By Pat Hughes
At long last, lawmakers in Illinois now seem to agree that some sort of pension reform must take place, finally grasping that the state has $200 billion in unfunded pension liabilities. There are, however, two very different schools of thought on how best to solve the problem.
One school of thought thinks that the pension system can be left largely in place but be fixed with incremental reforms, such as gradual changes in cost of living adjustments, employee contributions, and retirement ages. These ideas are at the heart of Daniel Biss’ and Elaine Nekritz’s pension reform proposal, HB 98.
The other perspective recognizes that the real problem is that the defined benefit structure does not work.
It does not work because annual pension contributions are put into investment funds, and the state had drastically unrealistic expectations for those returns—ranging between 7-8.5% annually for Illinois’ major pension systems. For example, none of those systems received more than a 1% return in fiscal year 2012. Failing to earn the promised investment returns has become the norm rather than the exception over the last 20 years.
That is how we got into this mess, and that is what remains almost entirely unchanged in the Biss/Nekritz pension plan.
Worse yet, the Biss/Nekritz plan guarantees that the state will make its payments. That sounds nice, but when the investment returns inevitably (and it is inevitable) come up short from these outlandish projections, taxpayers have to make of the difference.
What if the system were to fall $10 billion short in a particular year? That would mean either a sudden and drastic cut in core government services or a sudden and drastic tax hike on hardworking Illinoisans.
Opponents of the Biss/Nekritz plan understand that the state must move toward a defined-contribution, 401k-style structure, similar to the structure that 85% of the private sector has today. This system is far more fair for the taxpayers that fund it, as well as more fair for the employees paying into it—they finally have control over their own retirement without having to depend on politicians.
That is why is it especially frustrating to see Republicans in Illinois reaching across the aisle on defined benefit-style proposals. Two Republicans—David Harris (Mt. Prospect) and Darlene Senger (Naperville)—are even co-sponsoring the Biss/Nekritz legislation. Regardless of whatever concessions they think they are getting from Democrats on that deal, the resulting reforms would be shams, doing next-to-nothing to fix this system in the short or long term.
Compromise is not a good thing in and of itself. Meeting “somewhere in the middle” on pension reform leaves a system that remains completely impractical and irresponsible.
Democrats have the votes to pass whatever new pension structure they want—let them. And 2, 5, or 10 years down the road, when we are in this same situation again, they can own that result. The only reason they seek Republican votes now is so they can’t be held singularly responsible when their ideas fail.
Republicans, as well as any lawmakers that want to stand for real reforms and lasting solutions, need to draw a line in the sand and refuse to go along with any pension plan that leaves the current defined-benefit system in place.