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A solution for Illinois’ state retirement crisis

Chicago Tribune

Monday, February 22, 2021  |  Article  |  TED DABROWSKI AND JOHN KLINGNER

Retirement (70)

Serious pension reform seems like a pipe dream today. Illinois’ political class is still clinging desperately to tax hikes, pension debt re-amortizations and the hope of a federal bailout to maintain the status quo. Any mention of reforms — in particular, an amendment to the constitution allowing for changes to the pension system — is met with immediate dismissal.


But it’s only a matter of time before Illinois’ math no longer works and extreme financial circumstances make pension reform politically expedient. Illinois’ finances have been declining for decades, and the pandemic has brought the state to the brink. Senate President Don Harmon’s $42 billion bailout request to Congress, Illinois’ abandoned $1.2 billion bond issuance and the state’s reliance on $5 billion from the federal government to fill its budget hole are all proof that Illinois is running out of options.


What Illinois needs is a road map to reform that’s readily available when the state’s finances finally break down. At Wirepoints, we’ve laid out a path for fixing Illinois’ biggest problem: pensions.


Retirement reforms aren’t a silver bullet for fixing Illinois. There’s much more to be done on governance, ethics, regulation and more. But pension reform is an urgent priority no matter what side of the aisle you’re on. Other reforms won’t matter if the state ends up bankrupting itself.


Illinois’ crises can only begin to be fixed when the state’s official $137 billion in pension-related debts, the nation’s worst, are significantly reduced. The state’s $56 billion in unfunded retiree health insurance debts can’t be ignored either.


Our baseline reform plan reduces the state’s combined $193 billion in debts by nearly 40%, to $120 billion, saving the state an average of $5 billion annually through 2045. Those savings come largely from means-testing both cost-of-living adjustments and retiree health insurance benefits.


The core of our plan modernizes the state’s crumbling pension system. The private sector moved long ago from pensions to defined contribution plans and many states have followed since. Given the depth of its crisis, Illinois should do the same.


Fortunately, Illinois doesn’t need to reinvent the wheel. Illinois has a functional and fully tested defined contribution plan for state university workers that’s been in existence for more than 20 years. Lawmakers can simply replicate that plan for all state workers going forward.


Since 1998, 20,000 members of the State Universities Retirement System have opted out of the pension plan and into the 401(k)-style Self-Managed Plan, or SMP. About 15% to 20% of new university workers have joined the SMP each year since 2010.


None of those workers worry about today’s pension crisis. They, not politicians, control their own portable retirement accounts in which the equivalent of 15% of their earnings — 8% from the employee, 7% from the employer — is set aside each and every pay period.


Under our baseline reform, which would require a constitutional amendment, all existing state workers, including teachers and university employees, are moved into SMP-like plans. Most workers set aside 15% just like current SMP members do, while those already participating in Social Security set aside 6%. Workers won’t earn pension benefits going forward, but they’ll keep the benefits they’ve already earned, to be payable during retirement.


Ending the uncontrolled growth in pension promises is essential to ending Illinois’ public retirement crisis. That, coupled with billions in debt reduction by means-testing Illinois’ 3%

automatic cost-of-living adjustments and retiree health insurance subsidies, can put Illinois on a sustainable path.


The full details of our plan, scored largely by Segal Consulting, are laid out in the final part of our four-part series titled “Solving Illinois Pension Problem: Why It’s Legal, Why It’s Necessary and What it Looks Like.”


The most obvious benefit of the restructuring plan is the immediate reduction in the state’s official debt burden and the budget relief it will provide. Retirement costs as a share of budget would fall to 17% from 26%, freeing up resources for core services that have been crowded out for years.


Some will say our plan is draconian, while others will say our reforms don’t go far enough. That debate is welcome and our report includes additional options beyond our baseline plan.


Ordinary Illinoisans and public sector retirees find themselves in dire circumstances after decades of failed governance by the state’s political class. Unfortunately, lawmakers have Illinoisans arguing over tax hikes and tax schemes instead of spending reforms. An amendment to Illinois' pension protection clause should be their first priority.


What Illinois needs now are leaders from all parts of the state to take the first step and push for that amendment.


Ted Dabrowski is president and John Klingner is the senior policy analyst of Wirepoints, an independent, nonprofit research and commentary organization.