Illinois government pensioners deserve more control over their funds

Illinois government pensioners deserve more control over their funds

Expanding retirement savings plans as an option for all new Illinois state employees would give them choice and likely improve the state’s pension crisis.

Illinois public employees deserve choice when it comes to their retirement future, the same choice already offered to state university workers.

It’s unfair to offer that flexibility and control to one group and not to members of all five statewide pension plans. Providing all these workers the freedom join the same defined contribution retirement plan currently open to state university workers would make pensions more secure for them and could help address some of the state’s crippling fiscal problems. It could also provide them with more retirement funds – estimated at over $1.8 million by one study – than a defined benefit pension

A working model: SURS Retirement Savings Plan

Illinois already has a proven alternative to traditional, defined-benefit pension plans operating successfully under the State Universities Retirement System for over two decades. Since 1998, the Retirement Savings Plan, formerly called the Self-Managed Plan, has offered university employees within the SURS pension system greater control over their retirements, functioning similarly to private sector 401(k) plans while maintaining the security of state-backed retirement benefits. It was created to give employees more choice when it comes to their retirement savings.

The mechanics of the plan are straightforward: employees contribute 8% of their paycheck, which the state matches with an additional 7.6%. These contributions are guaranteed – the state can’t defer its obligations as it often does with pension payments, and employees must maintain consistent contributions.

This creates a reliable foundation for retirement planning that nearly 20% of newly hired university workers have chosen to embrace each year for the past five years. During the past 10 years, 15-20% of new employees have opted in each year.

What makes the Retirement Savings Plan particularly attractive is its flexibility combined with built-in safeguards. While employees gain the freedom to manage their investments through established providers such as TIAA and Fidelity Investments, they also retain protections not typically found in private-sector plans. They can’t borrow against their accounts or skip contributions, ensuring the funds remain dedicated to their intended purpose: a secure retirement.

There’s no reason to limit this option to only employees under the SURS pension system. Illinois should expand this plan to all five of its state pension systems as a new “Flexible Choice Plan” that employees can pick for more control over their retirement finances. Similar plans have been enacted in Rhode Island and Tennessee, which has one of the best-funded pension systems in the country. A defined contribution plan offers more freedom and security for retirees, even in the face of shaky state finances.

State employees and employers could benefit from the change

The success of this model speaks for itself. In 2024, about 18% of all active employees were enrolled in the Retirement Savings Plan, an impressive metric for an optional program. Actuarial projections estimate an even higher participation rate in the future, nearing 30% of all active employees.

Historical performance data proves these employees are able to gain control while still maintaining financial security; a 2020 Wirepoints study estimated an average university employee who started a Retirement Savings Plan account in 1978 could have accumulated over $1.8 million in retirement funds by 2018.

It’s only fair that the freedom this additional choice offers employees in one system be made available to all the others.

This style of retirement plan offers several additional advantages for state employees. Unlike traditional pension plans, these accounts are fully portable, meaning employees can take their entire retirement savings with them if they choose to change careers.

Another key benefit is transparency. With a self-managed plan, employees can see exactly how much money they have saved, track their investment performance in real time and adjust their strategy as needed. This level of visibility stands in stark contrast to the traditional pension system, where benefits can seem abstract until retirement.

They also have lower vesting requirements. Someone wanting to retire at age 62 with a traditional Tier 2 plan would need to have 10 or more years of service and would receive an age reduction. That same person on the Retirement Savings Plan would only need five years of service and their benefits would receive no age-based reduction.

For employees concerned about the state's ability to meet its pension obligations, a self-managed plan offers peace of mind. Unlike pension benefits that depend on future state funding, these retirement funds are secured in individual accounts that the state must fund with each paycheck. This guaranteed funding mechanism ensures promised benefits are delivered, providing a level of certainty that increasingly matters to public-sector workers.

Expanding pension choice would also help address the state’s pension crisis. Without a full actuarial analysis of this plan, it is difficult to estimate exactly how much the state would save from offering this choice to employees. Pension debt is prohibited from growing for those on a defined contribution plan because the benefits are paid within the retiree's account during their career. Costs to the state are set and won’t increase because of changes in actuarial variables such as longer life expectancies, changing retirement age or growing cost-of-living adjustments.

At 7.6% of a pensioner's salary, the defined contribution option is less costly for the state than Tier 1, which increases with the actuarial variables previously mentioned. While this may increase the cost of operations marginally compared to Tier 2 in the short term, it’s still a plan worth pursuing because of the positive long-term impacts.

It’s very likely this plan would reduce the state’s long-term liability, raising the current 46% funded ratio to a more fiscally sound amount over time. Offering employees more choice helps to protect existing benefits while offering some relief to the state’s pension burden.

Conclusion

To implement this reform, the Illinois General Assembly should pass legislation to create a flexible choice plan all new state employees can pick rather than being added to Tier 2. For employees entitled to state pensions, this solution provides greater control and freedom over retirement planning.

This option should complement, not replace, broader reform efforts. Further reform options include:

  • Pursuing a state constitutional amendment to eliminate the “impaired or diminished” clause so future pension growth can be controlled.
  • Improving state finances, working to raise the credit rating to AA from its current rating of A-, which is below the national average.
  • Reforming Tier 2, if needed, in a responsible and measured fashion to preserve cost savings.

Only after reforms are implemented will options such as the flexible choice plan represent genuine choices for employees rather than decisions driven by fiscal anxiety.

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