The Illinois Senate passed on May 17 a pension proposal sponsored by Senate President John Cullerton, D-Chicago, which lumps together several different pension reforms into one large bill. Among other items, Senate Bill 16 includes a “consideration” model that lessens benefits for current workers, and a proposed hybrid plan for new workers, which features both a 401(k)-style plan and a pension component.
By combining all those ideas, the pension bill might appeal to enough politicians to become law.
But this bill is far from the pension solution that Illinois needs.
SB 16 contains provisions that likely will be found unconstitutional. And because the bill perpetuates the pension system, it doesn’t begin an end to the state’s pension crisis.
Cullerton’s “consideration” model is likely unconstitutional
SB 16 attempts to reform pensions for current workers using the “consideration” model, an idea Cullerton first proposed several years ago. The problem is Cullerton’s consideration model doesn’t offer current workers a choice between the existing plan and another retirement plan of similar value.
Instead, his consideration plan offers current workers two options with inferior benefits compared with what they receive today. Workers must choose between freezing the salaries that count toward their pensions and receiving a smaller cost-of-living adjustment in retirement. Either way workers lose.
If the consideration section is struck down, the rest of the bill’s provisions also could be declared unconstitutional. Lawmakers will likely have delayed real reform by passing a deal destined to fail.
SB 16 perpetuates the pension system
With all the problems pensions have caused, the last thing politicians should include in reform for new employees is more pension plans. Yet Cullerton’s bill does just that.
The bill requires new state workers to choose between the current pension system and a new hybrid plan that’s part pension and part 401(k).
No matter their choice, workers’ retirements would still be under politicians’ control. The state’s pension liabilities would still grow. And taxpayers would still be on the hook for the cost of pensions. That’s unsustainable for both taxpayers and the state. The pension crisis will never end as long as pension liabilities continue to grow.
SB 16 forces new workers to subsidize older workers and retirees
The Cullerton bill perpetuates the Tier 2 pension system for new workers. Tier 2, a plan for new workers hired on or after Jan.1, 2011, forces workers to contribute more to the pension systems than what they’ll get out in benefits.
For example, new teachers in Tier 2 contribute 9 percent of their annual salary to their pensions. But the benefits they accrue (the normal cost) are only worth 7 percent of their salary. They actually lose 2 percent of value annually. That 2 percent props up the pension systems.
In other words, new workers are forced to subsidize the retirements of older workers and retirees.
According to a statement by the executive director of the Teachers’ Retirement System, Tier 2 could be overturned in court. If that happens, the subsidy Tier 2 members provide to older workers and retirees would end, and the unfunded liabilities of Illinois’ pension plans would jump by billions.
SB 16 only expands access to 401(k)-style plans for 5 percent of workers
On the surface, the Cullerton bill offers a way out of the pension system for current workers. It creates a new voluntary 401(k)-style plan for Tier 1 workers to join.
However, the bill limits the number of workers who can join – only 5 percent of existing Tier 1 workers are allowed to leave the pension plan.
That means a vast majority of workers will remain in the pension system, no matter how many actually want to leave.
The ability to join a 401(k)-style plan shouldn’t be restricted to an arbitrary percentage of workers. All workers should be able to choose a different retirement option.
Cullerton’s math isn’t public
Senators voted to pass Cullerton’s pension plan with little knowledge of its financial impact. No new numbers have been published on the consideration model since Cullerton introduced it two years ago, when the details of his plan were substantially different. And no numbers have been made public regarding the new hybrid plan.
Real reform exists
Some lawmakers have offered real solutions to the current pension crisis.
Under these lawmakers’ proposals, new state workers would be enrolled in a 401(k)-style plan. Current workers would have the option to join the 401(k) plan as well.
A 401(k)-style plan gives workers control over their money. Each worker’s personal retirement account is portable. Workers can take their retirement funds wherever and whenever they want. And the plans don’t depend on funding IOUs from House Speaker Mike Madigan, Chicago Mayor Rahm Emanuel or Gov. Bruce Rauner.
Most importantly, the Righter and Ives proposals begin an end to the pension crisis that has been building in Illinois for decades.
That’s a far better plan than the likely unconstitutional and unproven Cullerton pension bill.