Reeder: Time for Illinois to exit the pension business
By Scott Reeder firstname.lastname@example.org January 10, 2013 7:46PM
Updated: February 12, 2013 2:22PM
When will the whining end and the reforming begin?
That’s what kept running through my mind this past week as I listened to politicians, union leaders and government employees talk a lot about the state’s long-term, pension funding shortage but do little about it.
None of the plans that lawmakers are considering will go anywhere near solving this financial crisis. And yet even the most modest proposals have government workers angry.
For example, here’s an excerpt from a central Illinois newspaper the other day: “My wife and I planned carefully for retirement and left a sensible cushion,” said retiree John Kilgore, who taught English literature at Eastern Illinois University from 1978 to 2010. His wife, Dollie, was a nurse at the student health center, and both receive pension benefits through the state’s university retirement system. Kilgore said any pension reform adjustments to medical insurance or the pension’s (cost-of-living raises) “is more than our budget can stand.”
A pensioner facing poverty? Hardly.
Kilgore collects an annual pension of $91,692. He retired two years ago at 58.
He’s making more retired than most Illinoisans can ever expect to make working. And those working Illinoisans are the ones paying for his pension.
In January 2011, the Legislature jacked up the state income tax from 3 percent to 5 percent, and nearly every dime from the higher tax has gone to cover pensions. That’s the equivalent of an extra week of pay being taken away from every employee in Illinois.
Taxpayers are finding it hard to save for their retirements because they are busy paying for someone else’s.
Eighty-five percent of us in the private sector have 401(k) retirement plans, after all. Why not government workers, too?
I have a whole lot more confidence in individual workers making smart investment decisions for themselves than I do in politicians making decisions for them.
The transition from defined-benefit retirement plans (such as traditional pensions, similar to the state’s plans) to defined-contribution plans, such as a 401(k), has happened steadily in private business and industry over the past 30 years or so. Tragedy did not follow.
A pension is based on the idea that workers can be guaranteed a certain benefit in retirement.
But that is a fundamentally flawed idea because no one has a crystal ball to predict life expectancy, future investment returns, inflation rates and other factors.
And in the case of state government, the biggest variable is the politicians themselves. No one can predict what retirement benefits future politicians will promise public employee unions as they seek votes and campaign dollars.
A 401(k) plan is superior because it gets the state out of the business of predicting the future. It also empowers workers to make investment decisions for themselves.
Pensions are a vestige of a paternalistic culture where the boss knows best — not only regarding your work hours but your golden years.
As Illinois has clung to its outdated pension systems, the state has sunk deeper and deeper into debt. Its unfunded liability for its five systems is about $96 billion, rising by an estimated $17 million a day, according to state officials.
That’s the biggest pension debt of any state in the nation, and Illinois’ credit rating is among the worst of all the states.
It’s time for the state to get out of the pension business altogether.
Scott Reeder is a veteran statehouse reporter and the journalist-in-residence at the Illinois Policy Institute, a nonprofit research group that supports the free market and limited government.