Illinois is at a crossroads regarding pensions. I propose changes that go to the root of the problem, namely, to tax the pensions paid by the state. At 5 percent a year the state could collect more than cutting back the health insurance and the payment to adjust for inflation, namely, cost-of-living adjustments.
The state cannot strap itself to paying pensions out of funds that do not grow as fast as the payments, mainly because the state failed to pay its monthly obligations. The pension liability today amounts to over $85 billion. If the state cannot pay the pensions, then it must change the system. In other words, the state has to stop paying pensions and the responsibility must be turned over to private institutions that will manage the funds contributed by the state and the future annuitants. At their retirements, the employees will receive a pension proportionate to the funds deposited throughout their employment. Also, the state cannot continue to promise a payment of up to 75 percent of the last salary to its retiring employees, and those new pensions should capped at a reasonable level.
Illinois is paying pensions with funds received from current employees. To discontinue this practice the state will have to issue bonds to pay current retired persons. The repayment of those bonds will be done as the annuitants die. Current employees who have worked more than certain years will be given the choice to stay within the state system or to move to a private pension fund provider. After four or five decades, the state will be free of the pension problem and fiscally stronger.
These solutions, to tax pensions as any other income and to abolish the current pension system, are both radical but necessary.
J. Ignacio Mendez
Professor emeritus
Northeastern Illinois University
Chicago
