Report shows Illinois government pension crisis worst in U.S.

Illinois has the nation’s worst public pension crisis. Nationwide analysis from the Equable Institute shows Illinois state pensions remain fiscally unstable and threaten retirees and taxpayers, underscoring the need for reform.

The Equable Institute’s annual report on the state of public pensions nationwide reaffirms that Illinois pensions continue to lag the nation in funding and are in desperate need of reform.

If the state fails to fix its pension issues, the budget will continue to be strained, people will continue leaving the state over high taxes and future pension benefits could be at risk. Preserving the cost savings of Tier 2, offering retirement choice to state employees and constitutional pension reform should all be implemented if Illinois is to have any hope of gaining fiscal stability.

Comparing pension debt to the state’s gross domestic product helps measure the state’s ability to pay based on the local tax base. By that measure, Illinois ranks as the nation’s worst: unfunded obligations equal 19.02% of state GDP, up from 18.52% a year ago. In other words, roughly one-fifth of everything produced in the state would be required just to erase the shortfall.

That’s driving up the burden on taxpayers, whose contributions to state pension systems have grown nearly 20-fold, from $614 million in fiscal year 1996 to $11.2 billion in fiscal year 2025. The heavy pension bill explains why Illinoisans pay the highest effective property tax rate in the country.

Illinois’ funded ratio, the share of promised benefits already covered by assets, is 50.6%, the second worst in the nation. The state finished the previous two years in last place, but this year New Jersey slipped below it with a ratio of 50.2%. Illinois is one of only four states that remains under the 60% threshold many analysts label as seriously troubled.

Individual state pension systems are weak, too. Three of Illinois’ five statewide systems still rank among the 10 worst-funded in the country, tying New Jersey for the greatest number of distressed systems on the list. Arizona, Kentucky, California and Missouri help fill in the other spots, each with only one plan on that list. The State Universities Retirement System fell into the bottom tier last year but improved enough in 2024 to move up, while the other Illinois systems kept their poor positions.

A low funding ratio means more uncertainty. At 50.6%, Illinois only holds half the money it needs to meet promises already made. It’s like having 50 cents on hand for every dollar owed. If liabilities keep growing faster than assets, the ratio will shrink farther, and at some point the state will lack the cash to pay benefits on time.

Just like someone who fails to pay off their credit card debt, this continual “putting off” until later signals fiscal instability and is one of the biggest reasons behind Illinois’ bottom-of-the-nation credit rating, according to S&P. This low credit rating leads to higher borrowing costs and less appeal for people to stay here, let alone to make Illinois their home.

It’s not too late for lawmakers to improve the state’s financial outlook. First, they should preserve the savings generated by Tier 2, the leaner benefit formula created in 2010. That means avoiding the public union push for pension boosts that approach the unaffordable Tier 1 promises.

Second, they should offer new state workers the defined-contribution option already available to members of the State Universities Retirement System. That would give employees portable benefits like a 401(k) plan and reduce long-term risk for taxpayers.

Third, they should seek voter approval to amend the Illinois Constitution. The constitution severely restricts pension reform, making meaningful change almost impossible. Amending the state constitution would allow Illinois to adopt proven reforms implemented elsewhere, such as responsible cost-of-living adjustments, which would enhance fiscal stability and ensure the sustainability of pension benefits.

Illinois’ poor pension standing compared to other states is a clear signal for change. The longer Illinois state pensions lag their peers, the longer the state’s financial health is threatened, putting pensioners and taxpayers at risk.