A pension reform proposal endorsed by various Illinois university presidents would erode retirement security for public employees and make it harder for schools to recruit and retain talented teachers, two authors of a new study say.
The pension plan, known as the “Universities” proposal, is currently under consideration by the Illinois General Assembly’s conference committee tasked with crafting compromise legislation to address the state’s nearly $100 billion in unfunded pension liabilities.
Howard Wial, an associate research professor at the University of Illinois at Chicago, and Stephen Herzenberg, executive director of the Pennsylvania-based Keystone Research Center, analyzed the pension proposal as part of their study released Wednesday.
The pension proposal, put forth by a group of scholars from the University of Illinois and Northern Illinois University, focuses on the State Universities Retirement System. Members of the pension conference committee have said they are looking at ways to adapt the plan for other retirement systems.
“Policymakers need to recognize that this plan represents a very deep cut to public pension benefits despite the consensus that state underfunding, not public-sector employees, is responsible for Illinois’ pension challenges,” Herzenberg said in a statement.
The state's pension conference committee was put in place in June after the Illinois legislature failed to pass a reform measure during the spring legislative session. The House approved a plan that raises the retirement age, slashes cost-of-living adjustments (COLAs) and raises employee contributions. Proponents of the House measure say it provides the most savings, but critics say it’s unconstitutional. The Senate shot down the House bill and passed its own measure, backed by labor unions, that saves less money, but offers pensioners a choice. The House, however, never took up the Senate’s original bill.
Members of the conference committee have been meeting over the summer to address the issue, but have yet to say when they will unveil their own pension reform package.
Wial and Herzenberg did praise a recommendation in the university plan, which calls for the state to make fixed payments into the pension system. This would help guarantee that the state's payments are not too small in the future. But besides that, the proposal has “critical flaws” that need to be addressed, the researchers said.
According to the two researchers' analysis, “The [university] plan would undermine the long-term retirement security of Illinois’ public-sector retirees, most of whom do not receive Social Security benefits like their counterparts in most other states.”
About 80 percent of the university proposal’s estimated savings are projected to come from reducing the inflation-adjusted benefits of current and former state workers, the authors noted.
The proposal’s central feature would change the 3 percent compound interest on COLAs to one-half of inflation, which would lead to deep cuts in benefits over the course of retirement, the study reads. According to the authors, the COLA change amounts to a one-third cut to inflation-adjusted benefits for long-term retirees.
The authors also pointed out that retirement income under the proposal would be protected against inflation only half as much as Social Security benefits, which are indexed to the Consumer Price Index.
The benefit cuts would be particularly harmful, they say, to the retirement security of lower-income state workers and retired employees, specifically teachers, who are not enrolled in Social Security during public employment.
Just two out of 19 other state pension plans in which employees in 10 states do not participate in Social Security have less inflation protection than what is suggested in the university proposal, according to the study.
The proposed benefit cuts could result in less competitive compensation packages for college-educated public workers compared to what the private sector offers. This means it would be tougher for Illinois public schools, for example, to attract or keep teachers, the authors noted.
Additionally, the pension proposal would set up a hybrid retirement plan for new employees that combines a smaller defined benefit pension with 401(k)-style savings accounts. The authors claim that the move would actually create a new threat to the fiscal sustainability of the state’s pension systems.
“This could lead plan managers to invest in more conservative and liquid assets, reducing future investment returns for the existing pension plans and increasing the state’s unfunded liabilities, with taxpayers having to make up the difference,” the report reads.
Overall, Wial said the university proposal “falls short.”
“Illinois workers and taxpayers need a more balanced proposal that is fiscally sustainable but doesn’t leave teachers and other public employees with inadequate retirement savings,” he said in a statement.