A Step Forward: An Analysis of Pension Reform in Illinois

By: Navi Bajwa

On December 3, 2013, the Illinois State Legislature voted to pass a pension reform bill designed to address the feeble fiscal situation the state finds itself in.  The bill was designed to help pay down the worst funded pension system of any state in the Union, which included a $100 billion shortfall. The implementation of this bill is supposed to cut $160 billion over the next 30 years, making the pension fully funded by 2044.  The bill boosts five major provisions:

Limiting COLAS: A distinguishing provision of the previous Illinois pension system was the “cost of living adjustments” (COLAS).  The new bill will hold the COLA calculation at 3% of $1,000 per year of service.  Previously, the 3% rate was applied to the entire annual pension.

Raising the Retirement Age: The most basic solution to any pension crisis (short of scrapping the plan all together) is to raise the age at which a person may start collecting their benefits.  Under the Illinois plan, all public workers 45 years or younger when the bill passed will see their retirement age rise.  The younger the worker, the more years will be added.  Right now the retirement age for a public worker is 55; this rise will be capped at 60.

Funding Requirements: The Illinois legislature has committed to contribute a set amount of money to the pension fund every year.  It also gives the public labor unions the right to sue the State if it fails to meet this commitment.

Reducing Mandatory Contributions: This provision will reduce a worker’s contribution into the fund by 1%.

Optional 401K: Public workers now have the option to invest their savings into their own private plan, instead of using the state retirement fund.

So problem solved, right?  Well, on paper, yes.  Unfortunately, people on both sides of the aisle are not happy with this bill.  Government unions claim that the bill is unconstitutional. They point to the Illinois State Constitution, which says a worker cannot be denied benefits that they have been promised.  Conservatives simply argue that the bill does not go far enough in curbing worker benefits.

Of the five provisions, the Cost of Living Adjustments (COLAS) has created perhaps the largest controversy.  The unions saw the 3% annual increase to pension payouts as vital for the retiree’s financial security.  The state defended the increases by characterizing them as offsetting inflation.  The workers also cite to the fact that many of them do not qualify for social security benefits, so the pension is their only source of income after retirement.  Unfortunately, this provision, that workers seemed to rely on heavily, is also the provision that was draining the state.  For example, before the reform a worker with a $30,000 pension would see it rise to $30,900 the next year.  This would keep rising and that same worker could be earning a pension of over $50,000 by the end of 20 years.

The COLAS led to Illinois hemorrhaging money as thousands of workers’ pensions were growing unchecked every year.  The new way of calculating the living adjustment reigns in higher paid workers pensions who stood to gain large amounts every year under the old system.  Reforming the calculation, by having the 3% increase apply to only $1,000 of the pension every year, will cut down on yearly increases in a big way and save the state millions.  The COLA reform, along with retirement age increases, will take a bite out of the alarming $17 million increase to pension obligations the state was seeing every day.

Regardless of whether the bill does too much or too little, it was a needed measure.  Illinois’ finances have been in dire straits for far too long.  For years the legislature had opportunities to take this problem on, but partisan politics usually got in the way of comprehensive reform.  As the legislature continued to punt on the issue, the state suffered.  A result of waiting has led to money being diverted from essential programs like education.  In addition, the state’s credit rating has dropped to the lowest in the country.  The dysfunction in the state capital has also lead to labeling the state as economically unstable and other states have taken notice to such harmful labels.  The best example was the arrival of Texas Governor Rick Perry in the spring of 2013.  He pushed a pitch that was meant to entice Illinoisans to move their businesses to Texas.

The passage of the bill has given the state a much-needed reprieve from the suffocating embrace of debt.  But Illinois is not out of the woods yet.  The reforms passed last were just a start.  Lawmakers need to keep building on these results if they hope to return their state to fiscal security.

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