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ILLINOIS CAN SAVE $577M ON PENSIONS BY ADDING A DATE TO A LAW

Illinois Policy Institute/ Dylan Sharkey

Illinois’ pension debt is the highest of any state. An easy fix to state law would start the Tier 3 retirement program, saving $577 million while workers gain options.

Mike Crenshaw is a professor at Daley College and is constantly worried about the State Universities Retirement System, where his retirement money is tied up.

“We have about $300 billion in pension debt,” Crenshaw said.

Pensions take up 26% of Illinois’ budget, more than double the national average. Despite spending more on pensions than any other state, Illinois holds the most pension debt in the nation. But it can take a significant first step in fixing the pension mess by adding a start date to an existing state law.

Essentially, all pension debt stems from Tier 1 benefits promised to state employees hired before 2011, like Crenshaw. Tier 2 employees hired after 2011 will likely pay more than their benefits will be worth to subsidize Tier 1 benefits.

Implementing optional Tier 3 plans is one of the solutions to Illinois’ woes set out in the Illinois Policy Institute’s Illinois Forward 2023. The General Assembly passed Tier 3 plans during the fiscal year 2018 budget process. A technical error left an implementation date out of the language, and it hasn’t been corrected since. Lawmakers could fix this oversight for fiscal year 2023, which begins July 1, 2022.

“A lot of times we’re not given the intricacies of how a Tier 3 or alternative pension plan could benefit us,” Crenshaw said.

Tier 3 features

  • Employees contribute up to 6.2% of their salary toward a defined-benefit pension. They must also contribute at least 4% toward a defined-contribution component.

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  • Employee contributions vary automatically with the calculated cost of their benefits, so they can fall below 6.2% but cannot rise above that level.

  • Employers must contribute at least 2% and up to 6% of salary toward the defined contribution.

  • Tier 3 receives the same annual cost-of-living adjustment as Tier 2, equal to one-half of the increase in the consumer price index. The full retirement age is 67, just like Tier 2.

  • Costs for Tier 3 pensions are paid directly by the employer, aligning responsibility for setting benefit levels with responsibility for paying them.

Tier 3 plans are optional for employees. They would save the state an estimated $577 million in fiscal year 2023. They also give state employees the freedom to handle their retirement based on their individual needs.

“I would love to get out of Tier 1. I would love to be part of a Tier 3 or alternative plan,” Crenshaw said

It would take a constitutional amendment on pensions to change Tier 1 benefits, but Tier 3 plans would prevent Tier 2 and future employees from falling into the same vicious cycle Crenshaw is in.

Tier 3 hasn’t been implemented yet solely because of a clerical error on the implementation date. Lawmakers can easily fix this mistake by adding that date and instantly give state employees more freedom for their retirement.

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