The good and bad in Pritzker pension proposals

Gov. J.B. Pritzker announced plans to handle Illinois’ pension crisis. Some build on proven reforms while others could delay real progress.

Gov. J.B. Pritzker outlined new proposals aimed at addressing Illinois’ long-standing pension crisis. Here’s an assessment of the good, the bad and where lawmakers should proceed with caution.

1. Expanding the state pension buyout program: Good

One of the strongest proposals Pritzker included in his plans was to extend the state’s pension buyout program. This idea was originally championed by former state Rep. and current Illinois Policy Institute Senior Fellow Mark Batinick. It has been extended twice since being first signed into law in 2018.

A pension buyout allows government workers to take out a portion of the “net present value” of their pension – the amount needed today to fund a retiree’s lifetime benefit. After voluntarily “cashing out” all or a portion of their benefits at a 30-40% discounted rate, workers can roll the money into an IRA or 401(k)-style plan and control their money forever. In return, the discount equals savings for taxpayers.

Pritzker’s office estimates these payments have reduced the state’s unfunded pension liability by about $2.9 billion and that extending the program through fiscal year 2028 could reduce liabilities by another $1.4 billion.

Extending these benefits to downstate employees would generate additional savings. State Sen. Robert Marwick, D-Chicago, filed legislation to extend that option to those in Chicago’s pension systems as well as downstate police and fire pensions.

At both the state and local level, this is an important step toward meaningful pension reform that provides more choice for workers and relief to taxpayers.

2. Using surplus revenues to pay down pension debt: Good

Unfunded pension liabilities are like high-interest debt. Applying unexpected surpluses to that obligation is fiscally responsible and cost-effective.

Directing surplus funds to the pension systems reduces long-term costs, lowers risk and strengthens the systems without raising taxes or relying on budget gimmicks. It’s the responsible thing to do and an excellent recommendation from the governor.

3. Shifting to 100% funding by 2048: Neutral

Shifting the goal from 90% to 100% funding is an important and necessary change. However, extending the deadline from 2045 to 2048 actually makes the task easier by delaying progress. A better reform would have aimed to meet the 100% funding target sooner, especially when additional resources are available.

Every year with massive unfunded pension liabilities adds a year for taxpayers to pay interest. It means more state revenue is locked into pension costs instead of services or tax relief. It also keeps pension systems at risk to market downturns. Keeping Illinois’ fiscal position low for an additional year also increases the likelihood of tax hikes to keep up with the strained budget.

4. Raising the Tier 2 wage cap to Social Security levels: Bad

Pritzker reaffirmed his commitment to raising the Tier 2 pensionable earnings cap to meet the Social Security Wage Base. The fiscal year 2026 budget created a special account in the state treasury called the “SSWB Fund” with $75 million to support that change. That fund can be a safety net for violations of federal Safe Harbor laws, making the broad adjustment to the pensionable salary cap not only pre-mature, but also unnecessary.

It is too early to know whether it’s warranted until there’s a full actuarial analysis. Broad increases like this risk overshooting the fix and significantly increasing costs beyond what federal compliance requires.

Tier 2 benefits are already far more generous than what most people receive on Social Security. Illinois should not commit to costly structural changes without clear evidence they are necessary.

The best way forward is legislative restraint.

If lawmakers leave Tier 2 alone, Illinois pensions continue as designed and the “SSWB Reserve Fund” remains untapped until a documented violation emerges. Should one arise, only the affected worker’s annuity is corrected, sparing taxpayers from across-the-board benefit hikes.

By paying only when needed instead of boosting everyone’s benefits because there might be a problem, the reserve fund preserves Tier 2’s savings and avoids adding billions in new debt while Pritzker seeks to pay its existing obligations.

5. Fixed-length amortization Good

Fixed-length amortization strips are a technical but important improvement. They help smooth pension contributions as the systems approach full funding.

Without this change, market volatility could trigger sharp year-to-year swings in required payments, destabilizing the state budget just as Illinois nears sustainability. This proposal strengthens predictability and long-term planning.

6. Redirecting only part of expiring bond payments: Neutral

Illinois is paying down bonds that expire in 2030 and 2033. Once those debts are paid off, Pritzker recommends dedicating “a portion of the resulting savings to increased pension contributions” and accelerate debt reduction.

This proposal gets a neutral rating because of one question: why not all of it?

Once bond obligations are retired, it shouldn’t be an excuse for new spending. Every available dollar should go toward either reducing existing pension liabilities or alleviating strain on taxpayers.

If the state plans to use new or unexpected revenues to make additional pension payments, Illinois should be able to reach its funding targets sooner than projected. The governor’s proposals don’t specify how additional payments would be structured. If lawmakers are not careful, there is a legitimate concern new money could be used to fund benefit enhancements rather than accelerating debt reduction on current promises.

More reforms to consider

These are not the only reforms that Illinois should pursue. Additional solutions include offering workers the choice of a 401(k)-style plan that provides portability, predictability and reduced risk for taxpayers.

Lawmakers should also consider constitutional reform that would allow Illinois to make modest benefit adjustments to not-yet-accrued pension benefits similar to what states like Michigan, Arizona, Pennsylvania and Utah have done to improve the health of their pension systems.

Pritzker’s recommendations indicate steps in the right direction. Lawmakers should focus on reforms that are designed to reduce debt, keep pensions solvent, and offer more choices for the needs of modern-day workers.