A report released this morning by the Illinois Policy Institute outlines yet another reason Illinois should abandon the defined benefit pension system and adopt a 401(k)-style retirement program for government workers: The “cost shift” for teacher retirements is more affordable and predictable under a 401(k)-style system.
This week and next, Illinois lawmakers are discussing who should pay the “employer” share of teachers’ pension costs: local school districts or the state. For decades, the state has picked up this tab even though teachers are hired and employed by local school districts. The Illinois Policy Institute supports ending this practice and requiring local school districts to pay for the retirement costs incurred each year by current employees.
But while lawmakers debate a cost shift for the defined benefit pension system, they should instead be examining how affordable and predictable the cost shift is under a 401(k)-style plan, as proposed in House Bill 3303.
HB 3303 is the pension reform plan developed by the Illinois Policy Institute, which is constitutional, would protect already-earned benefits, and immediately reduces the unfunded liability by about half by moving all future benefits to a 401(k)-style system. This plan is supported by state Sen. Jim Oberweis, and state Reps. Jeanne Ives and Tom Morrison. The core components of the Institute’s plan have been scored by the Commission on Government Forecasting and Accountability. The Institute’s plan would achieve savings of at least $220 billion – more than any other pension proposal on the table.
Under this plan, all retirement benefits earned to date would be banked and protected, and all future benefits would be earned in a 401(k)-style system. Teachers would pay 8 percent of their salary into their retirement savings, and school districts would pay a matching 7 percent. The average cost to school districts would be just 2.9 percent of their total district budget. The report released today by the Institute, “The cost shift: why school districts would benefit from a 401(k)-style retirement plan” contains a grid showing how much the cost shift would be in each downstate and suburban school district in Illinois under HB 3303.
“Illinois’ pension system severely lacks accountability, and the cost shift is a step toward fixing that,” said Ted Dabrowski, vice president of policy at the Illinois Policy Institute. “In implementing the cost shift, lawmakers must ensure that schools have predictability and freedom in their budgeting process. That means moving to a 401(k)-style retirement system, as recommended by the Illinois Policy Institute. But school districts should be weary of cost shift plans that include shifting the unfunded liability to the local level – that should be a non-starter in plans for reform.”