New bill offers police and firefighters pension buyout option
Giving police and fire retirees a pension cash-out option would help reduce long-term pension debt.
A new bill would give some police and firefighters flexibility with their retirement. State Sen. Robert Martwick, D-Chicago, filed Senate Bill 3404 which would make a “pension buyout” available to members of Chicago’s pension systems as well as downstate police and firefighters.
Of the worst funded local pension systems in the nation, Chicago-area pensions take up seven of the bottom 10. In September, the city had to lend money to the firefighter’s pension fund to make that month’s payouts and avoid selling assets.
A “pension buyout” allows government workers to take out a portion of the “net present value” of their pension – the amount needed today to fund a retiree’s lifetime benefit. After voluntarily “cashing out” all or a portion of their benefits at a 30-40% discounted rate, workers can roll the money into an IRA or 401(k)-style plan and control their money forever. In return, the discount equals savings for taxpayers.
Chicago and cities across the state are racking up retirement debt with no end in sight. For cities like Harvey, that has meant needing to cut back on core services and file for financial help from the state. It’s a story that could spread to other cities like Chicago if no action is taken.
Further downstate, police and fire pensions are putting increasing pressure on taxpayers. In 2023, $1 of every $5 collected in municipal property taxes went to fund police and fire pensions.
Gov. J.B. Pritzker has recently proposed extending the buyout program at the state level for another two years. It has been extended twice since it was originally championed by former state Rep. and current Illinois Policy Institute Senior Fellow Mark Batinick and signed into law in 2018.
Pritzker’s office estimates these payments have reduced the state’s unfunded pension liability by about $2.9 billion and that extending the program through fiscal year 2028 could reduce liabilities by another $1.4 billion. It’s only available to retirees in one of Illinois’ five state pension systems, and nearly 14,000 retirees have chosen to take advantage of it.
The flexibility allows retirees to withdraw a larger amount at one time – such as using the funds to pay for housing or medical expenses – a vital option for some based on their circumstances, but one which they don’t currently have. Plus, a self-directed account can be willed to family while a pension cannot. Other retirees might desire to take the buyout because they are not confident in the stability of their pension funds.
Implementing such a program at the local level will spread those savings to the municipalities who need it most and give more workers more control over their retirement. Combined with other solutions, such as optional 401(k)-style plans and constitutional pension reform, buyouts are an important positive step toward Illinois recovering from its pension crisis and creating a manageable way to reward public servants for their lifetime commitment to our communities.