Record number of Illinois government workers opt out of pensions, into 401(k)-style plans

September 3, 2014
By Benjamin VanMetre

Illinois has the worst-funded pension systems in the nation. But there’s one group of state-government workers that isn’t worried about whether their retirement checks will be slashed. Today, more than 13 percent of all active employees in the State Universities Retirement System, or SURS, participate in a 401(k)-style plan instead of a traditional pension plan...

Illinois has the worst-funded pension systems in the nation. But there’s one group of state-government workers that isn’t worried about whether their retirement checks will be slashed.

Today, more than 13 percent of all active employees in the State Universities Retirement System, or SURS, participate in a 401(k)-style plan instead of a traditional pension plan run by the state. These state-university workers control their own retirement accounts and aren’t part of Illinois’ increasingly insolvent pension system.

And recent data from SURS obtained through a Freedom of Information Act request shows the popularity of 401(k)-style plans is growing.

Nearly 20 percent of all SURS employees eligible for a retirement plan in 2014 have chosen a self-managed plan over the traditional pension scheme. Just a few years after the Great Recession, the number of SURS members choosing self-managed plans has reached an all-time high.

In 1998, SURS began allowing its new workers to opt into self-managed retirement plans. In these plans, an employee contributes 8 percent of his or her salary toward retirement savings and the employer puts in a matching 7 percent. That means the employee has the equivalent of 15 percent of each paycheck put into an account that’s entirely theirs.

new_SURS_members

These workers chose self-managed plans not only to gain more control over their retirements, but also to make sure they could take their retirement funds with them wherever they went.

They’ll be happy they did.

These SURS workers are watching the stock market soar to all-time highs while the traditional pension system, run by SURS, heads toward insolvency.

Take the S&P 500, which is often a measure of the U.S. economy’s overall performance. It has more than doubled since SURS first offered its self-managed plan in 1998. On the other hand, the SURS pension-funding shortfall has grown to $19 billion from nearly $1.5 billion during that same time period. The plan has just 44 percent of the funds it should have today to meet its future obligations, down dramatically from 86 percent in 1998.

The risk of insolvency could be the reason why more and more workers are opting into the self-managed plan.

But in Illinois, state university employees are the only state employees that can opt to control their own retirements. Every other state employee is trapped in a retirement system they cannot control or escape.

That’s not fair.

Workers have already seen how that plays out in bankruptcy, whether it’s Cedar Falls, R.I., Pritchard, Ala. or Detroit. There, workers saw their pensions cut by as much as 55 percent.

All of Illinois’ government workers deserve the kind of control and freedom that 401(k)-style plans provide. Nearly 19,000 active and inactive Illinois state-university employees already enjoy these benefits. And if Illinois switches new government workers over to self-managed plans, thousands more could too.

They would join workers from many other states that have already implemented 401(k)-style plans. Michigan was early to modernize, implementing 401(k)-style plans for new workers more than 15 years ago. Alaska also converted its new workers in 2006. Even Democrat-controlled Rhode Island converted its existing workers in 2011 to a hybrid plan that includes 401(k)-style plans.

And since the Great Recession, six additional states have added defined-contribution plans, the most recent being Oklahoma.

States across the country are recognizing the need for real pension reform, and so are some government employees in Illinois. The state should follow their lead and put all government workers in control of their own retirements.