Research & Commentary: Illinois’ Pension Problem and How to Fix it

Published October 18, 2012

The pension system in Illinois is broke, both literally and structurally. Funding Illinois’ pension system is becoming increasingly difficult. According to Bloomberg, the national median funding ratio for state pension systems is around 71.7 percent for the year through June 2011. Illinois has the nation’s weakest funding ratio, at 43.4 percent.

The recent decision by the Illinois Teachers Retirement System (TRS) to lower its expected rate of return for its pension fund investments and its push for cost-of-living benefit cuts are positive steps, but they don’t go far enough to address the major problems built into the pension system.

The TRS’s modest decrease in its expected rate of return is not enough. The state’s public pension benefits are much more generous than private-sector retirement accounts, yet public-sector unions continue to protest and strong-arm legislators into leaving these gold-plated benefits untouched despite the state’s dire finances. This is shortsighted and dangerous, as the resistance to reform places the state’s taxpayers in an increasingly tenuous position.

Without an overhaul of the current, unsustainable pension system, Illinois taxpayers will continue to be burdened by substantially higher taxes to bail out legislators and special interests for their imprudent policies. If public-sector union bosses do not accept sensible changes, more state workers will be laid off, taxes will increase, and the state’s economy will decline even further.

The Illinois constitution prohibits fundamental reform of pensions for existing public-sector employees, so other steps will be required. Lawmakers should do the following: cap per-year pension payouts at a sensible level, raise the retirement age, eliminate double-dipping, change the pension payout formula, and require workers to make higher contributions to their pensions.

Newly hired public-sector workers should be placed in defined-contribution pension plans. Under these plans, workers own their pensions and can take them with them if they enter the private sector. Defined-contribution plans prevent the burden on taxpayers from rising automatically in future years.

The documents linked below offer additional information about pension system reform.

Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
John Nothdurft, director of government relations at The Heartland Institute, provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans. 

The State Public Pension Crisis: A 50-State Report Card
The Heartland Institute examines problems facing public pension systems, including the enormous burdens they pose in some locations. The report ranks each state on the operation and disposition of its pension plans and suggests ways to solve states’ pension system problems.

Research & Commentary: Public Pensions and the Assumed Rate of Return
Heartland Institute Senior Policy Analyst Matthew Glans examines the problems facing state and local pension funds, how assumed rates of return affect pension fund debt, and proposals to change the projected rates of return on pension fund investments.

The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
The Reason Foundation tackles the looming crisis created by states’ continued use of defined-benefit pension plans. This paper offers solutions to the pension problem and an analysis of why the current system is a disaster in the making. 

Pension Time Bomb
Columnist George Will describes how a California city had to file for bankruptcy because of its underfunded and over-generous defined-benefit pension plan. 

Defined Contribution Pension Plans in the Public Sector: A Best Practice Benchmark Analysis
This white paper from the TIAA-CREF Institute “addresses best practice benchmarks for the design of public sector primary (core) defined contribution pension plans. It includes an examination of the environmental conditions and factors affecting these plans as well as general principles for the design of effective defined contribution plans. Selected public sector core defined contribution plans are reviewed against identified best practices.” 

Let Employees Control Future of Retirements
Jagadeesh Gokhale and Peter Van Doren of the Cato Institute explain why the market is best-suited to relieve the fiscal pressures caused by state pension funds. 

The Ticking Time Bomb in State Pensions
The Boston Globe reports on how challenging the problem of defined-benefit pension plans has been in the corporate world and how the crisis will play out in the public sector. 

State Pension Funds Fall Off a Cliff
Barry W. Poulson and Arthur P. Hall consider different measures of historical and current funding shortfalls in state pension plans. Two case studies—the Public Employee Retirement Association of Colorado (PERA) and the Kansas Public Employee Retirement System (KPERS)—are examined in depth to explore fatal flaws that have caused funding crises in these plans. 

Market Slide Batters State Pension Funds offers a good synopsis of the condition of public pension plans nationally, particularly the growing unfunded liabilities resulting from the downturn in the economy. 

Pension Liabilities Loom as States Try to Help Retirees
USA Today explains how widespread state government pension problems are and describes policies states are trying as a way of easing the burden on their budgets.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit The Heartlander’s Budget and Tax News Web site at, The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database, at

If you have any questions about this issue or The Heartland Institute, contact Heartland Institute Senior Policy Analyst Matthew Glans at 312/377-4000 or [email protected].