Illinois Policy Institute - Illinois Pension Fake "Fix"

1. The 401(k) option is a fake: The bill says that some people would be allowed to participate in a 401(k)-style plan. But participation in the 401(k) option is limited to 5 percent of Tier 1 members (which includes members who were hired before 2011). Once 5 percent of these members are in the plan, it is closed. No one can transfer in or out of the plan. Moreover, the state can cancel the 401(k) plan at any time. If the state decides to cancel this defined contribution plan, the state can raid (“recover”) the money in the 401(k)s. The money effectively does not belong to the workers; it belongs to the state.

This is not a real defined contribution plan. In the private sector, the employer cannot go back and raid your fund; once the money is contributed and you are vested, it is yours. This is a fake 401(k) tucked in the bill to make it appear as a compromise.

2. Locks in higher income tax rates. By 2020 some of the state's pension bonds will be payed down, freeing up $1 billion a year. Instead of returning those funds to taxpayers, Madigan's pension bill requires the state to spend it on pensions. Returning $1 billion to taxpayers would allow the state to reduce the personal income tax rate by 0.25 percentage points, to 3.5 percent from 3.75 percent.

3. Lawmakers to taxpayers – “trust us on the numbers”: The bill reportedly saves up to $160 billion over the next 30 years, drops around $20 billion off the unfunded liability and reduces the first-year payment by up to $1.5 billion. Yet there has been no official actuarial analysis released from the Commission on Government Forecasting and Accountability.

Buck Consultants – actuaries for TRS – ran a preliminary analysis and concluded with the following: “While this analysis may provide some insight into the potential financial impact of this proposal, Buck Consultants strongly recommends that no action be taken on this analysis until final language is reviewed and evaluated by Buck Consultants.”

4. Under this plan, the unfunded liability remains at crisis levels: The bill reportedly only drops the unfunded liability to 2011 levels – levels that had already thrown Illinois into crisis. Bringing the pension-funding levels back to the crisis levels of just a few years ago isn’t reform. And the remaining $80 billion pension shortfall will continue to cripple the state.

5. Plan fails on COLA reform: This bill continues to pay cost-of-living adjustments, or COLAs, to five- and six-figure pensioners. There are nearly 35,000 retirees who receive more than $70,000 in annual pension benefits. This bill asks taxpayers to pay for COLAs of retirees who will collect millions in pension benefits over the course of their retirement.

6. Bill follows same broken model – Edgar ramp 2.0: People are enticed by the “new” plan that gets the systems to 100 percent funding by 2044. But that 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.

We are still exposed to the exact same defined benefit system. The same politicians. The same actuaries. The same ramp.

7. Bill allows early retirement benefits: The pension bill still allows many state workers to retire before age 60 with full benefits. For example, a 40-year-old teacher can still retire at age 57 with full benefits. Taxpayers will still be paying for the pensions of state workers who will retire a full decade before they will.

 

Ben VanMetre
Senior Budget and Tax Policy Analyst