State Rep. Elaine Nekritz, state Rep. Daniel Biss and several of their rank-and-file colleagues recently unveiled a new pension reform proposal. These lawmakers should be commended for stepping forward with a plan, rather than waiting on their political leaders to get around to fixing the problem. Unfortunately, the Nekritz-Biss plan falls short of fixing the state’s massive pension problem.
The proposal makes clear that lawmakers still do not understand the full scope of Illinois’ retirement debt crisis. Under new accounting rules, the state’s five pension systems are underfunded by more than $200 billion. That’s on top of the $15 billion of principal remaining on the pension obligation bonds sold under the Blagojevich and Quinn administrations. And on top of the $54 billion the state owes for unfunded retiree health benefits!
Despite this massive retirement debt, lawmakers continue to pursue plans that preserve too much of the existing, broken system. Government unions and taxpayers alike have long decried politicians’ mismanagement of the state’s pension funds – so why would “reform” keep more of the same?
Instead of giving government workers control over their own retirement dollars, the Nekritz-Biss proposal keeps politicians in control of the retirement systems and keeps taxpayers on the hook for poor investments. The new “cash balance” plan for future employees, for example, still guarantees a minimum of 4 percent returns on the pension funds’ investments. The returns earned by the Teachers’ Retirement System, or TRS, has averaged just 1.2 percent during the last five years, before accounting for investment fees. After fees, those returns are even lower.
It’s time to get government out of the retirement business. We cannot trust the politicians who caused Illinois’ pension crisis to manage it going forward. That’s why we need a government retirement system that is reliable and secure for workers, as well as affordable for taxpayers: a defined-contribution plan for all future work, similar to the 401(k) plans available in the private sector and the 401(a) plans already offered to many state university workers.
Although the Nekritz-Biss proposal does modify the automatic cost-of-living adjustment, which is one of the largest drivers of the state’s pension liability, the minor tweak simply does not go far enough.
According to TRS, the average teacher who retied in 2011 after 30 or more years in the classroom received a starting pension of $66,699 – more than twice the maximum Social Security benefit. The automatic, compounded cost-of-living adjustment boosts this even higher, increasing the typical pension by a compounded 3 percent every year, regardless of inflation. During the course of retirement, this career teacher can expect to receive $2.2 million in pension benefits. Nearly $600,000 of that lifetime payout is a direct result of the automatic cost-of-living adjustment.
Freezing the compounding cost-of-living adjustment until the pension systems recover would reduce between 20 to 30 percent of the state’s total pension liability. This is the single most effective way to immediately reduce the size of the state’s pension debt and guarantee the safety of future retirements.
Another failure of the Nekritz-Biss plan is it phases in changes to the retirement age much too slowly to significantly reduce the state’s unfunded pension liability. The plan increases retirement age between one and five years for some workers, leaving others with no changes at all. The state is unlikely to see any major savings from this component for decades, given that the full increase only applies to young workers, the increase itself is very modest and the increase is phased in very slowly.
The Nekritz-Biss plan also phases in local pension accountability too slowly, and fails to give school districts greater flexibility to manage their finances. The plan phases in the normal cost of future retirement benefits by 0.5 percent of payroll per year, meaning that it will take between 10 and 20 years to fully phase in. Worse yet, the plan does not provide school districts with greater flexibility to operate more efficiently and lower their costs.
Finally, the Nekritz-Biss plan asks current workers to contribute more toward a broken and unsustainable pension system. Asking employees to contribute more money, without fundamentally reforming the system to give employees more control over their retirement savings, is no solution to the pension crisis.
Illinois has the worst funded pension system in the nation. Big challenges need big solutions. The only way to move toward those solutions is to get politicians out of the retirement business altogether.
Jonathan Ingram is Director of Health Policy and Pension Reform at Illinois Policy Institute