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SPRINGFIELD — As a nurse in her 30s, Kristen Perez cringes at the prospect of working until she’s almost 70. But because of changes made to the state’s massively underfunded pension system 13 years ago, employees like Perez, who were hired by the state after the changes took effect, don’t qualify for the same retirement benefits as her longer-tenured colleagues with the Illinois Nurses Association. “This creates a second class of state workers that sows division,” Perez said Wednesday during a rally at the Illinois State Capitol of thousands of unionized teachers, first responders and other public employees seeking changes to the state’s pension system.
“Investing in state workers and delivering a fair and equitable pension for all the state workers, this is essential to meet the needs of the state and all the communities we all serve.” At issue are concerns over reforms made to Illinois’ beleaguered pension system in 2011. Workers hired after that date were placed into a “Tier 2” system that offered reduced benefits.
The overall goal of creating the “Tier 2” plan was to shrink a pension debt that now runs to $141 billion. But at some point, benefits paid out under the system won’t equal to what Social Security would provide to those employees, a violation of a federal “safe harbor” law. That would require the state to pay large sums in Social Security taxes instead of operating its own pension system which, while still costly, allows the state more flexibility.
This week, bills were introduced in both the Illinois House and Senate that are intended to address the “Tier 2” issue. Advocates caution without meaningful changes, there will be a continued shortage of public service employees because of difficulty in hiring and retention. With the state projecting a budget deficit next year that could exceed $3 billion, however, the cost of making those changes presents a significant challenge.
“The fact is that what we need to do is make sure that we’re meeting the Social Security ‘safe harbor’ minimum. So that’s something that hasn’t been fully calculated,” Gov. JB Pritzker said at an unrelated event in Springfield on Wednesday.
“But it’s clear that it needs to be dealt with because otherwise you created a whole other liability for the state.” The pension problem is a major political issue for Pritzker and the Democrats who control the General Assembly and count on organized labor as one of their top allies. A fix to the issue could conceivably cost billions of dollars spread out over several years.
A coalition of public service unions want to see the “Tier 2” employees’ final average salary pension calculation and retirement ages in line with the previous “Tier 1” system as well as across-the-board 3% simple interest cost-of-living adjustment for all “Tier 2” retirees. The coalition also called for adjusting the pension salary cap to match the Social Security wage base. Those adjustments are reflected in the bills introduced this week by two Democrats, Rep.
Stephanie Kifowit of Aurora and Sen. Robert Martwick of Chicago. Martwick said if a regular person planned for their retirement, they should aim for replacing 85% of their previous year’s salary, which should be able to grow with inflation.
But “Tier 2” benefits are roughly half of a beneficiary’s last salary, he said. “In terms of planning for our public sector employees’ retirement, we’re giving them a terrible benefit that gets worse and then has so many negative consequences,” Martwick said. “On the one hand, for those who recognize that, a lot of them are leaving, and so we have a shortage of employees.
On the other hand, for those who stay and retire on that benefit they’re going to receive such a shock to their overall quality of life.” Illinois’ pension woes are decades-old and have proven a central obstacle for governors and legislatures in balancing the state’s budget each year. In 1994, the pension system was in such tatters that Democrats and Republicans came together on a solution.
In what was billed at the time as an “extraordinary measure,” the agreement required a steady stream of payments over the next 50 years that would force the General Assembly to fulfill its constitutional obligations to hundreds of thousands of state employees. The plan called for the state pension system to reach a 90% funding level by 2045. But the law back-loaded major state payments and was sometimes ignored, and the system fell deeper into debt.
In 1997, the pension system’s unfunded liability was $13.7 billion, and by 2010 it had reached $85.6 billion.
That year, the General Assembly made changes to the pension code resulting in the emergence of the “Tier 2” system with a goal of cutting costs long term by lowering benefits for those hired after Jan. 1, 2011. At the time, the move was projected over the next three decades to lower the state’s contributions by more than $70 billion and cut the total pension liabilities nearly in half, by $256 billion.
Experts on the teacher retirement system, the state’s largest government retirement fund, have cautioned “Tier 2” benefits would begin to fall out of compliance by 2027 because of a limit on the benefits and inflation adjustments that would be much tighter than those adopted by Social Security. This would risk leaving retirement benefits for some workers to fall below what they could qualify for under the federal system. Supporters saw the bills that were introduced in the General Assembly as a way to jump-start consideration of the pension problem by lawmakers.
But the measures are not expected to be considered in the short fall veto session this month due to the complexity of the issue and cost concerns. Lawmakers will reconvene in January for a lame duck session before a new General Assembly is sworn in. Gov.
J.B. Pritzker addresses the subject of Illinois' chronically underfunded pension system during an unrelated news conference April 18.
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