Illinois' Pension Bomb Has a Short Fuse
A crisis exposes weaknesses.
The COVID-19 economic crisis showed the danger of government making promises it can’t afford.
Here in Illinois, the crisis has served as a dress rehearsal for the kind of havoc the state’s pension crisis could inflict on the Illinois economy and government retirees if nothing changes.
More than 1 in 10 Illinoisans – 1.1 million, or about 11.4% of the adult population – are members of an Illinois public pension system.
Those government retirment systems are sitting on mountains of debt. There's $144 billion in debt just in the five statewide systems, by the state’s conservative estimate, or $261 billion by a more realistic, independent estimate. They average only 40% of the funds needed to pay out retiree benefits long-term.
If you add in local pension debt, Illinois’ unfunded pension liability totals more than $200 billion by the state’s measure, and that amount grows every year. Another shock such as the Great Recession could cause the first pension fund to run out of money by 2039, according to actuarial analysis.
That amounts to a broken promise not only to retirees who are banking on having their pensions to support them, but also to the taxpayers who continue getting hit with higher taxes just to keep things from tanking.
Illinois politicians have enhanced benefits without funding them and pushed off the financial reckoning for decades. As a result, pension costs, which took up just 4% of the state’s budget in the 1990s, have increased by more than 500% during the past 20 years, growing to consume more than 25% of budgets in recent years - rapidly approaching 30%.
What’s more, generous retirement perks have been promised, time and time again, than can’t securely be delivered without financial hardship to the rest of the state. With employee contributions and benefits both fixed by state law, shortfalls in investment returns must be made up by taxpayers.
The cost of public pensions has grown so fast that taxes go up year after year – and even that isn’t enough to stop the mushrooming liability. As a result of overly optimistic expectations for investment growth, taxpayer contributions to the systems have grown much faster than official projections suggested they would. From 2010 to 2019, taxpayers were forced to pay $7.6 billion more than the state estimated they would, compared to projections five years prior to each payment. On average, taxpayer costs were 15% higher than expected during the past decade. The ripple effects of this include lagging economic growth, fewer jobs, and residents leaving for lower-taxed states.
It’s bad enough now, but without transformative changes to pensions a severe economic downturn will start a slide to insolvency. The potential collapse of government finances looms.
An actuarial stress test of the pension systems commissioned by the Illinois Policy Institute in the fall of 2019 shows if state-run pensions lose 20% of their asset value as a result of a recession – the same loss experienced in 2009 – and the average return on investment matches the roughly 4.6% the funds experienced in the decade that followed, the five retirement systems will run out of money in fewer than 30 years.
Under the stress test scenario, the State Universities Retirement System would be the first to reach insolvency, and by 2039, the fund would be unable to pay full benefits with assets on hand. The other systems would see their funding ratios – the amount of money on hand to pay promised benefits – decline each year despite constantly increasing employer contributions. Retirement systems for teachers, state employees and elected officials would run out of money between 2046 and 2048.
Last fall, taxpayers overwhelmingly rejected a push by Gov. J.B. Pritzker to scrap the Illinois flat tax protection in the constitution in favor of a progressive system he said could raise more funds to cover the crisis. In reality, the new tax scheme would have failed to pay off pension debt while enhancing politicians’ ability to raise everyone’s taxes in the future.
Still, Illinois House Speaker Emanuel “Chris” Welch floated the idea Feb. 24 of resurrecting the plan to pay for pensions, despite its political unpopularity.
To avoid a future in which Illinois taxpayers are continually asked to pay more in taxes for fewer and fewer government services – while public servants are left with shaky retirement systems – Illinois must enact structural reforms as soon as possible to make pensions more resilient and affordable.
Amending the Illinois Constitution to allow for reductions in the future growth of pension liabilities, without taking away a single dollar of already earned benefits, could solve the problem in a way that’s fair and beneficial to every Illinoisan.
Modest reforms similar to those in a law passed in 2013 – before it was thrown out by the Illinois Supreme Court – can solve the pension crisis while still leaving public workers with generous retirement benefits that are more secure than the status quo. A pension reform amendment will ensure the changes survive future legal challenges.
Reforms that replace impractical, compounding post-retirement raises with a true cost-of-living adjustment pegged to inflation, that slightly raise retirement ages for younger workers and that temporarily freeze annual benefit increases for some of the state’s largest pensions to bring them back in line with inflation would fix the problem. Those moves can save the state over $2 billion per year while fully eliminating the debt by 2045.
Everyone knows the only way to solve Illinois’ pension crisis is to do the right thing by addressing out-of-control benefits. Politicians have to defuse the Illinois pension bomb, before it’s too late.
Adam Schuster is senior director of budget and tax research at the Illinois Policy Institute.