Increasing State Employee Retirement System costs fall on the backs of Illinois taxpayers

Employee contributions to the State Employees’ Retirement System, or SERS, have gone up by 66 percent since 1998. During the same time period, taxpayer contributions to state employee retirements increased by 593 percent. In 2012 alone, Illinois taxpayers contributed $1.1 billion more to SERS than state employees did. And the disparity between taxpayer and employee...

Employee contributions to the State Employees’ Retirement System, or SERS, have gone up by 66 percent since 1998.

During the same time period, taxpayer contributions to state employee retirements increased by 593 percent.

In 2012 alone, Illinois taxpayers contributed $1.1 billion more to SERS than state employees did.

And the disparity between taxpayer and employee contributions is projected to get worse. Between 2013 and 2045, taxpayers can expect their annual contribution to SERS to increase by 164 percent, to $4.4 billion. Employee contributions, on the other hand, will rise only 118 percent, to $535 million. The increase in taxpayer contributions occurs because taxpayers, and not the employees, are required to pay for any shortfalls in the pension system.

These shortfalls are largely a function of the pension system’s defined benefit structure. Defined benefit systems are chronically underfunded due to poor investment returns, changed actuarial assumptions, overly generous benefits and structural underpayments.

For example, taxpayers have to make up the difference when the fund’s investment returns are lower than projected. From 1996 to 2012, missed investment targets added $3.6 billion to the retirement system’s shortfall, according to the Commission on Government Forecasting and Accountability.

Similarly, changes in actuarial assumptions since 1996 mean taxpayers will have to cough up an additional $3.7 billion.

State employees, however, continue to pay a constant percentage of their payroll to the pension system, regardless of shortfalls or growing liabilities. This situation creates the massive disparity between employee and taxpayer contributions.

Ultimately, politicians have proven they can’t manage defined benefit systems.

Illinois must move away from defined benefit plans and embrace 401(k)-style plans if it wants to avoid a fiscal disaster. A defined contribution plan, such as the one the Illinois Policy Institute has developed, does just that.