Pension plan developed by universities fails to solve Illinois’ pension crisis
A six-point pension plan created by the Institute of Government and Public Affairs, or IGPA, fails to solve Illinois’ pension problem. That’s because the plan, Senate Bill 2591, maintains the state’s unmanageable defined benefit plan for current employees. It requires all new employees to participate in a hybrid defined benefit and defined contribution pension plan, and...
A six-point pension plan created by the Institute of Government and Public Affairs, or IGPA, fails to solve Illinois’ pension problem.
That’s because the plan, Senate Bill 2591, maintains the state’s unmanageable defined benefit plan for current employees. It requires all new employees to participate in a hybrid defined benefit and defined contribution pension plan, and in doing so, eliminates the state’s only real 401(k)-style retirement option going forward. That existing retirement program – the State Universities Retirement System’s 401(a) plan – currently serves 17,500 employees. Under SB 2591, no other employees would be able to join this plan.
The IGPA plan would currently only apply to SURS, but there is discussion about expanding the plan to all state retirement systems. Here is what it does:
- Maintains the broken pension system and introduces a hybrid plan: The plan maintains the current unmanageable defined benefit plan for existing employees. New employees would be forced to participate in a new hybrid plan, thus eliminating their option to participate in the 401(k)-style retirement plan that currently exists in SURS. The only real 401(k)-style retirement plan for university workers in Illinois would no longer be an option for new hires.
The new defined benefit and defined contribution hybrid plan would exist for all new employees. Employees would contribute 8 percent of their salary to their retirement. One-third of the employee contribution would be deposited into the employee’s 401(k)-style retirement account and the remaining two-thirds of the contribution would be deposited into the defined benefit plan. That results in a backward hybrid plan, with a majority of the funds going to a defined benefit model and only a small portion going to the employee’s individual retirement account. The hybrid pension plan would also be offered as an option to current Tier 1 and Tier 2 employees.
- Fails to suspend COLAs until systems are well funded: Only partially reduces cost-of-living adjustments, or COLAs, by limiting compounding COLAs to half the rate of inflation. Reforming compounding COLAs is the biggest lever for reducing Illinois’ unfunded liability.
- Phases in cost-shift over an extended period of time: A significant driver of Illinois’ pension crisis is the fact that the state makes pension contributions on behalf of local school districts and state universities even though these workers are not employees of the state. The IGPA plan phases in a cost-shift over a 12-year period. But a 12-year phase-in does little to address the crisis today and frees up time for lawmakers to make changes to these requirements before the full implementation of the bill.
Additionally, any savings from a pension cost-shift should be directed towards tax relief. But the savings from the SB 2591 cost-shift plan simply free up money for the state instead of directing it toward tax relief. Remember how the 2011 income tax hike was supposed to be temporary? Dedicating money from a real cost-shift plan to a comprehensive tax relief plan would help politicians keep their sunset promises to all of us.
- Exchanges funding guarantee for higher employee contributions: Increases employee contributions by 2 percent for the Tier 1 defined benefit program at a rate of 0.5% over four years. This increase is made in exchange for a pension-funding guarantee. Although slightly different than funding guarantee provisions included in other reform plans being considered today, this plan allows the pension system and any of its members to take legal action to compel the state to make the pension payment. Pension guarantees similar to this plan ultimately prioritize pension payments above all other government services.
- Reduces assumed rate of return: Reduces the assumed rate of return to 75 basis points above the interested paid by 30-year U.S. Treasury Bonds. The expected rate of return used by pension funds is rightly labeled as the “biggest lie in global finance.” That’s because retirement systems like Illinois’ Teachers’ Retirement fund, or TRS, assume an 8 percent rate of return on pension investments, yet failed to earn returns that meet those expectations.
Aligning the expected rate of return with long-term treasury bonds is an important step toward realizing the true magnitude of Illinois’ pension debt.
- Amortizes current unfunded liability: The idea of paying down debt on a level-dollar basis is a good one. That’s how most of us pay off our mortgages. It also prevents the reckless “pension ramp” that increases the state’s costs year after year. However, current liabilities will continue to accumulate under the hybrid plan. And defined benefit liabilities for Tier 1 will continue to grow due to missed investment targets, mistaken actuarial assumptions and benefit increases.
The only way to solve Illinois pension crisis is to end the state’s defined benefit plan altogether and give workers retirement freedom and mobility with 401(k)-style retirement plans. State Reps. Tom Morrison, R-Palatine, and Jeanne Ives, R-Wheaton, along with state Sen. Jim Oberweis, R-Sugar Grove, are leading the efforts to modernize Illinois’ broken pension system with a 401(k)-style defined contribution plan for all state employees.