How to Fix Illinois Pension Problem

The decision by the Illinois Supreme Court to strike down the 2013 pension “reform” legislation has sent a shock wave through Illinois’ political channels. That law would have reduced benefits for retirees by cutting the 3% annual compounded Cost of Living Adjustment (COLA), forcing some workers to wait longer to retire, and limiting the amount of salary used to calculate pension benefits. The Court ruled unanimously that this violated the provision of the constitution which states that pensions are a “contractual obligation” which “shall not be diminished or impaired.”

As I have previously stated, the law was not only obviously illegal according to a plain reading of the constitution, it was also inherently unfair to state workers. While many commentators have used the pension crisis to demonize state workers (see for example Diana Sroka Rickert’s recent op-ed in the Chicago Tribune) most state workers are not receiving lavish benefits upon retirement. The benefits are also not out of line with what can be expected in the private sector between company retirement plans and social security. Here are some facts from RebootIllinois:

  • The average annual pension for University Professors is $37,284. These employees are not eligible for social security.
  • The average annual pension for Teachers is $51,288. Also not eligible for social security.
  • For the rest of your standard state employees, the average annual pension is $38,025. Some of these workers are eligible for social security, others are not.

Do those benefits really sound lavish? I don’t think so.

At this point some readers will be saying, “it’s those damn politicians. They must be padding their own pensions.” Wrong again.

  • The average member of the General Assembly receives only $56,520 and is not eligible for social security.

The one exception to this fact is judges, who receive an average pension of $128,628. While judges are not technically supposed to be ‘politicians’, in Illinois they run for election on a partisan ticket.

So how did Illinois pension system get in this mess?

With the above knowledge about average benefits, it should not be surprising that the Commission on Government Forecasting and Accountability (COGFA) found that benefits were not the root of the Illinois pension problem. In fact, salary increases actually reduced pension liabilities in two of the three normal-employee systems. Rather, the root cause of the massive $100 billion liability is “insufficient employer contributions.” The state hasn’t been paying its bills and it let the debt rack up. Most of the blame for what amounts to several decades of financial mismanagement falls on Democrats who have usually been in control, but some Republicans are complicit as well.

After the failure of the State to pay its bills, the second root cause of the Illinois pension problem is a handful of bad apples. See, while most workers receive only modest benefits, a select few engage in manipulative behavior like double dipping or pension spiking. “Double dipping” refers to the practice of retiring, collecting on a pension, and then going back to work for another state employer to receive both a salary and a pension at the same time. Double dipping can also refer to moving around after being vested in multiple pension systems to receive more than one retirement payment. “Spiking” is the practice of sharply raising an employee’s salary just before they retire to bring up the salary used to calculate their pension. It is practices like this that generally lead to the absurd pensions heard about in the news.

Current bans on double dipping don’t apply to most state workers and more reform is needed. Likewise, the current caps on spiking are not strict enough and Governor Bruce Rauner has proposed cracking down. Getting rid of these abuses would certainly be a step in the right direction, but it doesn’t go far enough.

More than 11,000 state employees receive pensions in excess of $100,000. One retired doctor is receiving almost half a million dollars a year while also receiving a salary because he’s still employed part time with the state, which is perfectly legal under current law. State law should absolutely be changed to prevent these types of abuses going forward, but that does not solve the debt issue.

So what can we do to fix the Illinois pension problem?

First, the state constitution should be changed to allow lawmakers to place a $100,000 cap (pegged to inflation) on the maximum pension payment an individual can receive from the State. The cap should include current retirees. No one needs more money than that to retire on when the pension is being heavily subsidized by taxpayers. Besides, anyone making enough during their career to receive $100,000 or more in pension payments certainly had a salary high enough to make personal investments and savings.

Second, Illinois should start taxing retirement income, except social security. Generally speaking, tax increases will not solve the problem; but, Illinois is one of only 3 states that exempt all retirement from the income tax. The federal government taxes it as well. Why should retirement income be treated differently than regular income? Pension benefits are only a portion of what workers made before retirement, but their salary was taxed. The best part about this solution is that it would likely require no constitutional amendment or court battle. The state has broad power to set tax policy and taxed retirement income for nearly 15 years after the 1970 constitution enshrined the pension protection.

Finally, the state needs to reconsider its accounting. The current goal of 90% funding of the pension system is not necessary. Even the Congressional Budget Office only suggests 80% and, really, the state just needs to ensure that it has cash on hand to cover outflows. The state should also consider Ralph Martire’s suggestion to re-amortize the debt, but without his suggestions to increase taxes. Tax increases will only drive more people and businesses out of the state, reducing the tax base and compounding the state’s problems.

The three-step approach outlined above would put the Illinois pension system back on the track to fiscal solvency.

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Phil King

Phil King

I am an avid reader and believer in free markets and individual liberty. I have management experience in both government and on political campaigns. I am a critic of politicians on both sides of the aisle, many of whom are badly failing the American people.