Illinois Policy Institute Pension Reform
Proposal Offers Real Reform for Illinois’ Pension Crisis
Imagine a pension reform plan that would have a typical career public school teacher retiring with $1 million in the bank and immediately reduce the state’s pension obligation by $46 billion.
That’s the proposal the Illinois Policy Institute presented this week to address the state’s pension crisis.
It’s worth taking a look at the Institute’s latest proposal since they stepped front and center at a Statehouse news conference on Thursday to offer up a fundamentally different pension reform proposal from other plans on the table.
Here are the key differences between the Institute’s proposal and other plans being circulated in Springfield:
It rules out extending the 2011 income tax increase.
It protects pension benefits already earned by employees but ties all future earned retirement benefits to a 401(k)-style defined contribution plan.
It pays off the unfunded pension liability on a level-dollar basis.
This final difference is important, because all other pension proposals keep in place the state’s current ramp repayment plan, which pushes more and more debt onto future generations.
State Rep. Tom Morrison, R-Palatine, has introduced House Bill 3303, a companion bill to the Institute’s proposal.
“This will let us once and for all end the irresponsible pension ramp that has troubled our finances for so long,” Morrison said. “We’ll begin paying down the remaining debt, year after year, on a level basis, just as you would pay down your mortgage. This payment would be about $4.7 billion – what we paid in fiscal year 2012. There is no ramp, no ever-increasing crowd out of government services.”
Key points of the Institute’s plan:
Reduces the fiscal year 2014 unfunded liability by $46 billion, a 46 percent reduction. This brings the unfunded liability down from $101 billion to $55 billion.
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 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.
So what does this mean for a typical government worker?
A teacher who starts his or her career at age 25 at a salary of $35,000 and receives a 3 percent raise each year can retire at age 67 with $1 million in the bank, based on an average annual investment return of 4 percent. With that amount, a teacher could buy an annuity worth $54,000 annually.
“This bill reforms pensions in a constitutional way,” Morrison said. “It protects the pension benefits workers have earned to date. The pension formula will simply apply to their current service and their current salary. They will receive a basic pension as if they had left government employment today. But in order to fully protect those benefits, we have to change how future benefits are earned. And while we’re making those changes, let’s do it in a way that empowers workers with real control, rather than keeping the power in the hands of this legislative body.”
“By moving away from the outdated pension systems we have, we can take the power away from Springfield – who nobody trusts to manage this crisis – and give it back to the individual workers.”
State Sen. Kyle McCarter, R Lebanon, agreed.
“We have to shift away from this defined benefit program,” he said. “Caterpillar tractor did this. The federal government did it many years ago. No major industry is sticking with defined benefit plans. They are all going to defined contribution plans. Why shouldn’t the state of Illinois do the same thing?”
State Rep. Jeanne Ives, R-Wheaton, stressed the need to solve the state’s current fiscal crisis without continuing the 2011 temporary income tax hike.
“The 2011 tax hike is scheduled to sunset in January 2015 and we owe it to taxpayers to keep that promise,” she said. “Illinois’ political leadership needs to discern what government can and should be doing, and return to the basics of good public policy – spend within our means and operate under a balanced budget. These simple tasks are common practice among families and businesses that live and work in Illinois. Asking lawmakers to do the same is a reasonable request.”