Key Takeaways
- • Illinois government-worker pensions consume roughly a quarter of the state budget (25 percent), versus an average of 4 percent for other states, according to Illinois Policy Institute research.
- • The state's 2015 pension shortfall has reached $111 billion, and Illinois holds the lowest credit rating in the nation, three notches above junk status, per Moody's and Fitch.
- • Illinois has 667 government pension funds covering more than 1 million workers and retirees, with the General Assembly's own system only 16 percent funded.
- • The report attributes the crisis to generous benefits, political manipulation such as the 1994 Edgar legislation deferring contributions to 2045, and inherent flaws in defined-benefit plans, which account for 60 percent of the shortfall.
- • Advocates argue for shifting public workers to defined-contribution plans such as 401(k)s, as Oklahoma has done, while noting that already-earned benefits are constitutionally protected.
Summary
A Illinois Policy Institute explainer, published February 3, 2016, describes the state's government-worker pension system as the worst in the nation and argues that it threatens state workers, lower-income residents, retirees, and taxpayers alike. Written by Ted Dabrowski and John Klingner, the report says the cost of pensions has pushed the state, the city of Chicago, and hundreds of municipalities into financial strain, forcing tax increases and cuts to programs that lower-income residents rely on.
The report explains that Illinois public pensions are defined-benefit plans in which employees and employers contribute a set share of salary, and the fund invests those contributions in the stock market to meet future obligations. Illinois has 667 government pension funds, including five state-run funds, 355 suburban and downstate police funds, 296 firefighter funds, seven Chicago funds, and three Cook County funds. Credit agencies Moody's Investors Service and Fitch Ratings have rated Illinois the lowest in the nation, three notches above junk.
The authors attribute the crisis to three factors. First, they cite overly generous benefits, including retirement in the 50s for 60 percent of state workers and automatic 3 percent compounding cost-of-living adjustments. They report that 53 percent of more than 213,000 state retirees can expect lifetime benefits above $1 million. Second, they characterize pensions as a political tool, pointing to the 1994 legislation under Gov. Jim Edgar that pushed contributions out through 2045 and to Chicago's redirection of $3 billion in teacher pension contributions over a decade. Third, they argue that DB plans are inherently fragile, with 60 percent of the state's shortfall attributed to failed assumptions about investment returns and mortality.
The report says Chicago's police and firefighter funds are roughly a quarter funded, the Teachers' Retirement System less than half funded, and the General Assembly's system 16 percent funded. By 2025, it projects the state will spend more on teacher pensions than on classroom instruction. The authors contend that defenders of the status quo, including unions, misstate average benefits by including short-term workers, and that the Illinois Constitution's protection applies to earned benefits but not to benefits yet to be earned. Public-sector reform toward 401(k)-style plans is presented as the alternative, noting that nearly 85 percent of private-sector workers are in defined-contribution plans.
The report explains that Illinois public pensions are defined-benefit plans in which employees and employers contribute a set share of salary, and the fund invests those contributions in the stock market to meet future obligations. Illinois has 667 government pension funds, including five state-run funds, 355 suburban and downstate police funds, 296 firefighter funds, seven Chicago funds, and three Cook County funds. Credit agencies Moody's Investors Service and Fitch Ratings have rated Illinois the lowest in the nation, three notches above junk.
The authors attribute the crisis to three factors. First, they cite overly generous benefits, including retirement in the 50s for 60 percent of state workers and automatic 3 percent compounding cost-of-living adjustments. They report that 53 percent of more than 213,000 state retirees can expect lifetime benefits above $1 million. Second, they characterize pensions as a political tool, pointing to the 1994 legislation under Gov. Jim Edgar that pushed contributions out through 2045 and to Chicago's redirection of $3 billion in teacher pension contributions over a decade. Third, they argue that DB plans are inherently fragile, with 60 percent of the state's shortfall attributed to failed assumptions about investment returns and mortality.
The report says Chicago's police and firefighter funds are roughly a quarter funded, the Teachers' Retirement System less than half funded, and the General Assembly's system 16 percent funded. By 2025, it projects the state will spend more on teacher pensions than on classroom instruction. The authors contend that defenders of the status quo, including unions, misstate average benefits by including short-term workers, and that the Illinois Constitution's protection applies to earned benefits but not to benefits yet to be earned. Public-sector reform toward 401(k)-style plans is presented as the alternative, noting that nearly 85 percent of private-sector workers are in defined-contribution plans.
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