The path forward on pension reform: A fair solution for all stakeholders
State Reps. Tom Morrison (R-Palatine) and Jeanne Ives (R-Wheaton) have proposed House Bill 3303, which is based the Institute’s pension reform plan. State Sen. Jim Oberweis (R-Sugar Grove) introduced a floor amendment to Senate Bill 2026, which is identical to House Bill 3303. The problem Illinois has the nation’s worst-funded pension systems. The unfunded liability currently stands at more...
State Reps. Tom Morrison (R-Palatine) and Jeanne Ives (R-Wheaton) have proposed House Bill 3303, which is based the Institute’s pension reform plan.
State Sen. Jim Oberweis (R-Sugar Grove) introduced a floor amendment to Senate Bill 2026, which is identical to House Bill 3303.
The problem
Illinois has the nation’s worst-funded pension systems. The unfunded liability currently stands at more than $100 billion. Earlier this month, the state received its 13th downgrade under Gov. Pat Quinn. Illinois’ pension crisis has spiraled so out of control that not even the architects of the system can fix it. A two-hour meeting last Friday between party leaders and the governor ended without a deal, continuing the stalemate among the state’s most powerful political players. Worse yet, the plans being discussed would, at best, cut the state’s unfunded liability by $21 billion, only taking Illinois back to where it was in 2011.
Solution
The only solution to Illinois’ pension crisis is to follow the lead of other states and the private sector by adopting defined contribution plans. Starting in June 2006, Alaska shifted all new employees to defined contribution plans. Michigan shifted all new state employees to 401(k) plans beginning in March 1997. And in 2011, Rhode Island passed a hybrid plan that allows workers to participate in a blended defined benefit and defined contribution plan. More than 80 percent of private sector workers are now enrolled in defined contribution plans.
Why this works
This is the only proposal that ultimately solves Illinois’ pension crisis. This plan modernizes the state’s retirement system by eliminating political control, ending the irresponsible funding ramp and fulfilling promises to all stakeholders. Ultimately, these reforms restore fiscal order to the state by eliminating the unsustainable defined benefit structure, which is the root cause of nearly 60 percent of the state’s unfunded liability according to the Commission on Government Forecasting and Accountability. This paves the way for the economy to flourish, fostering an environment where businesses can thrive and create the jobs Illinoisans desperately need.
Here are the plan’s major outcomes:
- Reduces fiscal year 2014 unfunded liability by $46 billion. This 46 percent reduction brings the unfunded liability down to $55 billion from $101 billion, the government’s fiscal year 2014 projection.
- Reduces fiscal year 2014 state contributions to $4.7 billion, a nearly 30 percent drop from $6.7 billion under current law.
- Protects constitutionally guaranteed benefits already earned by retirees and current workers.
- Empowers current workers to control their retirement savings going forward with 401(k)-style plans modeled after the existing State Universities Retirement System’s 401(a) plan.
- Reduces the state’s annual pension contribution by more than $2 billion in the first year and eliminates the state’s unfunded liability by 2045. Ends the irresponsible repayment ramp and instead moves to level annual payments.
- Freezes cost-of-living adjustments until retirement systems return to healthy funding levels.
- Aligns the retirement age with Social Security’s retirement age while still protecting workers who are nearing retirement under current law.
- Promotes accountability and fiscal responsibility by requiring local governments to pay the employer share of their employees’ retirement savings plans.
- Makes government workers’ retirement savings plans portable, giving workers more flexibility and freedom to move their plan from job to job.