5 principles to guide Illinois’ public pension reform
With nearly $214 billion in state and local pension debt threatening both retirees and government finances, Illinois needs a new path forward. Here are five principles to guide the state, protect taxpayers and safeguard public servants.
Government worker pensions are driving up taxes, eating resources for the public services Illinoisans expect and driving residents to other states. The problem is creating a future no Illinoisan should want.
Decades of unrealistic overpromises have created a system that diverts an immense share of tax dollars from essential services. Taxpayer contributions to state pension systems have exploded from $614 million in fiscal year 1996 to $11.2 billion in fiscal year 2025.
All those resources are going to, yet still fall short of liabilities that grow too quickly for Illinoisans to cover. There is $143.7 billion in state pension debt and another $70 billion in local government pension debt threatening the retirement security of public servants and the financial health of Illinois.
Now a new challenge may threaten to compound these problems. The state’s “Tier 2” pension system, created in 2010 to control costs for new workers, might risk falling out of compliance with federal requirements. Federal law mandates retirement benefits be at least equal to Social Security, or else Illinois could face a federal demand to pay Social Security taxes for government workers. To the extent that issue may be a concern, the state should address it with a targeted fix that preserves much of the valuable cost savings provided by Tier 2. Taking action to preserve Illinois’ government retirements and improve the state’s financial position requires agreement on aims and underlying values.
The best way to address these challenges is with solutions that protect existing worker benefits without resorting to tax increases that would further hurt Illinois families and businesses.
The following principles outline a vision for meaningful pension reform.
The Illinois Policy Institute supports pension reform that:
1) Protects workers’ retirements from insolvency.
The foundation of any pension reform should be to ensure a benefits structure public servants can truly rely on. Illinois must establish a concrete roadmap to reach 100% actuarial funding before or by 2045, guaranteeing the systems’ durability and capacity to fulfill future commitments.
2) Ends the constant threat of tax hikes.
Illinois residents and businesses already face some of the highest taxes in the nation. Property taxes, which fund a significant portion of pension liabilities, are currently near 2%. That’s more than double the median rate across the nation of 0.76%. Attempting to solve the state’s pension crisis by further increasing this burden is unfair and counterproductive because high taxes are the No. 1 reason people cite for wanting to leave the state. As more people leave, more is demanded of those who choose to stay. No fair solution can increase the burden on taxpayers.
3) Improves the state’s financial position.
The current system’s structural deficiencies and political manipulation have created an unsustainable burden that threatens both taxpayers and plan beneficiaries, driving Illinois’ credit rating well below the national average. While most states maintain ratings of AAA (16 states), AA+ (12), or AA (13), Illinois lags at A- from S&P and Fitch, placing it at the bottom of all 50 states. The low rating makes it more expensive for Illinois to borrow. Illinois should design a legally binding framework that safeguards pension-specific funding in a secure account, conditional on a realistic plan to pay down the debt. The inherent unpredictability of defined benefit systems requires stronger protections against political interference and more conservative assumptions to ensure long-term stability. Policymakers must also take decisive steps to secure an AA credit rating within the next five years. Increasing our rating will boost market confidence and decrease state borrowing expenses, creating a virtuous cycle that strengthens our pension system’s sustainability.
4) Gives workers retirement choices.
Workers deserve retirement options that align with their individual needs and preferences. Modern retirement plans should empower employees with greater control over their financial futures through defined contribution options similar to 401(k) plans that satisfy federal requirements while avoiding additional Social Security tax obligations for the state. To that end, Illinois should create a “flexible choice plan” modeled after the successful State Universities Retirement System’s Retirement Savings Plan, formerly called the Self-Managed Plan. Expanding that option to the other four statewide pension systems would provide all state employees the option to fully manage their own retirement funds, maximizing both flexibility and personal control over their financial futures.
5) Provides fair, reasonable benefits to all workers.
Tier 2 reforms, if needed, should be targeted and modest to ensure IRS compliance while preserving the fiscal benefits of the Tier 2 reforms. The state could face those additional Social Security taxes depending on whether the IRS finds Tier 2 pensions are insufficient. Making specific adjustments for the highest-paid government workers rather than broad ones protects taxpayers while ensuring the system meets necessary federal requirements.
Illinois’ pension crisis has persisted for decades because the state has lacked a principled foundation for reform. The time has come to move beyond quick fixes and create targeted and lasting reforms that will secure retirements for generations to come.