continue to attract the same quality of employees. Reducing pension payments would therefore not end up being a free lunch in terms of solving the financial problems facing state and local governments.

This piece hyping the pension problems facing Chicago and Brandon Johnson is typical of the coverage that progressive mayors and especially progressive Black mayors get in the media. Invariably, more moderate mayors, such as Richard M. Daley and Rahm Emanuel, two prior white mayors, under whom Chicago’s large pension debt accrued, were treated as pragmatic reformers. The failure of their “reforms” is often swept under the rug.

For example, when Emanuel took office in 2011, he proclaimed the Chicago public schools a disaster that he was going to clean up. The problem with this story was that his predecessor, Richard M. Daley, had “reformers” running the schools for the prior 15 years. The most recent one was Arne Duncan, whom President Obama nabbed to become secretary of education.

But the gloves come off when there is a progressive Black mayor, especially one who came out of the Chicago teachers union, like Brandon Johnson. Suddenly the problems that have faced Chicago for decades, like crime, poor educational outcomes, and underfunded pensions are disasters that they are held responsible for addressing.

To be clear, the public employee pension systems in Chicago and the state of Illinois face serious problems, as do systems in many other states. Governments made commitments to their workers without putting aside the funding necessary to meet these commitments. However, it is important that the size of the problem be accurately described, as well as the size of the promised benefits. Much of the reporting on the topic in recent decades has not done this.

There is one final irony to the way public pension problems are discussed. Most state and local governments had reasonably well-funded pensions three decades ago. Then we had a huge run-up in the stock market in the 1990s. Many cities, notably Chicago, effectively allowed the stock market to make its pension contributions for them. The extraordinary gain in stock prices meant that pension funds could maintain proper funding without the normal pension contribution from the government.

This was all great as long as the bubble continued to expand. But when the bubble burst in 2000–2002, the pension funds were suddenly badly underfunded. The crash of the market also threw the economy into a recession, making it an especially bad time to increase payments to the pension funds. Daley, who was mayor at the time, essentially adopted the strategy of hoping that the stock bubble would reinflate. It didn’t.