To the Editor:

HBO debuted its original movie on Ponzi-schemer Bernie Madoff over the weekend. Based on Henriques' book "The Wizard of Lies," the film (and book) tells the chilling tale of Madoff's fraudulent investment scheme in which more than 2,200 people lost almost $20 billion in retirement savings.

That is a lot of victims losing a lot of money.

But it's peanuts compared to what public pensioners – in Illinois and elsewhere – stand to lose if drastic reform measures aren't taken soon. More on this in a moment. 

A Ponzi scheme is a form of fraud in which early investors see quality returns, not because their money was invested wisely as the investors are led to believe, but because new investors fund the payouts. The cycle perpetuates itself – more and more new investors are needed to continue to fund previous investors' returns at an unbeknownst higher risk to themselves – until it inevitably collapses.

In Madoff’s case, the collapse occurred in 2008, after almost 30 years, when the housing bubble burst and the economy was sent into the Great Recession. Simplistically, far fewer new investors could be found, and prior investors, many hurting because of the turn in the economy, asked for their full investments back.

Madoff was sentenced to 150 years in prison after pleading guilty to multiple counts of fraud. His victims suffered untold losses.

What’s the point of my Madoff history lesson?

A strong case can be made that public pensions – including in Illinois – are eerily similar to a Ponzi scheme, and that a similar collapse might be inevitable. That would mean an untold number of new victims that would make the Madoff case seem relatively minor by comparison.

The difference between a Madoff-like Ponzi scheme and the public pension crisis is that government is complicit in the latter, and that dedicated public servants, state retirees and taxpayers are the ones at risk.

I think we all can agree that taxpayers and state workers who have spent their careers serving Illinois residents, teachers included, don’t deserve that.

Doubt that will happen in Illinois or with other public pension systems in the U.S.? Let’s start with Puerto Rico.

The U.S. territory in the eastern Caribbean declared a form of bankruptcy (after Congressional approval) earlier this month because of massive debt that included $50 billion in underfunded pensions. In a story headlined "In Puerto Rico, pension fund works like a Ponzi scheme," the New York Times reported the following:

"Puerto Rico, where the money to pay teachers’ pensions is expected to run out next year, has become a particularly extreme example of a problem facing states including Illinois, New Jersey and Pennsylvania: As teachers’ pension costs keep rising, young teachers are being squeezed — sometimes hard. One study found that more than three-fourths of all American teachers hired at age 25 will end up paying more into pension plans than they ever get back."

For pensioners in Puerto Rico, where a recovery plan is still being devised, it could mean pennies of the dollar of what they were promised.

For current and future pensioners in Illinois and elsewhere, a similar fate awaits if drastic reforms don't happen.

Illinois' five state pension funds are now underfunded by more than $130 billion, worst in the nation. At that deficit, the pension funds have in hand just about 37 cents of every dollar they will owe to current and future pensioners.

But it actually could be much worse than that.

Money set aside to fund pensions – from taxpayers and public employees – is invested to grow the dollar pool. But most pension systems have over-estimated the rate of returns on these investments. As recently as 2014, Illinois' Teachers Retirement System projected an inflated 8 percent annual return rate. That projection was dropped to 7.5 percent three years ago. Just last year, Illinois' State Employees Retirement System downgraded its rate of return estimate to 7 percent. Each of these downgrades cost Illinois taxpayers hundreds of millions of dollars annually because the taxpayers are legally required to make up the difference.

Dan McCaleb

Illinois News Network

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Illinois House Speaker Michael J. Madigan
6500 South Pulaski Road
Chicago, IL 60629

Illinois General Assembly
301 S 2nd Street
Springfield, IL 62707

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