Diana Rickert Diana@IllinoisPolicy.org or (312) 607-4977
Daniel Anthony Daniel@IllinoisPolicy.org or (773) 750-1031
Newest pension plan falls short
SPRINGFIELD, Ill. (Dec. 5, 2012) — Ted Dabrowski, vice president of policy at the Illinois Policy Institute, released the following statement in response to a new pension reform proposal to be unveiled today by members of the Illinois House:
“Unfortunately, this proposal makes it clear that lawmakers still do not understand the full scope of Illinois’ government employee retirement crisis. Under new accounting rules, the state’s five pension systems are underfunded by more than $200 billion. Additionally, the state faces more than $54 billion in unfunded retiree health care benefits for government workers, and $15 billion in pension obligation bond debt.
Until lawmakers address the true size of this crisis, their proposals will continue to tinker around the edges – keeping government employee retirements at risk, and forcing taxpayers to foot the bill for a broken and bankrupt system.
A cursory review of the proposed plan reveals the following:
- The proposal preserves too much of the current broken pension system. Voters, government unions and the public have expressed their anger with politicians’ mismanagement of government pension funds. It’s time to get government out of the retirement business. We cannot trust the politicians who caused Illinois’ pension crisis to manage it going forward. That’s why we need a government retirement system that is reliable and secure for workers, as well as affordable for taxpayers: a defined-contribution plan.
- The proposal fails to fully freeze the current cost of living adjustments, or COLAs. Freezing COLAs, until the pension systems return to health, would reduce between 20 to 30 percent of the state’s official pension underfunding. It is the single, most effective way to immediately reduce the size of the state’s unfunded liability and ensure the safety of the future retirements.
However, the House proposal continues to maintain the current 3 percent compounded COLAs, but applied only to the first $25,000 of retirees’ pensions. The proposal has limited impact on reducing the state’s unfunded liability. This means under this new proposal, retirees would continue to receive a COLA for a large part of their pensions.
- The proposed plan phases in local pension accountability, which requires local school districts and universities to pay the “employer share” of pension costs accrued by government workers each year. The phase-in will occur at 0.5 percent of payroll each year until the local jurisdictions have absorbed the full normal cost. This phase-in period is much too long to be fully effective. A phase-in period of 1 to 3 years would be more effective in bringing immediate accountability back where it belongs.
- Retirement ages for most government workers should be increased to 67 years of age, the retirement age required by both Social Security and Illinois’ Tier 2 plan. Today’s plan from the Illinois House increases the retirement age, which is a step in the right direction, but does not go far enough to sufficiently reduce the unfunded liability.
- The House plan asks current workers to contribute more toward the pension system. Asking employees to contribute more money, without fundamentally reforming the system, is not a sustainable solution and not in the best interest of the employees.
- The Illinois House proposal includes a cash balance plan for Tier 2 employees. It is important to note that a cash balance plan under this proposal is not the same as a defined-contribution cash balance plan commonly found in the private sector. A major weakness of the cash balance plan is that it effectively guarantees retirees a rate of return and keeps the state – and taxpayers – on the hook for shortfalls in the plan.
We commend these members of the Illinois House for putting a proposal on the table, and look forward to reviewing in more detail when it is filed as legislation. However, information about the proposal that currently is available indicates it would fail to end the crisis and bring the pension systems back to solvency.
Illinois has the worst pension crisis in the nation and its fiscal situation is dire. Illinois needs real and fundamental pension reform. Today’s proposal by members of the Illinois House falls far short. State employees, taxpayers and Illinois’ legacy deserve the boldest reforms in the nation.”
For bookings or interviews, contact:
Diana Rickert 312-607-4977
Daniel Anthony 773-750-1031
The Illinois Policy Institute is a nonpartisan research and education organization. Our vision is to make Illinois first in economic outlook and job creation, and for Illinois to become a free enterprise leader for the rest of America. As a leading independent research and education organization, the Institute generates positive and sustainable policy solutions for citizens and lawmakers that help unleash talent and entrepreneurial ability. To learn more about the Institute or review our policy work, please visit: www.illinoispolicy.org.