Pension reform has been a hot topic in Illinois for years now. It’s a massive fiscal challenge that spends roughly 25% of our general fund and one we have yet to adequately meet.
Here’s a quick timeline of events to catch us up to speed:
In 2010, the Illinois General Assembly took the first step toward pension reform by creating a “Tier Two” in which all new hires from Jan, 1, 2011 forward pay more into the pension system over the course of their career with a slightly less generous benefit in retirement than the “Tier One” employees, who are those who started working prior to 2011.
Tier Two removed the compounding cost-of-living increases, caps benefits in two ways compared to Tier One, raises the minimum retirement age to 62 (or age 67 for state employees to receive the maximum benefit), compared to Tier One, where employees can retire as early as 55.
While creating “Tier Two” was a reasonable step to reduce the state’s long-term pension obligations by more than $70 billion over 30 years, looking at the big picture, it’s only a ripple in the pond.
In 2013, the General Assembly took a bolder step, passing a law to require retirees to contribute a small portion to the cost of their own health care. This law was immediately challenged and ultimately ruled unconstitutional by the Illinois Supreme Court in 2015.
In 2018, we passed a pension buyout bill, extended in 2019, to give employees nearing retirement the option to accept a lump-sum payment in return for a reduced benefit compared to what they’d receive without a buyout. Think of the Lottery, where a jackpot winner can choose between a lump-sum payment or monthly installments over a fixed period of time. Your choice is between less overall money but getting it all upfront; or more money long-term in installments.
Under Illinois’ new buyout law, current public workers can exchange the 3% compounded cost-of-living adjustments for a lump sum payment of 70% of the value and a 1.5% COLA that is not compounded. Also, vested former workers can opt to receive a lump-sum payment amounting to 60% of the value of their pension balance. The buyout plan is projected to save the state $400 million.
The key feature here is choice. I believe in a pension solution that offers state workers the ability to choose an option that best meets their own individual retirement goals. For some, that is the “Tier Two” defined benefit plan. For others, they might prefer a defined contribution plan.
What is the difference, you might ask? A defined benefit plan is a pension for which your employer makes contributions on your behalf and promises you a set payout when you retire. A defined contribution plan, like a 401(k) or 403(b), requires you to put in your own money. What’s good about a defined contribution plan is that it reduces taxpayer obligations to fund the pension systems while giving state workers the ability to self-direct the investment of their own retirement funds. There needs to be more bipartisan discussion here in Illinois about how a defined contribution plan would work – but it’s a conversation we should have.
The bottom line is this – employees are paying in their required contribution and should not be blamed for the state’s pension woes. They should, however, be brought in as part of the solution. I meet with retirees all of the time and they are grateful for their pensions, but it’s important to note that many earned very modest salaries and, as a result, modest pensions. Many also understand that the current path we are on is not sustainable with the state’s pension debt far exceeding our ability to pay.
If we fail to act, our pension crisis will continue to crowd out increasingly scarce resources for priorities like K-12 education and providing a safety net for the most vulnerable children, families and seniors in our state. Governor Pritzker’s “pennies for pensions” plan would pay a relatively minuscule, one-time $200 million extra to the pension systems this year only, despite the fact that we have over $135 billion in current unfunded liabilities. That is like a family scrounging for pennies in the couch to pay an additional $1.67 each month on $13,500 in credit card debt. It won’t work.
The most viable solution to the state’s pension crisis would be for us to reverse Illinois’ annual population losses and grow our economy, but that is a topic for another column. For now, let’s allow state workers to give us feedback on their level of interest in a defined contribution plan and seeing how many folks take advantage of the buyout option. Together, we can guarantee a secure retirement for all current and future retirees while respecting the fact that taxpayers cannot keep paying more to bail us out of a bottomless pit.
Tony McCombie of Savanna, Illinois, is state representative for Illinois’ 71st District, which includes portions of Rock Island, Henry, Carroll and Whiteside counties. Contact her office at (815) 632-7384.