State lawmakers want to spike Illinois’ public pension benefits by $60B

Pension experts projected state lawmakers’ plans to drastically expand benefits for newer employees would add $60 billion to the state’s pension liability. Illinois is already $143.7 billion in the pension hole.

State lawmakers face a relatively small problem with ensuring Social Security is not more generous than state pensions. While no individual testing has been done to determine whether this is currently an issue or when it might arise in the future, some lawmakers are using the concern to push for drastic overhauls to the state’s pension systems. One proposal would spike Illinois’ pension benefits by nearly $60 billion.

That amount would be in a state already short $143.7 billion of what is needed to fully fund the five statewide pension systems today.

Consultant group Segal estimated the effects of House Bill 5909, legislation recently introduced in the Illinois House and Senate to drastically expand benefits for state workers hired since 2010. The bill makes changes that put newer hires closer to the overpromised retirement benefits of state workers hired before 2010.

In total, the bill would increase pension benefits by nearly $60 billion and increase the state’s unfunded pension liability by nearly $670 million. Meanwhile, the total costs for taxpayers would increase by nearly $30 billion from 2027-2045, the other $30 billion would be covered primarily through investment returns and additional employee contributions.

The General Assembly introduced “Tier 2” in 2010 for newly hired employees to slow the unsustainable growth of pension obligations. Some critics assert Tier 2 benefits are unjust because they are lower than the payments for older employees set to benefit from Tier 1 benefits.

At the start of the lame duck session in November, state Sen. Robert Martwick, D-Chicago, and state Rep. Stephanie Kifowit, D-Aurora, introduced legislation to address the gap by expanding Tier 2 benefits. Their proposed solutions come at a price far beyond what the state can afford, according to the recent letter from Segal’s pension experts to the Illinois General Assembly’s Commission on Government Forecasting and Accountability.

The bill would adjust Tier 2 benefits so they’re much closer to Tier 1. The proposed changes would include adjusting the annual cost of living allowance to a simple 3%, regardless of inflation. There are also changes to the way the final average salary is calculated, plus a lower retirement age and more.

With limited data, Segal’s actuarial estimates of costs did not account for all of the proposed changes in the over 500-page piece of legislation. Even with just the major changes accounted for, the cost was staggering: nearly $30 billion in added expenses to implement the changes in just three of the five state pension systems. The state is simply unable to afford this kind of additional spending on top of pension obligations that already eat about 20% of the state budget every year.

This analysis comes just after the commission’s report on the status of its state pensions at the end of 2024, reporting that in spite of better-than-expected investment returns, unfunded liabilities grew to $143.7 billion. The report also highlights that the state needs to increase annual pension spending by $5.1 billion to truly pay down the debt.

These retirement liabilities were cited by the S&P as a principal reason for Illinois’ lowest-the-nation credit rating of A minus. A Tier 2 expansion package like this one could risk dropping the state’s credit rating even lower, worsening the financial outlook.

While states such as Nebraska, Tennessee and Wisconsin have more than enough money on hand to cover 100% of promised benefits, Illinois remained the worst in terms of funding for its pension systems for the second year in a row. Illinois only has about 46 cents on hand for every dollar of benefits promised to workers in the five state-run pension systems.

For comparison, only four states in the nation have less than 60 cents on hand for every dollar of promised benefits. Experts consider less than 60% dangerous and less than 40% past the point of no return.

Illinois needs reforms that control pension costs, not legislation that makes a massive expansion. Even chief sponsor Sen. Martwick admitted the state cannot afford such a drastic increase in benefits.

There is a concern Tier 2 benefits might be falling below the federal requirement that government pensions be at least equal to Social Security benefits. A few top pensioners making over six figures by the end of their careers might be getting less than they should, according to federal rules.

But there is no need to use a chainsaw when a scalpel will do. If someone’s benefits are found to be below what’s federally required, they could be adjusted on a case-by-case basis, as suggested by state. Rep Blaine Wilhour, R-Louisville, in House Bill 5798. Alternatively, if there is a problem, the pensionable salary cap could be raised and pinned to the Social Security wage base to avoid this concern. Segal estimated this change alone would cost the state an additional $6.2 billion through 2045 and increase pension benefits by more than $13 billion.

If deemed necessary, such measures would fix the potential problem without adding undue costs for taxpayers or substantially increasing the risk of insolvency in the state’s pension systems. Taxpayers and public employees deserve a balanced, sustainable solution.

Clarification: An earlier version of this article reflected only part of the cost outlined in the actuarial analysis. The full boost to pension benefits would be $60 billion.