Kifowit bill risks digging Illinois pension hole deeper
Illinois lawmakers propose a Tier 2 pension expansion that adds costly sweeteners, despite struggling to keep up with current obligations.
State Rep. Stephanie Kifowit, D-Oswego, has introduced House Bill 4673, legislation she said would “fix” Illinois’ Tier 2 pension system for those hired after 2010, but it boosts benefits to make it even harder for Illinois to fill its pension hole.
While an actuarial analysis of HB 4673 has yet to be released, a similar proposal by Kifowit last year was projected to add $60 billion in liabilities just to implement across the state’s three largest pension systems. This most recent bill could add similar costs or even more to the state’s pension debt.
Among the most notable changes is a more generous cost-of-living adjustment. HB 4673 guarantees a 3% cost-of-living adjustment each year, up from the lesser of 3% or half of inflation currently promised. Aside from a few years during the COVID-19 pandemic, inflation has been below 3% for decades and is projected to resume this trend. That means rather than simply keeping benefits aligned with inflation, it’s providing a benefit increase each year.
HB 4673 also adds an additional funding component for the state and local governments to cover benefit increases. It would through 2049 make an additional $5 billion in contributions to the state pension funds and add $5 billion to the Local Government Distributive Fund, which shares state income taxes with local governments.
Illinois faces a severe pension crisis with nearly $144 billion in debt – the only state with unfunded liabilities over $100 billion – mainly because of unrealistic benefits promised “Tier 1” pensioners hired before 2011. This crisis threatens retirement security, crowds out spending for other important line items in the state’s budget and contributes to high taxes, which stifle business and drive people out of the state.
To curb these unsustainable costs, the Illinois General Assembly introduced a set of reforms dubbed “Tier 2” in 2010. Workers in Tier 2 retire with full benefits at 67 rather than 60, which creates parity with the Social Security retirement age. They have benefits calculated based on the highest eight years out of their last 10 of service, have a pensionable salary cap and have benefits increased yearly at a rate of the lesser of 3% or one-half of the increase in the Consumer Price Index, simple rather than compounding.
Advocates for richer Tier 2 benefits argue Illinois pensions may run afoul of federal rules mandating retirement benefits at least match Social Security. But those claims are currently unfounded because there has been no actuarial analysis at the individual plan level.
For full-career workers, Tier 2 already provides a secure retirement that is far more generous than Social Security, often guaranteeing at least two-thirds of final average salary with automatic annual increases. Many Illinois public employees receive more each year in retirement than the average Illinois taxpayer earns working to support them.
That has not stopped public sector unions and lawmakers from using the federal rules to justify boosting pensions across the board.
“The pension promise has been eroded by the Tier 2 ‘fix’ in 2011,” Kifowit said about her House Bill 4673. “People are working full careers, paying in every month, and still being told to retire later, live on less and hope the math works out.”
The real threat to public workers’ retirement security is the crushing pension debt that crowds out core services, drives up taxes and pushes pension systems closer to insolvency. Reversing the cost-saving changes made in Tier 2 and expanding benefits beyond what taxpayers can reasonably keep up with risks the stability of the entire state.
Illinois lawmakers should practice financial restraint and look to enact solutions that give state workers choice and flexibility in their retirement. Their primary focus should be adequately funding existing promises rather than overpromising even more and spiking the state’s debt.
Expanding Tier 2 benefits risks undermining state finances and putting the very workers these reforms claim to protect in an even more precarious position.