We need a sense of urgency on self-managed public pensions

  • Kristina Rasmussen

    Kristina Rasmussen

  • Associated Press File PhotoThe Illinois legislature missed an opportunity to act on pension reform during the spring General Assembly session.

    Associated Press File PhotoThe Illinois legislature missed an opportunity to act on pension reform during the spring General Assembly session.

 
By Kristina Rasmussen
Guest columnist
Posted6/8/2015 1:00 AM

Illinois House Speaker Mike Madigan and Senate President John Cullerton left Springfield at the end of May without sending a budget to Gov. Bruce Rauner. Without a budget, state operations grind to a halt and a shutdown looms as early as July.

As outrageous as their abdication of duty is, it's not the only place where the Illinois General Assembly fumbled badly this spring.

                                                                                                                                                                                                                       
 

Their biggest missed opportunity came on May 9 -- the day after the Illinois Supreme Court ruled against changing existing workers' pension benefits.

On that day, the General Assembly should have moved swiftly to put every new government employee into a defined-contribution retirement plan. These are better known in the private sector as a 401(k)s.

There is no question about the constitutionality of setting up a new retirement system for workers about to start their first day on the job. Indeed, Madigan and Cullerton did it themselves when they created Tier 2 -- a second defined-benefit system -- in 2010. And they did it all over the course of just one day -- literally within hours.

It's common sense that if you're trying to get out of a hole, you stop digging. Similarly, if Illinois wants to stop the spiraling pension debt crisis, it should move every new hire into a 401(k) going forward. It's the only way to begin to contain the unfunded-liability threat inherent to a defined-benefit pension system.

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Madigan and Cullerton wouldn't have even needed to look very far to find a time-tested benefits package on which to model the new "Tier 3." More than 17,500 workers in the Illinois State Universities Retirement System, or SURS, have chosen a self-managed program in lieu of the politician-controlled, traditional pension plan.

In this plan, the employee contributes 8 percent of his or her salary, and the employer matches 7 percent of that salary. In total, 15 percent of the employee's salary goes toward a retirement savings account each pay period that is then invested. It's generous enough not to trigger Social Security enrollment.

This approach creates greater budget certainty for taxpayers, empowers government workers with control over their own savings and ultimately moves retirement costs to a more sustainable path. Perhaps most importantly, it creates fairness between public- and private-sector workers.

And contrary to received wisdom, 401(k)-style reforms don't have to come with prohibitively expensive "transition costs."

A new analysis by an actuarial firm regularly used by the state shows that moving all current and new workers into a 401(k) could actually knock $1 billion off the state's annual pension payment, and that's even after making the defined-contribution match.

                                                                                                                                                                                                                       
 

Plus, it would immediately reduce the systems' unfunded liability by 20 percent while meeting scheduled payouts for already-earned benefits. A plan for just new hires will offer less savings because fewer people are enrolled in it at the outset, but over the long haul, it is part of any real pension solution.

The case for immediately aligning all new hires with a self-managed plan is compelling. It is affordable. And it is politically possible.

Rauner campaigned on supporting 401(k)-style reforms. So have many legislators, including state Sen. Matt Murphy and state Reps. Tom Morrison, Jeanne Ives and a number of their colleagues. Why not put one of those campaign promises to the test?

There's still a chance to get the job done. The General Assembly will be called back to Springfield on a rolling basis throughout the summer. Any time not spent hammering out a budget compromise or improving Illinois' job climate should be spent passing a self-managed plan for all new government employees.

Every day that the General Assembly does nothing, the pension liability grows by another $13 million. Illinois can't afford another day of inaction from Madigan and Cullerton.

Kristina Rasmussen is executive vice president of the Illinois Policy Institute, a taxpayer watchdog organization.

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