Key Takeaways
- • Illinois' government-worker pension system is described by the Illinois Policy Institute as the worst in the nation, with pension costs consuming roughly 25 percent of the state budget versus an average of about 4 percent for other states.
- • The state's 2015 pension shortfall has reached $111 billion, according to the report, which attributes the gap to overgenerous benefits, political manipulation, and inherent defined-benefit plan flaws.
- • Illinois has 667 government pension funds covering more than 1 million workers and retirees, and the report notes Moody's and Fitch have assigned the state its lowest credit rating in the nation, three notches above junk.
- • The report contends that about 60 percent of the state's pension shortfall stems from failed actuarial assumptions such as investment returns and mortality rates, rather than missed contributions alone.
- • The Illinois Policy Institute advocates shifting new public workers to defined-contribution plans such as 401(k)s and reforming benefits not yet earned, while acknowledging that already-earned benefits are constitutionally protected.
Summary
The Illinois Policy Institute's explainer, authored by Ted Dabrowski and John Klingner, characterizes the state's government-worker pension crisis as the worst in the nation. The report argues the burden extends beyond public employees to lower-income residents, retirees, and taxpayers, as rising pension costs have forced the state, the city of Chicago, and hundreds of municipalities to raise taxes and cut programs that lower-income residents rely on.
The report describes Illinois' system as predominantly defined-benefit, in which employees and employers contribute a set share of salary that is invested, with guaranteed lifetime benefits and automatic cost-of-living adjustments of typically 3 percent annually. It notes that the state's 667 government pension funds cover more than 1 million workers and retirees, including five state-run funds, hundreds of police and firefighter funds, and multiple Chicago and Cook County funds. By contrast, nearly 85 percent of private-sector employees are in defined-contribution plans, and Oklahoma and Kentucky have moved toward such models.
Attributing the crisis to three factors, the institute cites overly generous benefits, including retirement in the 50s for 60 percent of state workers, and cites an example of a state's top pensioner earning a COLA exceeding $16,000 in 2015. It also points to political manipulation, including Gov. Jim Edgar's 1994 legislation extending contribution schedules through 2045, and to the diversion of $3 billion in Chicago teacher pension contributions over a decade. The report says the state's 2015 shortfall reached $111 billion and that Chicago police and firefighter funds hold only about a quarter of needed assets. The General Assembly's retirement system is reported to be 16 percent funded.
The report concludes that defined-benefit structures are inherently unsustainable, and it rebuts defenders of the status quo, including the Chicago Teachers Union, on average pension figures and constitutional protections. It maintains that already-earned benefits should be protected while future benefits can be reformed.
The report describes Illinois' system as predominantly defined-benefit, in which employees and employers contribute a set share of salary that is invested, with guaranteed lifetime benefits and automatic cost-of-living adjustments of typically 3 percent annually. It notes that the state's 667 government pension funds cover more than 1 million workers and retirees, including five state-run funds, hundreds of police and firefighter funds, and multiple Chicago and Cook County funds. By contrast, nearly 85 percent of private-sector employees are in defined-contribution plans, and Oklahoma and Kentucky have moved toward such models.
Attributing the crisis to three factors, the institute cites overly generous benefits, including retirement in the 50s for 60 percent of state workers, and cites an example of a state's top pensioner earning a COLA exceeding $16,000 in 2015. It also points to political manipulation, including Gov. Jim Edgar's 1994 legislation extending contribution schedules through 2045, and to the diversion of $3 billion in Chicago teacher pension contributions over a decade. The report says the state's 2015 shortfall reached $111 billion and that Chicago police and firefighter funds hold only about a quarter of needed assets. The General Assembly's retirement system is reported to be 16 percent funded.
The report concludes that defined-benefit structures are inherently unsustainable, and it rebuts defenders of the status quo, including the Chicago Teachers Union, on average pension figures and constitutional protections. It maintains that already-earned benefits should be protected while future benefits can be reformed.
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