Chicago firemen pensions is a 90 year-old problem

January 29, 2014


Chicago is drowning in unfunded pension liabilities. Last month, Illinois passed pension reform for state pensions, but did not take up Chicago’s pensions. Illinois governor Pat Quinn says the city’s pension will be taken up in the spring. Chicago’s pensions are deeply underfunded and have unique problems. The Chicago Tribune wrote:

The much-discussed government worker pension debt in Chicago now has a price tag: $18,596 for every man, woman and child living in the city.

That per-person figure is the highest among the nation’s 25 largest cities. It’s nearly double that of New York, the city with the second-largest tab. And it’s more than five times the median for locales included in the new study done by a major investment research company.

The Morningstar survey is further evidence that Chicago is in deep financial trouble due to the large shortfall in its pension systems that cover police, fire and other city workers. The study also included debt from retirement systems covering the state, Chicago Public Schools and Cook County government, liabilities for which the 2.7 million or so Chicagoans are either partly or wholly on the hook.

If we calculate the liability shortfall by the number of households in Chicago, the number is about $50,000 per household, or $1,673 per household per year over 30 years. Although some of the pension liabilities will be made up by investment earnings, Chicago households will need to be heavily taxed to make up the shortfalls.

Chicago’s pension problems are decades in the making. In a WBEZ Chicago radio piece, documents from 1927 are studied to show that the firemen’s pension plan was underfunded even in that year. The Firemen’s Annuity has had a deficit ever since the 1920s.

Chicago’s problems have swollen to such enormous size that some of their pension plans could run out of assets within 10 years without major restructuring. For example, the Firemen’s Annuity had a funded ratio of 24 percent at year end 2012, down from 28 percent in 2011 (from page 9):

Chicago and Illinois can raise taxes to make up pension shortfalls or reform retirement ages and pension benefits to lower the amount of benefits paid out. The U.S. Census says that Chicago’s median household income was $43,628 in 2011. In 2012 the Firemen’s Annuity Fund paid out an average annuity of $64,860 per retiree. Illinois and Chicago politicians have to weigh these figures and balance the needs of their retired workers with their city’s ability to be taxed. Correcting decades-old problems will not be easy.

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