There’s an old joke about a man who goes to a doctor, complaining that he hurts every time he touches his leg, arm or head. The doctor examines him and gives him the diagnosis, “You have a broken finger.”
That’s similar to the problems created by a broken pension system. Consider Chicago, where what’s happening should be a warning to Nevada.
Combined, Chicago’s pension systems are only 28.1 percent funded. Nationally the average is 82.5 percent. It’s important to understand what this funded ratio means. In a defined benefit pension system, the government promises workers guaranteed retirement benefits based on factors such as years of service and pay level. To pay for these pensions, government employers and sometimes government employees make pension contributions. These contributions don’t go into a lockbox. They are largely invested in the stock market, bonds and private equity. In theory, the original contributions and subsequent investment gains produce enough money to fund future retirement benefits.
In practice, however, most governments failed too contribute enough initially. In later decades, this led to lost investment gains and meant that taxpayers had to make up the contribution shortage. And because compound interest is one of the most powerful forces in the universe, this gets expensive quickly.
Chicago has some of the highest property tax rates in the nation, but its current residents aren’t receiving much bang for their buck. Much of Chicago’s property tax revenue covers public pensions. It could get worse in the future.
In a recent interview with Financial Times, Illinois Comptroller Susana Mendoza said, “If the (stock) market gets a cold, I don’t even know that we’ll survive with pneumonia.”
She warned that some of the city’s pension funds could be “completely insolvent” if there were a market downturn. This is Chicago, one of the largest cities in the country, not a town with 500 residents.
Ms. Mendoza is running for Chicago mayor. She’ll likely face stiff opposition from public employee unions who see the issue as a problem for taxpayers to fix. The government unions aren’t an innocent party. They use their political power to elect candidates who approve generous future benefits, like Gov. JB Pritzker just did. These politicians know they won’t be in office when the bill comes due.
Nevada’s pension system is in much better shape than Chicago’s. At the end of June 2025, the Nevada Public Employees’ Retirement System was 77.3 percent funded. But pension contributions have steadily increased over the past 20 years, straining the budgets of state and local governments.
Nevada should learn from Chicago’s mistakes and move new hires into a defined contribution system rather than the old defined benefit model.
