House Republicans’ pension plan not the solution Illinois needs
Illinois needs to begin an end to its pension crisis by expanding access to a standalone 401(k)-style plan to all government workers; the new proposal by the House GOP does not accomplish this.
Illinois House Republicans included a pension reform plan as part of the new budget “compromise” they proposed June 14. But this plan won’t fix the state’s budget crisis – and part of it is likely unconstitutional.
The pension plan includes a “consideration” model originally proposed by Illinois Senate President John Cullerton, D-Chicago, which 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.
The recycled ideas in the plan include provisions that will likely be found unconstitutional. And because the plan perpetuates the bankrupt pension system, it won’t solve the state’s pension crisis.
Republicans’ true aim with this proposal is to find some short-term budget savings, but it leaves the state’s pension crisis unchecked.
That’s far from the pension solution that Illinoisans need.
The plan’s “consideration” model is likely unconstitutional
The Republicans’ pension proposal attempts to reform pensions for current workers using the “consideration” model, an idea Cullerton first proposed years ago. The problem is the consideration model doesn’t offer current workers a choice between the existing plan and another retirement plan of similar value.
Instead, it offers current workers two options with inferior benefits compared with what they receive today. Workers must choose between two alternatives: either freezing the salaries that count toward their pensions or 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.
The plan perpetuates the pension system
With all the problems pensions have caused, the last thing lawmakers should include in any reform for new employees is more pension plans. Yet the Republican plan does just that.
The plan requires new state workers to choose between the current pension system and a new hybrid plan that’s part pension and part 401(k)-style plan.
Regardless of their choices, 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.
The plan forces new workers to subsidize older workers and retirees
The Republican plan 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.
The plan only expands access to 401(k)-style plans for 5% of workers
On the surface, the Republican plan 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.
Real reform exists
The real solution to Illinois’ pension crisis has been right under lawmakers’ noses for nearly two decades.
A successful, standalone 401(k)-style plan for state university workers has been operating in Illinois for nearly 20 years and has over 20,000 members.
Illinois can begin an end to its current crisis if it expands that 401(k)-style plan to all state workers. Current workers would have the option to join the 401(k)-style plan as well.
Moving new workers to 401(k)s will slow down and eventually stop Illinois’ accrued pension benefits from growing. That will allow Illinois to begin paying down its unfunded pension debt.
Contributions would be mandatory, just as they are in the university workers’ plan. State workers not covered by Social Security would set aside 15 percent of their salary each pay period. Each worker would contribute 8 percent of each paycheck into his or her own 401(k)-style account, and the state matches that contribution with another 7.3 percent.
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 IOUs from House Speaker Mike Madigan, Chicago Mayor Rahm Emanuel or Gov. Bruce Rauner.
That’s a far better solution than the likely unconstitutional and unproven Republican “compromise” pension plan.