Pension Reform in Illinois to Continue ‘For the Good of Both Taxpayers and Employees’
Institute CEO, John Tillman, featured in an article on reform of the state pension system.
By Brenda Schory
As Illinois’ pension crisis reached a crescendo last year, lawmakers enacted a two-tiered reform bill that went into effect this year.
The reform changed the system for new employees hired on Jan. 1, 2011, or after, so they will retire with full benefits at 67 instead of 60, and their retirement will be calculated on a maximum salary of $106,800.
The reforms will help, but more work is needed to address the state’s $83 billion shortfall, say legislators and public policy experts.
Illinois is one of two states with less than 60 percent of necessary assets to fund its pension, according to a report from the Pew Center on the States. Pew’s report on state pensions found a $1 trillion gap between what states promised to pay retirees and the actual money available to pay at the end of Fiscal Year 2008.
Proposals for fixing the state’s pension system range from expanding the reforms to current workers to a progressive income tax to fund the current program.
State Sen. Chris Lauzen, R-Aurora, wants the 2010 pension reform applied to current employees’ future work, a savings of between $1 billion and $1.5 billion. Lauzen would extend the reforms in more legislation that would cap benefits and raise the retirement age for current employees.
“What I request is for the good of both taxpayers and rank-and-file state employees to get this right. It is in their interests to cap the benefits at a whopping $120,000 a year,” Lauzen said. “Taxpayers and rank-and-file state workers and teachers would have to be foolish not to take action when the current program is bankrupt.”
Raising the state income tax 66.7 percent, from 3 to 5 percent, to help pay the pension obligations puts an unfair burden on his constituents, Lauzen said. The increase is for four years.
“The typical family I serve has an income of $44,000 to $55,000,” he said. “I think it borders on the bizarre that they are being asked to pay an additional $800 to $1,200 in order to fund pensions that have no cap.”
Lauzen said current Illinois retirees would not have their pensions changed and the amounts already accrued and earned for current workers would remain the same.
But going forward, Lauzen also wants to eliminate pensions for current members of the General Assembly. He would apply the same standard as any state worker. Lawmakers would keep what they’ve accrued and earned, but going forward, no more.
That means Lauzen would keep the pension he’s earned in his 18 years serving in the General Assembly, but further benefits would end if his reforms are accepted.
“If we’re going to reform pensions for the entire state, let’s start with our own,” Lauzen said. “It [the savings] is not a huge number, but it is symbolic. It’s important to start right.”
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John Tillman, executive director for the nonprofit Illinois Policy Institute, said there were two parts to the pension problem that need to be addressed while seeking a solution.
“One is a benefit problem, which is driving the unfunded pension liabilities of $80 billion,” Tillman said. “The problem on the benefits side is that we have a defined benefit but not a defined contribution [from the state].”
To understand that is to know a bit about how pensions work.
A defined benefit means the retired worker gets a specific amount of retirement income. A defined contribution means the worker and the employer make specific contributions to the pension.
The problem in Illinois, Tillman said, is a defined benefit but not a defined contribution. The state agreed to pay a certain amount into its six state pensions – and then did not.
“The problem here is that it is the taxpayer who is on the hook for this,” Tillman said. “The state did not put in enough money. The governor came back to the taxpayers and said, ‘In order to fund all this, to pay all the retirees, we need more money from you.’ ”
Tillman said it’s not such a good deal for retirees, either.
“You have $80 billion unfunded, it’s … risky for the worker because the money is not there and they’re counting on that money,” Tillman said. “The state was skipping payments and giving deals to public employees that were unaffordable. Those two things combined are bad for the worker.”
His recommendation is to honor everything already committed, but then apply the 2010 pension reforms to current employees, as Lauzen advocates.
“Taking the two-tiered reforms for new employees and applying them to current employees going forward would be an excellent step while protecting everything they’ve earned so far until [that] day,” Tillman said. “Reset the deal starting tomorrow, using the new tier for current employees.”
Also in the realm of fixing the problem is to convert public pensions to 401(k) plans, such as those used in private industry, he said.
An employer contribution would be a point of negotiation, he said.
In creating a system with a defined contribution, the worker owns the pension and politicians are not responsible for the payments.
“The bottom line is, you do not want politicians to have control of whether your pension payment is being made,” Tillman said. “What we need to do is make a mechanism for all retirees – without politicians.”
Legislation currently being drafted would require the state to make its pension payments first before any other money is appropriated, Tillman said.
“This will fix the current problem,” Tillman said.
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Or not.
Anders Lindall, spokesman for the American Federation of State, Local and Municipal Employees, said he does not see diminished wages and retirement benefits as a solution to the state’s pension woes.
“The average retirement benefit is $22,000,” Lindall said. “Eight of 10 public employees do not receive Social Security as their pension. … This is their only shot at sane, modest retirement security.”
Lindall said police officers and firefighters should not receive less after retirement than a private sector employee who has paid into Social Security and likely has a 401(k). The public pension is the public worker’s replacement for Social Security and 401(k) retirement accounts, he said.
Instead, Lindall said, his pension solution is for Illinois to focus on paying down its debt.
“The sooner it pays that debt, the cheaper it will be to meet its pension liability,” Lindall said. “The longer it ignores its pension liability, it continues to accrue interest. It’s like a credit card or mortgage, you can’t wish it away, it’s just going to get bigger. The state needs to pay what it owes.”
“If they attempted to pass changes for current employees, that is clearly unconstitutional and I think you would have a milelong line at the courthouse door,” Lindall said. “Rather than saving money, an unconstitutional assault on current employee pensions would only entangle the state in a costly legal battle it would be certain to lose.”
In Illinois, other court challenges to that portion of the constitution have failed. But Tillman said case law shows wins on both sides in other states with similar clauses in their constitutions. The only sure thing in this current situation, he said, is that it will be subject to litigation.
This time, however, Tillman predicted, the union’s position would lose.
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Earl Silbar, 68, a retired GED teacher from city colleges, said he is disgusted with the current class war the pension predicament has fostered. A member of Fox Valley Citizens for Peace and Justice and another group, Living Wage Jobs for All Illinois Coalition, Silbar is against reducing pension benefits.
“These are the kinds of things we hear from think tanks and foundations. You rarely hear it from a person working for a living,” Silbar said. “This is a race to the bottom. The big corporations dumped retirees like garbage … and now they feel like, why should anybody get it. Their goal is to drive us into the ground.”
Silbar’s solution is to repeal the tax breaks for the wealthy.
“Let the rich pay their fair share of taxes [instead of] penalizing people who are working for a living,” Silbar said. “We need to become an army. People working for military contracts at Boeing or Northrup or General Electric get government money and they’re not complaining. If they want to abolish government, let them build their own highways and waterlines.”
Steve Bruesewitz, 57, of St. Charles, another member of Silbar’s groups and a former candidate for the Kane County Board, also does not support cutting pension benefits.
Bruesewitz supports a graduated or progressive income tax for Illinois instead of a flat rate, but also property tax relief and increasing the standard deduction.
“We should not be dragging those who are unionized and fortunate to have a better middle-class lifestyle down to the lowest possible level,” Bruesewitz said. “We’re making current [employees] be responsible for the misdeeds of past governors.”
But that kind of thinking will just hurt future generations, said Mark Grosso, 60, a railroad retiree who also serves on the Geneva School Board.
“I’m for people walking in and taking some cuts,” Grosso said. “People are going to have to bite the bullet on it.”
Grosso said state lawmakers need to face hard solutions so as not to burden current workers and future generations with public pension obligations.
“I think of my two kids when this whole Legislature voted for the income tax increase,” Grosso said. “I think of how my kids are struggling to make house payments. Both couples have to work, and it’s going to cost them a couple thousand dollars more a year to feed the big bureaucracy around here.”