Lawmakers considering adding more than $64.5 billion in pension costs in final hours of budget negotiations

As state lawmakers finalize the 2026 budget, public sector unions are pushing for major benefit spikes for Tier 2 pensioners to be included in last-minute additions.

Illinois lawmakers are aiming to pass the state’s 2026 budget by May 31, before their spring session is scheduled to end and the threshold for passing bills is greatly increased. One ongoing facet of those negotiations is what will happen with Illinois’ “Tier 2” pension benefits for those hired in 2011 and more recently.

Active legislation in Springfield would massively overhaul Tier 2 pensions for state and local workers and add more than $64.5 billion in additional costs for the state alone, according to an actuarial analysis commissioned by the Commission on Government Forecasting and Accountability. While estimates are not available for the costs at the local level, the amount would be in the tens of billions of dollars and place further strain on Illinois already nation-leading property taxes.

Among other things, Senate Bill 1937 increases “Tier 2” pension benefits for state and local government employees. Those changes include:

• Lowering the normal retirement age from 67 to 65 with 20 years of service or 62 if pension benefits are fully maxed out
• Reducing early retirement penalties, allowing for pensioners to retire as early as 57 with reduced benefits
• Increasing Cost-of-living-adjustments in the General Assembly Retirement System and Judges’ Retirement System to a compounded 3%
• Giving a 3% non-compounding COLA to all other Tier 2 pensioners every year
• Calculating benefits based on six years of salary instead of eight
• Increasing the pensionable salary cap
• Lowering the downstate police and fire retirement age from 55 to 52 with 20 years of service, reducing early retirement penalties (police and firemen can retire at any age without penalty if they’ve maxed out their pension) and calculating benefits based on four years of salary rather than eight years

And House Bill 3657 increases “Tier 2” benefits for local government employees in Chicago:

• It changes the final average salary formula to be more generous – highest 4 of last 5 years or 8 of the last 10 years
• It raises the Tier 2 salary cap to $141,407.74 for workers in Chicago
• Increases the salary cap annually at the lesser of 3% or inflation

Local governments will be forced to fund these new benefits with no funding from the state. The bill even says as much. In fact, the last line reads: “no reimbursement by the State is required for the implementation of any mandate created by this amendatory Act of the 104th General Assembly.”

Illinoisans already pay the highest property taxes in the nation. And this is exactly how Illinois state and local governments got into its pension crisis in the first place: promising new benefits with no plan to pay for them.

As for the state’s pension payment plan, SB1937 would create a new funding schedule that makes payments through 2049 and targets 100% funding in addition to the 90% funding target by 2045 that is currently in place. While 100% funding is the appropriate target, a new and even longer pension funding ramp will only exacerbate Illinois’ pension crisis and further burden future generations of Illinoisans.

By adding billions in new benefits while extending the ramp and backloading pension payments, Illinois’ unfunded pension liabilities will likely increase far beyond what is currently projected. According to the state retirement system’s actuaries, the state’s current pension funding ramp already falls more than $5 billion short of fully funding pensions annually and has resulted in an additional $59 billion worth of pension debt since its inception. Making matters even worse, another $66 billion in pension debt has been added over the course of the funding ramp as a result of benefit increases, poor investment returns, and changes to demographics and assumptions that make defined benefit pension systems inherently risky.

In addition to modifying the pension funding ramp, SB1937 would also create a new “20-year layered amortization approach” when calculating the minimum state contribution starting in 2036. While actuaries say too little detail was available to analyze what the increase in state pension contributions would be as a result, the new policy would extend pension debt costs far beyond even the 2049 end date for the new funding ramp, further placing the burden of Illinois’ pension debt on future generations of Illinoisans.

Rather than push through a massive pension overhaul during the final hours of legislative session, lawmakers should preserve the current structure of Illinois’ Tier 2 pension system and take measured steps to identify and address problems.

The state should:

1. Conduct a thorough actuarial analysis, including individual testing and a legal risk assessment. Lawmakers owe it to taxpayers and workers to understand the facts before acting.
2. If a problem is found, target solutions at the individual level. That’s more fiscally responsible than boosting benefits across the board. Lawmakers could use legislation similar to House Bill 5798, filed this session by state Rep. Blaine Wilhour, R-Louisville.
3. Expand the option for defined contribution plans to all employees. Currently, only workers in the State Universities Retirement System can choose a 401(k)-style plan. Defined contribution plans offer portability and flexibility for short- and medium-term workers that pensions – even spiked ones – don’t.