Illinois crafted the solution to its pension crisis nearly 20 years ago/many lawmakers don’t even know that plan exists

Illinois crafted the solution to its pension crisis nearly 20 years ago when lawmakers passed a retirement plan that gave state university workers an alternative to the state’s traditional pension plan.

The problem is many lawmakers don’t even know that plan exists.

More than 20,000 university workers have opted into this alternative 401(k)-style plan since its creation. And since 2012, 15 to nearly 20 percent of new university workers have chosen to enroll in the plan annually, despite the fact that the pension plan is the automatic default plan offered by Illinois’ public universities and colleges.

State university workers in the 401(k)-style plan enjoy flexibility and portability, and don’t have to worry about retirement IOUs from the Illinois General Assembly. University workers like this option because a healthy 15 percent of a worker’s salary is set aside each pay period. Each worker contributes 8 percent of each paycheck into his or her own 401(k)-style account, and the state matches that contribution with another 7 percent.

However, their peers in the State Universities Retirement System, or SURS, pension plan are participating in a fund that has only 41 cents of every dollar needed today to pay out benefits to retirees.

Today, despite record stock market returns, Illinois state pension plans are missing over 60 percent of their funds, and Illinois workers in traditional pensions are owed $130 billion and counting.

With pensions in such a mess, why aren’t all Illinois workers – not just university workers – given the same choice regarding their retirements?

401(k)s across the nation

Illinois is still far behind the curve when it comes to offering retirement freedom to its state workers.

Michigan froze its pension plan in 1997 and moved new state workers into a 401(k)-style plan. In late 2016, a Michigan Senate committee approved a measure to add teachers to the plan.

Alaska did the same for new state workers and teachers in 2005.

Momentum in favor of 401(k)s has also picked up since the Great Recession. Virginia, Tennessee, Georgia, Utah, Rhode Island and Oklahoma have all included self-managed plans as part of their new retirement systems since 2008.

All these states have followed the lead of the private sector, where nearly 85 percent of workers are now enrolled in some form of defined-contribution plan.

Fact-checking the pushback against 401(k)-style retirement reform

Opponents of reform like to promote three myths about 401(k)-style plans:

  1. Markets are too risky for public sector workers: In fact, Illinois pension funds invest in the same markets as 401(k)s and invest in far riskier markets than most people do. Many state pension funds, including in Illinois, are finally admitting they take too much risk. Moreover, lawmakers have left most Illinois pension funds headed toward bankruptcy while draining local government budgets.
  1. 401(k)s don’t provide enough retirement savings: University workers are required by law to invest in their 401(k)s, and they can’t skip contributions or withdraw funds from their accounts. The state is also legally required to contribute funds into the worker’s account every pay period. That’s why 401(k)-style plans, as structured in the SURS plan, can provide millions in retirement funds for the average government worker.
  1. 401(k)s don’t provide a Social Security-style benefit: SURS offers many options for workers to create Social Security-like benefits. The SURS 401(k)-style plan members can balance their investments among assets with varying degrees of risk, and retirees can convert their savings into annuities.
401(k)-style reforms are easy to execute

Illinois politicians can begin an end to Illinois’ pension crisis by extending the SURS 401(k)-style plan to all state and local workers.

All new state workers would be enrolled in a new 401(k)-style plan going forward.

And all current workers would also be given the option to enroll in the 401(k)-style plan. If they opt in, their already-earned pension benefits would be protected. The pension benefits of current workers who do not enroll in the 401(k)-style plan, as well as current retirees, would not be affected by the 401(k)-style plan.

Such a plan complies with the Illinois Constitution, is fair to taxpayers, and gives new workers flexibility, portability and individual control over their retirements.

Lawmakers embraced 401(k)-style plans 20 years ago for just one class of state workers. The only fair thing to do now is to offer that same 401(k)-style plan to all employees.


Ted Dabrowski
Vice President of Policy

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