The Chicago Sun-Times recently reported some very alarming facts about Illinois’ public pension system, among them:
* Nearly 4,000 state retirees are receiving more than $100,000 per year in pension payouts; and
* 14,280 retirees are making more than they earned during their highest-salaried year.
While these extreme pensions represent only a fraction of the total, they are indicative of a much larger problem. The pension system in Illinois is broke, both literally and structurally.
The state’s public pension benefits are much more generous than private-sector retirement benefits, yet government worker unions continue to protest and strong-arm legislators into leaving these gold-plated benefits untouched regardless of the state’s dire fiscal situation. This is short-sighted and dangerous, and the continuous resistance to reform places the state’s taxpayers in an increasingly tenuous position.
Without pension reform, Illinois will continue to dig itself into a deeper financial hole each year, requiring spending cuts and/or more tax hikes. If public-sector union bosses do not accept sensible changes to the pension system, more state workers will be laid off, taxes will increase, and the state’s economy will decline even further.
Newly hired public-sector workers should be placed in defined-contribution pension plans. Under these plans, workers own their pensions and can take the pensions with them if they enter the private sector. Defined-contribution plans prevent the burden on taxpayers from rising automatically in future years.
Because the state’s constitution prohibits fundamental reform of pensions for existing public-sector employees, different steps are needed to help alleviate the fiscal burden. Per-year pension payouts should be capped at a sensible level, the retirement age should be raised, double dipping should be eliminated, the way pension payouts are formulated should be changed, and workers should be required to make higher contributions.
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.
The documents linked below offer additional information about pension system reform.
Research & Commentary: Defined Contribution vs. Defined Benefit Pensions
http://heartland.org/policybot/results/23974/
Heartland Institute Legislative Specialist John Nothdurft provides a bullet-point comparison of defined-benefit pension and defined-contribution retirement plans.
The Gathering Pension Storm: How Government Pension Plans Are Breaking the Bank and Strategies for Reform
http://www.reason.org/ps335.pdf
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
http://www.washingtonpost.com/wp-dyn/content/article/2008/09/10/AR2008091002726.html
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
http://www.tiaa-crefinstitute.org/research/articles/docs/DCPlansinPublicSectorCraneHellerandYako.pdf
This white paper from the TIAA-CREF Institute “addresses [the] 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.”
Next Big Bailout: Public Pensions?
http://heartland.org/policybot/results/24917/
This Detroit News op-ed by Heartland Institute Legislative Specialist John Nothdurft outlines the mounting public pension crisis. Nothdurft warns, “Without an overhaul of these unsustainable pension systems, American taxpayers will be forced once again to bail out governments for their foolish, shortsighted decisions.”
Let Employees Control Future of Retirements
https://www.cato.org/pub_display.php?pub_id=6556
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
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2006/11/28/the_ticking_time_bomb_in_state_pensions/
This article outlines 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.
Market Slide Batters State Pension Funds
http://www.stateline.org/live/details/story?contentId=349061
This article from Stateline.org offers a good synopsis of the shape of public pension plans nationally, particularly the growing unfunded liabilities related to the downturn in the economy.
Pension Liabilities Loom as States Try to Help Retirees
http://www.usatoday.com/news/nation/2008-06-11-pensions_N.htm
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.
For further information on the subject, visit the Budget & Tax Issue Suite on The Heartland Institute’s Web site at http://heartland.org.
Nothing in this message is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. If you have any questions about this issue or the Heartland Web site, you may contact Legislative Specialist John Nothdurft at 312/377-4000 or [email protected].
John Nothdurft joined the staff of The Heartland Institute in May 2008 and left in January of 2019.
