Today the Illinois Legislature is expected to take up a faux pension reform bill that is being heralded by many business groups, lawmakers, and the media as real “fundamental reform.” The financial problems facing Illinois’ pension system are massive and obvious, and yet the minor changes being proposed are being heralded by various advocates and some opponents as being significant or even “extreme.”
That couldn’t be further from the truth. The reforms being proposed won’t lead to a fully funded system for another 30 years, assuming the overly optimistic estimates and rate of return assumptions are correct. Benjamin VanMetre of the Illinois Policy Institute points out the “plan is really no different than the ramp Illinois has today, which is expected to have the systems 90 percent funded by 2045. The truth is there is no difference between the old plan and the new one.”
While compromise is a basic element of politics and policy-making, compromise also can give the public the illusion that the problem has been solved, when in fact such compromises purposely avoid the root of the problem.
The fundamental source of the pension problem in Illinois is the “defined-benefit” pension plan system, which goes practically untouched by the proposal except for a few minor tweaks to retirement age and COLAs. Public employees will continue to receive a pre-set benefit amount upon retirement for an indeterminate amount of time. This type of system is financially unsustainable and will crowd out spending for other programs such as education.
Here are the three biggest problems with the pension proposal:
1. The optional defined-contribution plan included is capped at 5 percent enrollment. One could assume this is out of fear that too many public employees will want to take control of their own retirement and be given the flexibility to change jobs, thereby undercutting the current Ponzi scheme. Cunningly, the proposal includes language that would allow government to cancel these defined-contribution plans and seize the money in them. The combination of the enrollment cap and the provision allowing the state to seize these plans makes this aspect of the proposal nothing more than window-dressing for what is truly needed as part of any fundamental pension reform. At minimum, the state should have stopped the bleeding by enrolling all new employees in a true, employee-owned 401k-style pension plan.
2. Changes to cost-drivers are minor or are actually harmful. The changes to the COLA formula and a pension cap of nearly $110,000 do little to curb costs and change the financial trajectory of the system. Phasing in a five-year increase in the retirement age is a step in the right direction but one that will still allow pensioners to retire much earlier than private-sector employees and collect millions of dollars’ worth of pension benefits for an indeterminately lengthy amount of time.
3. Prioritizing and guaranteeing pensions payments above other government expenditures, such as education and public safety, is a guarantee for higher taxes and higher spending. The guarantee written into the proposal is somewhat vague, but that doesn’t mean it won’t be applied at the expense of other core functions of government or taxpayers.
Illinois politicians are refusing to acknowledge they are guilty of promising overly generous benefits while pushing the costs onto future generations of taxpayers by failing to fully fund the pensions. Those who say this plan is the best one that is politically viable in Illinois are being disingenuous or haven’t been paying attention. Rhode Island – a very blue state with a similar per-capita proportion of state and local public employees – passed fundamental pension reforms that go much further than Illinois’ proposal does.
Illinois may have only one opportunity to get pension reform right, and this proposal is not it. More than likely, this proposal will set back the true fundamental pension reform that is required to protect taxpayers from further tax hikes, give public employees more job flexibility, and put Illinois on a sustainable fiscal path.