By Jonathan Ingram – Director of Health Policy and Pension Reform at Illinois Policy Institute
In the mid-1990s, Illinois lawmakers were facing a serious problem: the unfunded liability of the state’s five public pension systems. By 1996, the state’s unfunded pension liability stood at $20 billion. As a way to combat this growing problem, the state created a repayment schedule, often called the “pension ramp.” The pension ramp promised to get the systems 90 percent funded by 2045.
According to the repayment schedule, by now the five systems should be nearly 57-percent funded. Instead, the systems are just 39-percent funded and the state’s pension debt has grown to $95 billion. So what happened?
If you spend any time in Springfield, you’ll often hear that the pension debt was caused by the state “skipping pension payments.” But this is what you probably won’t hear: taxpayers have actually paid more than the pension ramp projected.
Under the original repayment schedule, the state was to pay $32.1 billion between fiscal years 1996 and 2012. So what really happened? Taxpayers pumped $40.1 billion into the pension systems, or $8 billion more than the original ramp called for.
These are problems with the underlying structure of Illinois’ pension plans, not problems stemming from taxpayers shirking their responsibilities. The defined-benefit structure guarantees that a large share of the actual costs will be hidden and largely unknown until the systems come back to taxpayers asking for more money to make up for poor returns and mistaken assumptions.
This creates massive uncertainty for future budgets. For example, the state’s fiscal year 2014 pension contribution was projected to be $3.7 billion when the pension ramp was created. The actual contribution for fiscal year 2014, on the other hand, will be $6.8 billion. That’s nearly twice as much as what was predicted, despite the fact that taxpayers have pumped $8 billion more into the pension system than the original pension ramp called for.That’s why we need a government retirement system that is reliable for workers, but still affordable for taxpayers. We must freeze all of the defined benefits workers have already earned and move to a defined-contribution plan for all future work, similar to the 401(k) plans available in the private sector and the 401(a) plans already offered to many state university workers.
Illinois has the worst-funded pension system in the nation. Big challenges need big solutions. The only way to move toward those solutions is to get politicians out of the retirement business altogether and give employees real control over their retirement savings.