As your State Senator, and more importantly a resident of the 110th House of Representatives District, I read with great interest the October 10th JG-TC coverage of the debate between Republican Chris Miller and Democrat Shirley Bell.
One of the issues raised in the debate dealt with how Illinois can fix its broken pension system.
The pension crisis is driven by “accrued liability.” Accrued liability is the amount of money that would be owed if not only current retirees continued to receive their benefits, but every other current employee who works within the system suddenly quit and began collecting whatever benefits they had earned at that point. According to that measure, the state-managed pension funds have asset levels that account for approximately 35 percent of the “accrued liability” figure.
Now the “accrued liability” figure is important, but not because we need to be realistically concerned that one day every employee will just walk away from their job. Here’s why it matters, using a simple example. If parents of a child want to save for higher education, they’ll be wise to start saving money and investing it now. The earlier the money is invested and earning a return, the larger the investment returns will be later. The larger the investment returns, the more money is accumulated, and that’s less money the parents will be required to pay later.
It’s the same for the pension funds. The more money that’s put away and invested, the less taxpayer money will be required later. So the accrued liability figure is a good measure of how prudent the state’s investment and fiscal practices may or may not be.
Why is that funding ratio so low? In the Oct. 9 debate Dr. Bell, the Democratic nominee, is quoted as having blamed "the state," meaning members of the General Assembly and governors for not paying enough into the pension funds. That’s true, to an extent. About half of the shortfall is attributable to inadequate investment by policymakers. But the other half is attributable to lower than expected investment returns and pension enhancements approved in the 1980s and 1990s that were not paid for by those employee groups. To the extent that she is correct, Dr. Bell should be contacting the leader of her party, Speaker Madigan, and lodge her complaint there. Democrats controlled the General Assembly and the Governor’s Office and provided almost every vote the last three times the state shorted the pension funds.
The road forward must include paying the pension obligation and exploring responsible changes to the system. Both candidates advocated for a change in the system, but the system has been changed, in 2011. Beginning that year, all new employees began working under a new system of pension benefits known as “Tier 2.” Tier 2 benefits are significantly lower than the original system (Tier 1). Tier 2 benefits are low enough, in fact, that the early actuarial studies indicate state taxpayers will actually see a net gain in revenue for every employee enrolled in the new system.
So if the new pension benefit system is actually a net money-maker for taxpayers, why are we still in crisis? Because pension changes take decades to make a difference in the bottom line. Even though all new employees have been working under the new system for almost eight years, remember there are thousands who are retired and receiving benefits already under the original system and thousands more who began their employment prior to January of 2011, and therefore, will retire and receive Tier 1 benefits. So while the bottom line will improve significantly over time, that is decades down the road.
What about a defined-contribution, “401(k) style” plan, such as what Republican Chris Miller suggested? It’s the right idea -- almost everyone in the private sector is enrolled in such a plan, and more public entities are moving in that direction. I’ve sponsored legislation that would add such a plan to our pension system to start that conversation, but it comes at an up-front cost, and those who advocate for an overall reduction in government spending must account for it. It’s the right system in the long term, for everyone involved, but it won’t be free. Nothing in government ever is.