Pension proposal a move in the wrong direction
House Speaker Mike Madigan’s latest pension proposal is a giant step backward. The overall effect of this plan would be to leave Illinois pensions worse off than they are today – and that’s saying something, considering the state has $100 billion in official pension debt. If this plan passes, both taxpayers and government employees will...
House Speaker Mike Madigan’s latest pension proposal is a giant step backward. The overall effect of this plan would be to leave Illinois pensions worse off than they are today – and that’s saying something, considering the state has $100 billion in official pension debt.
If this plan passes, both taxpayers and government employees will be able to look forward to another tussle over pensions in a few years, with unfunded liabilities likely growing even larger than they are currently. The only winners will be pension actuaries who have consistently gotten their financial predictions wrong, but who will be kept busy making another round of rosy predictions for yet another pension rescue scheme.
The state’s three main pension systems, which provide retirement funds for employees of state government, public universities and public schools (except for Chicago Public Schools) are critically underfunded, holding about 40 percent of the assets they should to meet their pension commitments. Madigan’s plan is supposed to bring the three pension plans back to full funding by 2045.
The plan’s positives are so minor and halfhearted that they hardly even count. The provision for defined contribution retirement plans is the best example of this: the bill allows for no more than 5 percent of state employees and teachers to set up their own retirement accounts. But those accounts are an illusion even for the few who are allowed to open them – the state can cancel the defined contribution program and reclaim all the assets. This, of course, defeats the entire point of having defined contribution accounts – they are supposed to belong to employees and the employer is not supposed to be able to take them back.
The plan also provides for later retirement dates for younger employees, but if you’re 45 or older you can still retire at 60, just as you can currently. The cost-of-living adjustments, or COLAs, are cut back a bit, but they still accumulate even if there’s no inflation, and well-off retirees receiving five- and six-figure pensions are still eligible for COLAs.
That is supposed to be the good news. The bad news is that rather than contributing more to the system, government employees will be paying 1 percent less into their retirements, and unions will still be able to negotiate to have taxpayers pick that up, too. And the state will be guaranteeing pension funds, meaning retirements will be a higher priority than state police, government services and public schools. This guarantee could lead to an intolerable situation in which essential services would have to be cut to protect pensions. At that point, pensioners would still lose out as taxpayers leave the state in droves and take their taxable incomes with them. As retirees in Detroit can testify, a government guarantee isn’t worth much when the government itself is bankrupt.
Somehow, lawmakers claim this package is supposed to bring the state’s dangerously underfunded pension systems back into balance. But the pension actuaries, who are supposed to calculate what pensions owe and how much money they need now to take cover future pension costs, have a long track record of underestimating how much government pensions cost.
Over the last 20 years, the state has initiated a pension payment ramp, sold pension obligation bonds, borrowed more money and hiked income tax rates by two-thirds. All of those actions were supposed to put government employee pensions on a sound footing, but instead a pension shortfall of $20 billion has exploded to $100 billion.
Illinois desperately needs a thorough overhaul of its pensions, not just for taxpayers but for its employees, too. Illinois needs to move to bona fide defined contribution plans, and for those in the traditional defined benefit program it needs to increase contributions from employees, increase retirement ages and cut back on COLAs. The Illinois General Assembly needs a serious plan that provides relief for taxpayers and ensures that retirement funds won’t go bust and leave retirees with nothing but empty promises. While this plan makes some gestures in the right direction, as a whole it moves the wrong way.