 Illinois House Republicans included a pension reform plan as part of the new
budget “compromise” they proposed June 14. But this plan won’t fix the state’s
budget crisis – and part of it is likely unconstitutional.
The pension plan includes a “consideration” model originally proposed by
Illinois Senate President John Cullerton, D-Chicago, which lessens benefits for
current workers, and a proposed hybrid plan for new workers, which features both
a 401(k)-style plan and a pension component.
This is not a new proposal. State Rep. Jim Durkin, R-Western Springs, Cullerton
and State Rep. Barbara Flynn Currie, D-Chicago, each proposed similar plans only
a few weeks ago.
The recycled ideas in the plan include provisions that will likely be found
unconstitutional. And because the plan perpetuates the bankrupt pension system,
it won’t solve the state’s pension crisis.
Republicans’ true aim with this proposal is to find some short-term budget
savings, but it leaves the state’s pension crisis unchecked.
That’s far from the pension solution that Illinoisans need.
The plan’s “consideration” model is likely unconstitutional
The Republicans’ pension proposal attempts to reform pensions for current
workers using the “consideration” model, an idea Cullerton first proposed years
ago. The problem is the consideration model doesn’t offer current workers a
choice between the existing plan and another retirement plan of similar value.
Instead, it offers current workers two options with inferior benefits compared
with what they receive today. Workers must choose between two alternatives:
either freezing the salaries that count toward their pensions or receiving a
smaller cost-of-living adjustment in retirement. Either way, workers lose.
The Illinois Supreme Court has already ruled against plans that cut benefits.
The consideration plan would likely be found unconstitutional as well.
If the consideration section is struck down, the rest of the bill’s provisions
also could be declared unconstitutional. Lawmakers will likely have delayed real
reform by passing a deal destined to fail.
The plan perpetuates the pension system
With all the problems pensions have caused, the last thing lawmakers should
include in any reform for new employees is more pension plans. Yet the
Republican plan does just that.
The plan requires new state workers to choose between the current pension system
and a new hybrid plan that’s part pension and part 401(k)-style plan.
Regardless of their choices, workers’ retirements would still be under
politicians’ control. The state’s pension liabilities would still grow. And
taxpayers would still be on the hook for the cost of pensions.
That’s unsustainable for both taxpayers and the state. The pension crisis will
never end as long as pension liabilities continue to grow.
The plan forces new workers to subsidize older workers and retirees
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The Republican plan perpetuates the Tier 2 pension system for new workers. Tier
2, a plan for new workers hired on or after Jan.1, 2011, forces workers to
contribute more to the pension systems than what they’ll get out in benefits.
For example, new teachers in Tier 2 contribute 9 percent of their annual salary
to their pensions. But the benefits they accrue (the normal cost) are only worth
7 percent of their salary. They actually lose 2 percent of value annually. That
2 percent props up the pension systems.
In other words, new workers are forced to subsidize the retirements of older
workers and retirees.
According to a statement by the executive director of the Teachers’ Retirement
System, Tier 2 could be overturned in court. If that happens, the subsidy Tier 2
members provide to older workers and retirees would end, and the unfunded
liabilities of Illinois’ pension plans would jump by billions.
The plan only expands access to 401(k)-style plans for 5% of workers
On the surface, the Republican plan offers a way out of the pension system for
current workers. It creates a new voluntary 401(k)-style plan for Tier 1 workers
to join.
However, the bill limits the number of workers who can join – only 5 percent of
existing Tier 1 workers are allowed to leave the pension plan.
That means a vast majority of workers will remain in the pension system, no
matter how many actually want to leave.
The ability to join a 401(k)-style plan shouldn’t be restricted to an arbitrary
percentage of workers. All workers should be able to choose a different
retirement option.
Real reform exists
The real solution to Illinois’ pension crisis has been right under lawmakers’
noses for nearly two decades.
A successful, standalone 401(k)-style plan for state university workers has been
operating in Illinois for nearly 20 years and has over 20,000 members.
Illinois can begin an end to its current crisis if it expands that 401(k)-style
plan to all state workers. Current workers would have the option to join the
401(k)-style plan as well.
Moving new workers to 401(k)s will slow down and eventually stop Illinois’
accrued pension benefits from growing. That will allow Illinois to begin paying
down its unfunded pension debt.
Contributions would be mandatory, just as they are in the university workers’
plan. State workers not covered by Social Security would set aside 15 percent of
their salary each pay period. Each worker would contribute 8 percent of each
paycheck into his or her own 401(k)-style account, and the state matches that
contribution with another 7.3 percent.
Each worker’s personal retirement account is portable. Workers can take their
retirement funds wherever and whenever they want. And the plans don’t depend on
IOUs from House Speaker Mike Madigan, Chicago Mayor Rahm Emanuel or Gov. Bruce
Rauner.
That’s a far better solution than the likely unconstitutional and unproven
Republican “compromise” pension plan.
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