Figure out if there’s a problem before boosting Illinois pensions
Without careful evaluation of whether Illinois’ pensions for newer employees are running afoul of federal rules or what the penalties would be, spending $78 million from the state’s budget is premature and wasteful.
Illinois Gov. J.B. Pritzker’s latest budget sets aside $78 million in anticipation of adjusting pensions for state workers hired after 2010 – a premature fix without enough information.
While Pritzker is only putting $78 million into the pensions for now, over time the change could balloon into $13 billion in benefits. The state has not done the legal or actuarial studies to figure out whether the change is even needed.
Some are concerned that Illinois’ Tier 2 pensions system, created in 2010 for new workers, might violate federal rules that a government pension must be at least as generous as Social Security. In an extreme case, Illinois could face paying Social Security taxes on its workers.
But state leaders don’t know if anyone is in violation of the federal rules. If there are violations, Illinois has no clue as to how many workers are impacted. The state doesn’t know what the penalties might be. It hasn’t studied the legal questions. Pension calculations by actuaries have not been performed to determine the need or the cost.
Illinois lawmakers and Pritzker need to understand these things with more certainty before increasing the state’s irrevocable pension benefits and forcing taxpayers to live with the results.
The Tier 2 pension system is intended to save money and provide a sustainable retirement package for public sector workers. Unlike the Tier 1 system, which adds a compounding 3% boost each year and allows members to receive benefits exceeding their lifetime contributions, Tier 2 pensioners fully fund their retirements.
Tier 2 benefits are guaranteed by the state, so any potential shortfall because of lower-than-expected investment returns or retirees living longer is covered by taxpayers rather than Tier 2 members. The budget states, “One of the strongest contributing factors to the future health of the systems is the growing proportion of active Tier 2 members.”
Some critics are concerned high-earning Tier 2 pensioners – those making more than $127,283 annually in 2025 – could eventually receive less in retirement benefits than they would through Social Security. That limited issue has fueled calls for broader, more expensive pension reforms, potentially eroding Tier 2’s cost savings. Earlier retirements, higher annual benefit boosts and more generous initial payments have all been proposed.
With $143.7 billion in pension debt and one of the worst-funded systems in the nation, Illinois can neither afford to indulge in more overpromised benefits nor risk a potential violation of the federal pension rules. This is why a full legal and actuarial analysis, including testing at the individual pensioner level, must be done to determine if and when such a violation may occur and what the penalties would be. These analyses should also include options for potential solutions that identify the costs for taxpayers and impacts on the state’s pension liabilities and funded ratios.
While Pritzker’s proposal would likely resolve any potential federal violations, it might also be expanding benefits unnecessarily. Illinois should not be guessing about how to fix something it doesn’t understand.
Who is affected by a potential violation?
To date, no independent study has analyzed pensions on an individual basis. It also hasn’t been conclusively determined if specific workers’ pension benefits are falling short of the federal requirement.
Union interests have seized on the Social Security concerns to push for increased benefits for all workers. However, potential violations primarily affect high-earning government workers, whose final average salaries exceed $127,283.
Because no independent actuarial analysis has been completed, it remains uncertain how many people in Tier 2 may be affected. Pritzker’s proposed $78 million dollar fix isn’t a one-time expense; it only covers the cost for one year. Similar costs would be added in future years to the budget’s usual pension package, which continually consumes 20% of the state’s budget.
Raising the pensionable salary cap without understanding who and how many would be impacted would add unnecessary costs to the state’s budget for years to come.
What would the penalties be?
On top of uncertainty about who is impacted, it also remains unclear what the penalties would be if Tier 2 fails to comply with federal rules.
Would the state start paying Social Security taxes for every state employee, or only for those whose pensions are deemed non-compliant by the IRS? Because of Illinois’ constitutional protection of pension benefits, either scenario would result in high costs to the state, as these workers would receive their pensions as well as Social Security benefits.
It’s undoubtedly in the best interest of Illinois to look for a solution to Tier 2 compliance issues, but policy makers need to understand the details first.
What should be done in the meantime?
Before committing to any additional spending, Pritzker must gain a better understanding of the scope of the problem and the cost of addressing it. The state must conduct an in-depth actuarial study, including individual testing, and a thorough assessment of legal risks. Lawmakers owe it to taxpayers and public employees to carefully analyze the situation before rushing into legislative action.