Illinois already has a model for pension reform: self-managed retirement plans

Illinois' five public pension systems are broke. The systems are expected to pay out more than $600 billion between now and 2045, but have just $62 billion in the bank.

Jonathan Ingram
Director of Health Policy and Pension Reform

Illinois’ five public pension systems are broke. The systems are expected to pay out more than $600 billion between now and 2045, but have just $62 billion in the bank. None of the state’s pension systems have enough money on hand to pay benefits to the people who have already retired, let alone those still working.

In order to avoid collapse, Illinois must move away from its broken, politician-controlled, defined-benefit plan toward a worker-controlled, defined-contribution plan for all future work.

The difference between these two types of plans is important. In a defined-benefit plan, the employer pays a fixed, regular payment during the course of a worker’s retirement. The formula for those payments is typically complex and varies by age, years of service and salary.

In a defined-contribution plan, on the other hand, the employer pays a fixed amount during the course of a worker’s career. The amount is deposited into a personal account, controlled by the worker. This allows workers to manage their investments. When they retire, workers can purchase an annuity or similar plan with the money in their personal accounts. This allows them to customize their retirement plan – including everything from the size of a cost-of-living adjustment to survivor benefits – in a way that suits them best. This means workers’ retirements are determined by what they value most and by how much money they have saved in their account.

The good news is that Illinois already has a model for defined-contribution plans. In the mid-1990s, the state began offering university employees a choice between the politician-controlled defined-benefit plan and a new self-managed, defined-contribution plan. More than 10,000 workers have chosen this defined-contribution plan.

Under the self-managed plan, the employee contributes 8 percent of his or her salary toward retirement savings, while the employer matches 7 percent of salary. This money is deposited into a personal account, which the worker can then use to invest in any or all of the more than 50 different investment funds.

At retirement, the employee can roll the money over to another qualified plan, take a lump-sum withdrawal or purchase a lifetime monthly annuity. If he or she leaves government service before retirement, the worker has several options available, including leaving the money in the self-managed account at the State Universities Retirement System, moving the money to another qualified plan or taking a lump-sum refund.

This kind of plan creates greater budget certainty for taxpayers, empowers government workers with control over their own retirement savings and ultimately moves retirement costs to a more sustainable path.

The sad truth is that the state’s current politician-controlled, defined-benefit plans are unsustainable and insecure. Dick Ingram, the executive director of the Teachers’ Retirement System – which is the state’s largest pension fund – has warned that it’s likely the system could become insolvent. He no longer feels comfortable telling 25-year-old or even 45-year-old teachers that they will get their pensions.

The pension crisis Illinois faces is serious. The state has the worst-funded pension systems in the nation. The only way to move toward real, lasting solutions is to get politicians out of the retirement business altogether. It’s time we gave government workers real control over their retirement savings.