Illinois has a pension problem, but it’s not what you think

This is not a story about underfunded public pensions.

It’s no secret that Illinois has more than $140 million in unfunded pension liabilities. However, the “funded ratio,” or assets divided by liabilities, is up 7% under Gov. JB Pritzker to its highest level in two decades. Pension payments have stabilized at 20% of the budget.

But part of this improvement has been on the backs of public service workers.

Since 2011, Illinois has had a two-tiered pension system. Most teachers, nurses, university workers, and state employees now are in “Tier 2.” These workers must work longer before reaching retirement age, have smaller salary bases for determining benefits, and receive cost-of-living adjustments that fail to keep pace with inflation. Their retirement earnings are far below their “Tier 1” counterparts in the same exact jobs.

Now, Illinois faces a growing public service labor shortage. Vacancy rates at state agencies are at record highs, with between 5,000 and 8,000 unfilled positions since 2021. Illinois is short 15,000 registered nurses. There are 7,500 unfilled teaching and public-school positions, and surveys of school superintendents have identified “retirement system issues” as a primary culprit.

Labor shortages create downstream consequences we can feel in our communities. Fewer teachers mean larger class sizes and poorer educational outcomes. Nurse shortages degrade the quality of patient care and invite preventable medical errors. Child and family services vacancies mean children linger in foster care when they’d otherwise be adopted. Open juvenile justice services mean less treatment and care for troubled youth.

Tier 2 also has exposed the state to legal liability. Teachers and many state government employees are not covered by Social Security and, under federal law, their pensions must be at least equivalent to what they would have received in Social Security benefits. But thousands of Tier 2 workers are at risk of earning less. If the state does nothing, it could face costly lawsuits.

Some policies have been put forth to address these concerns.

The Pritzker administration has proposed reforming Tier 2 to comply with Social Security and fully funding pensions by 2048, which would at least address the legal matter.

The Fair Retirement and Recruitment Act proposed in the General Assembly would go further. It matches Social Security, lowers retirement ages, and improves salary bases and cost-of-living adjustments. Three-quarters of the legislation would be paid for by taking a portion of money being used to pay off bond debts and redirecting it toward pensions once those bonds come off the books in 2030 and 2033. The remaining cost would be $3 billion over two decades — about $150 million per year.

It’s fair to question whether pension reforms should occur at a time when the federal government is gutting funding. The “One Big Beautiful Bill Act” will cost the state nearly $600 million this year. Illinois also is facing $8 billion in federal health care, education, food aid, and infrastructure cuts by 2029, which will shrink employment by 86,000 jobs. This “lost” funding is money Illinois taxpayers already paid to the federal government through income taxes, entrenching Illinois as a “Donor State” while our neighbors “take” more than they put in.

While Congress or a future president can alter federal distributions to correct the Donor State vs. Taker State dynamic, state officials need not let this temporary (but serious) obstacle prevent them from fixing Tier 2. History has shown that kicking the can down the road only worsens long-term issues.

So when it comes to pensions, Illinois finally has halted the explosive growth in unfunded liabilities but created a new problem: a pension system that exposes the state to legal liability and undermines its ability to attract and retain the workforce needed to deliver vital health, education, and public services in our communities.

The next step is for the state to consider meaningful reforms that can restore its competitiveness in the public service labor market without breaking the bank.

• Frank Manzo IV is an economist at the nonpartisan Illinois Economic Policy Institute.