Illinois finds potential fix for newer employee pensions, rejects push for $64.5B boost

Lawmakers quietly added a fund intended to comply with federal rules about pensions for newer state workers. If it works, Illinois taxpayers will have avoided costly federal mandates and a push by public employee unions to expand obligations by $64.5 billion.

Illinois taxpayers faced a double threat from pensions for state workers hired since 2010: federal rules’ might have eventually forced the state to pay Social Security taxes, or state worker unions might have succeeded in adding $64.5 billion to the state’s pension debt.

Public-sector unions pressed for late-session bills that would have boosted those Tier 2 pensions and let workers retire earlier, but their efforts failed. Instead, state lawmakers inserted the “SSWB Base Reserve Fund” into House Bill 1075, the massive “Budget Implementation Act.”

It was the first direct state response to concerns Tier 2 pensions for the highest-paid workers might not comply with federal rules that pensions be at least as good as Social Security. By avoiding pressure to undo the cost savings of Tier 2 benefits, state lawmakers succeeded in limiting the federal threat and the costs.

What does the reserve fund do?

The fiscal year 2026 budget creates a special account in the state treasury that can receive transfers or appropriations and keeps its own interest.

Gov. J.B. Pritzker’s press release describes the fund as setting aside $75 million “to cover the estimated first-year costs of adjusting SSWB for State Tier 2 members until legislation is enacted.”

The Social Security Wage Base is the maximum earnings on which you are taxed, currently $176,100. It is also a limit on the benefits – someone making $500,000 will get no more from Social Security than the person making $176,100. The cap on earnings used to calculate Social Security and earnings used to calculate an Illinois Tier 2 pension were the same in 2011. But the pensionable salary cap today is $125,774 – a high figure but much lower than the Social Security Wage Base, creating a gap.

This gap has become a growing concern because it creates the possibility that a retiree’s benefits could violate the federal laws that guarantee pensions will not fall below the Social Security benefits. One proposed solution to this problem has been to raise the salary cap to be the same as Social Security. This fund seems to be intended to hold the money needed to make that adjustment.

The language also specifies how much of the fund should go to each of the state’s pension systems if an adjustment is made. This would total more than $13 billion in additional benefits by 2045.

But legislation that adjusts the final average salary has not been passed yet and doesn’t have to be.

The language included in the budget stipulates that if an individual’s Tier 2 benefit is ever found to be below what they should have received if they were on Social Security, the budget allows this reserve fund to cover the difference. This solution would prevent payroll taxes or system-wide benefit spikes if a problem is found. It would also save taxpayer money from being prematurely spent or unnecessarily hoarded in the fund.

What happens now?

The best way forward is legislative restraint.

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

Whatever money from the state goes into this fund should be based on the amount needed to pay a benefit equivalent to Social Security in case someone is found to fall short. This is different than raising the earnings cap to match the Social Security Wage Base, increasing pension benefits across the board as a result.

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. Illinois still faces a $143.7 billion unfunded pension hole, so preventing new costs is critical. The fund answers federal worries without inflating benefits unrelated to that issue.

If lawmakers are interested in further reforms, they should conduct a full actuarial analysis to assess how many people might be at risk of a federal rules violation in the coming years and how much money the reserve fund actually needs to pay for the true minimum benefit. Optional 401(k)-style plans should also be expanded across all five state pension systems, giving younger, shorter-term workers more choices in their retirement benefits.

If lawmakers leave well enough alone, this reserve fund gives Illinois a scalpel instead of a sledgehammer for keeping newer worker pensions ahead of Social Security, shielding both workers and taxpayers without further damaging state pension systems.