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 Illinois faces the nation’s worst pension crisis,
but lawmakers in Springfield still show no desire to fix it. Their inaction
threatens the retirement security of thousands of public employees and the
prosperity of the state’s taxpayers. As funding ratios continue to decline and
push the retirement systems toward insolvency, Illinois’pension debt is already
inflicting great harm on Illinois through higher taxes, fewer jobs and slower
economic growth, residents moving out, cuts to education, and other critical
priorities.
While some point to the Illinois political landscape as a reason for inaction on
pension reform, several states with similar political dynamics have made
significant pension reforms in recent years.
Vermont is the latest blue state to recognize the need to address its public
pension shortfalls. The state has over $7 billion in total pension liabilities
with more than $2.5 billion in unfunded pension debt. A significant portion of
Vermont’s pension problems also stems from other post-employment benefits, or
OPEBs. The state’s overall debt is about half pension debt and half OPEB
liabilities. Those combined costs have caused Vermont’s retirement funding gap
to rise rapidly, going from $1 billion to $5.7 billion in less than 15 years.
Given the growing severity of the problem, state officials proposed potential
changes to the retirement system in 2021 to make it more sustainable. There was
union resistance to the proposed plan because it required state workers to work
longer to receive benefits, accept reductions in benefits, and increase their
contributions. The terms of the proposal and complaints from union leaders
pushed lawmakers to create a task forcecharged with hammering out significant
reform measures that were agreeable for both labor leaders and lawmakers.
Despite initial reluctance to accept reforms, Vermont unions and lawmakers
unanimously struck a deal on some commonsense pension reforms that improve the
sustainability of public pension funds for both state workers and taxpayers. The
plan includes the following provisions:
Makes no changes to the benefits of current retirees and beneficiaries.
Invests $200 million in one-time funds toward unfunded pension liabilities and
commits the state to ongoing additional payments.
Phases in higher employee contribution rates for active members and modifies the
Cost-of-Living-Adjustment (COLA) formula for all employee groups.
Labor leaders were pleased the deal does not require members to work longer for
less retirement security and that the state committed to paying for the promises
it made to workers. They also supported the progressive structure of the deal,
which does not require increased contributions for the lowest earning workers in
the bottom quartile, while those in the top earning quartile would see their
required contributions increase by 0.5% over each of the next five years.
Senator Corey Parent, a Republican lawmaker on the task force, was encouraged to
support the reforms due to the willingness of workers to accept smaller cost of
living adjustments and pay more in contributions. He believes as the task force
proceeded, the parties involved “started to realize the problem’s not easy to
solve, and realistically can’t be solved just by taxing people more or having
government put more in. It required adjustments in the actual program to remain
sustainable.”
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The resulting agreement makes significant changes to the structure of the
state’s pension system, benefits, contributions, and state payments to pension
funds which ultimately make the system more sustainable for taxpayers and more
secure for workers. The deal also proves taxpayers and state workers can benefit
from commonsense pension reforms that protect promised benefits, bring future
benefits to sustainable levels, and require fiscal responsibility to fund
pension systems.
While Illinois continues to struggle with its massive unfunded pension
liabilities, some blue states with much healthier pension positions have
recently taken steps to address their problems before they become the next
Illinois. For example:
In 2018, Colorado adopted automatic economic adjustments to its pension systems
that impose shared sacrifice to prevent pension holes from growing. If a
system’s funding ratio drops, cost of living adjustments fall while employer and
employee contributions both automatically increase. The law also expanded access
to an optional defined contribution plan.
In 2020, New Mexico replaced unsustainable guaranteed annual benefit increases –
much like the 3% compounding raises most Illinois pensioners receive – with a
true cost of living adjustment tied to inflation.
In 2013, California subjected the Public Employees Retirement – the largest U.S.
public pension system – to greater cost and risk sharing.
Perhaps most surprising for those familiar with the politics of inaction on
Illinois pension crisis, each reform had the support of government unions.
All of these states have acted in response to the unsustainable growth of
unfunded pension liabilities and all have a funded ratio of at least 63% as of
2019, showing they are attempting to correct the problem before it becomes
worse. Illinois, on the other hand, has a funded ratio below 39%, yet lawmakers
and their union donors refuse to act on the problem. They have no excuse for
avoiding pension reform. Unions and lawmakers in other states have acknowledged
the sobering realities of their unfunded pension liabilities long before
reaching the level of crisis currently faced in Illinois, where political
alliances often override the desire for sound public policy.
The current pension politics in Illinois is creating winners out of union
leaders and the lawmakers they bankrollwhile making losers out of state workers
whose retirement security is at risk, as well as taxpayers charged with
financing those unsustainable systems. Even though pension reform may not be
politically desirable for the powers that be, it doesn’t change the fact that
pension reform is good public policy because it corrects an unsustainable
funding system, boosts retirement security for state workers, and saves
taxpayers money.
For too long, Illinois unions and lawmakers have risked a financial catastrophe
for taxpayers and jeopardized the retirement security of hundreds of thousands
of state workers for no other reason than their unwillingness to acknowledge a
problem that other states have already addressed. It’s time for Illinois’
political leaders and power brokers to stop pursuing political gain and start
pursuing public policy solutions like pension reform.
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