Union members rally at the Illinois Capitol in November to call forpension reform. (Capitol News Illinois photo by Andrew Campbell)
Capitol News Illinois photo by Andrew Campbell
SPRINGFIELD — Changes that would make Illinois pension systems compliant with Social Security by improving benefits for government employees hired since 2011 could be on the table when lawmakers return to Springfield in January.
The General Assembly passed legislation in 2010 to create a second tier of state pension benefits in hopes of reducing long-term liabilities. But the latest benefits structure for employees entering the government workforce after 2010, known as Tier 2, has raised concerns about fairness and its compliance with Social Security.
Not all public employees are covered by Social Security. But federal law requires governments to provide benefits that are at least equal to Social Security. If a pension system fails to meet that “Safe Harbor” requirement, the employer must make up the difference. Officials from pension systems have said doing so would be costly.
While calls for changes have grown louder in recent years, the underlying concerns aren’t new, Sen. Robert Martwick, D-Chicago, told Capitol News Illinois.
“It was contemplated by members of the General Assembly during debate for its passage that Tier 2 could create a problem if it didn’t satisfy Safe Harbor,” Martwick said.
Tier 2 employees also say the benefits they receive, which are not as generous as those received by Tier 1 employees who were employed before 2011, will make retirement challenging and are currently hurting recruitment and retention in public sector jobs.
Lawmakers are tentatively scheduled to be back in Springfield on Jan. 4 for a lame duck session before new lawmakers are sworn in on Jan. 8.
“Whether that will all come together in a fashion that is ready for lame duck or not remains to be seen,” Rep. Stephanie Kifowit, D-Oswego, said.
Latest proposal
Kifowit’s House pensions committee has held more than a dozen hearings exploring pension reform in the past two years, including on multiple bills she has filed. The latest bills, House bill 5909 and Senate bill 3998, are a product of the “We Are One Illinois” coalition of labor unions seeking Tier 2 reform.
“We understand this is a big lift,” Illinois AFL-CIO Secretary-Treasurer Pat Devaney said in a Dec. 13 committee hearing. “We’re going to continue to push for a lame duck solution. We’re ready today, tomorrow, through the holidays to work.”
The union-backed proposal would aim to fix the “Safe Harbor” flaw of Tier 2, in part by increasing the maximum salary used to calculate pension benefits. The current maximum salary for Tier 2 employees is more than $40,000 less than the Social Security salary base and has increased at half the rate of inflation. The new average salary calculation for Tier 2 would be the same as Tier 1.
Martwick said the problem with Tier 2 is it uses 60% of a person’s highest average salary over eight years to calculate benefits, compared to 70%-80% under Tier 1.
The proposal would also include an annual non-compounded 3% cost of living adjustment for all pension systems to keep pace with inflation.
Another key fix in the bills would put the Tier 2 retirement ages back in line with Tier 1. Under current law, Tier 2 employees are eligible for retirement benefits at a higher age — depending on how long they’ve been employed — such as 67 for teachers compared to 62 for Tier 1, and age 55 for most police officers and firefighters, compared to 50 for those under Tier 1.
Projected cost
Union officials and leaders of the state’s pension funds told the committee recently it’s not clear how much a Tier 2 fix would cost or what penalties the state would face if the Internal Revenue Service decided to act on the violation.
Only a few Tier 2 employees have retired or will retire in the next few years, officials from the pension systems said. But when they do, if their benefits are found noncompliant, units of government from the state to school districts will have to make up the difference to ensure benefits are adequate.
“It’s not that we should fix the illegal parts of the benefits structure, it’s that we have to fix it, otherwise others are going to fix it for us to the drastic detriment of state and local government finances,” Devaney said.
A report earlier this year by the Commission on Government Forecasting and Accountability shed some light on what those proposals could cost.
The April analysis of a different bill found it would cost the state $5 billion in total through fiscal year 2045 to tie the salary cap to the Social Security wage base and improve the rate of the annual cost of living adjustment.
The analysis also showed lower retirement ages would cost about $3 billion in total through FY45.
Between lowering the retirement ages and creating parity with Social Security, COGFA’s analysis shows state pension costs could increase by about $500 million annually. Kifowit said she believes that sum is small enough that the budget can “absorb” it without tax increases — though Illinois could already be facing a multibillion deficit, according to early estimates from the governor’s office.
Gov. JB Pritzker proposed a plan in February that focused more on restructuring the state’s pension payment law than fixing Tier 2. It would aim to make pensions 100% funded by fiscal year 2048, rather than 90% by FY45 under current law.
Pritzker proposed reviewing and, “if necessary,” adjusting the salary cap on Tier 2 pensions to align with the Social Security wage base to stay compliant with the law. But he has not publicly taken a position on the latest union proposal.
“It’s not something that needs to get done exactly in the next session. But it’s clear that it needs to be dealt with because otherwise you create a whole ’nother liability for the state,” Pritzker said of the Safe Harbor issue at a November news conference.
Illinois’ unfunded pension liability grew by $1.5 billion in fiscal year 2024 to $143.7 billion, according to a December report from COGFA. The pensions systems were collectively funded at 46%, which is an improvement from 44.6% in fiscal year 2023.