Five reasons why the university pension plan won’t solve Illinois’ crisis

The Institute of Government and Public Affairs, or IGPA, a university-based research organization, recently developed a pension plan for Illinois. That plan was presented at a pension conference committee hearing earlier this month. But it’s not the type of reform Illinois’ needs. The IGPA plan fails to solve Illinois’ pension problem. Here are five reasons...

The Institute of Government and Public Affairs, or IGPA, a university-based research organization, recently developed a pension plan for Illinois. That plan was presented at a pension conference committee hearing earlier this month. But it’s not the type of reform Illinois’ needs. The IGPA plan fails to solve Illinois’ pension problem. Here are five reasons why.

The plan:

1. Eliminates the state’s only real 401(k)-style retirement plan and maintains the broken defined benefit pension system: The IGPA plan takes reform in the wrong direction by maintaining the defined benefit pension system for current workers and eliminating the option for new employees to participate in the 401(k)-style plan that currently exists in the State Universities Retirement System.

Instead of having the option to completely control their own retirements, new employees would be forced to participate in an inferior plan that only allows them to manage one-third of their retirement. For the remaining two-thirds of their retirement plan, the IGPA plan would require employees to rely on the same defined benefit plan that led to Illinois’ pension crisis.

Failing to reform the system for current employees and maintaining the defined benefit plan ensures future growth in pension liabilities.

Almost everyone working for government in Illinois is forced to contribute to a defined benefit pension plan, and these systems are woefully underfunded. However, people in SURS have the option to control their entire retirement account by enrolling in a full 401(k)-style plan. With 17,500 employees currently participating, university employees have already shown their preference for the SURS 401(k)-style plan.

The preference for 401(k)-style plans is shared by other states. Michigan put all new workers on 401(k) style plans beginning in 1997. Alaska did the same in 2006. Expanding, not eliminating, Illinois’ only 401(k)-style plan should be part of any pension reform package.

2. Mostly preserves COLAs – one of the biggest drivers of Illinois’ pension debt: The IGPA plan fails to achieve the savings necessary to reform Illinois’ pension system by only partially reducing cost-of-living adjustments, or COLAs. The plan limits COLAs to half the rate of inflation but refuses to cap the COLA rate, meaning COLA costs could continue to grow uncontrollably. In periods of stagflation – high inflation and slow economic growth – these COLA benefits would be disastrous to the pension systems.

Reforming COLAs is the biggest lever for reducing Illinois’ unfunded liability. Freezing COLAs until systems are healthy again is necessary to help save the systems from insolvency. Real COLA reform could cut the unfunded liability by approximately one-third.

3. Forces taxpayers to continue picking up university retirement tab for another decade:  A significant driver of Illinois’ pension crisis is the fact that the state makes pension contributions on behalf of state universities, even though university workers are not employees of the state. This practice costs the state approximately $400 million each year.

Shifting these costs to universities would create accountability and require universities to pay their share of their employees’ retirement costs. A real reform plan would require universities to be accountable today. But the IGPA plan phases in a cost-shift over a 12-year period, which does little to address the current crisis and frees up time for lawmakers to make changes to these requirements before full implementation of the bill.

4. Makes funding pensions the top priority for state government: The IGPA plan increases Tier 1 employee contributions in exchange for a pension-funding guarantee. Although slightly different from other funding guarantee provisions, this plan allows the pension systems and their members to take legal action to compel the state to make the pension payment. Pension guarantees similar to this plan prioritize pension payments above all other government services, jeopardizing funding for those who rely on it the most.

It’s irresponsible for the state to guarantee an obligation over which it has no control. As long as Illinois maintains the unpredictable defined benefit pension structure, the state is providing an open-ended guarantee with the potential for severe and unforeseeable costs.

5. If the IGPA plan were applied to the state’s five pension systems it would only make a small dent in the $100 billion unfunded liability: The plan, if applied to the state’s five pensions systems, is estimated to reduce the $100 billion unfunded liability down to where it was just two years ago – levels that were considered in crisis even then. Savings this small not only fail to solve the problem, but will also require lawmakers to revisit Illinois’ pension crisis again in just a few short years.

The only way to solve Illinois’ pension crisis is to end the state’s defined benefit plan, and give workers retirement freedom and mobility with 401(k)-style retirement plans. State Reps. Tom Morrison, R-Palatine, and Jeanne Ives, R-Wheaton, along with state Sen. Jim Oberweis, R-Sugar Grove, are leading the efforts to modernize Illinois’ broken pension system with a 401(k)-style defined contribution plan for all state workers.