Pension reform reaches the 2-minute warning

Pension reform reaches the 2-minute warning

By Jeffrey Brown and Avijit Ghosh

The two-minute warning has sounded on pension reform, and legislators are calling for "Hail Mary" passes in the hope of finally defeating the fiscal problem created by the underfunded public pension system. Unfortunately, many of the bills treat pension reform as nothing more than a cost cutting exercise. In contrast, the winning strategy is a thoughtful solution that makes the pension system fiscally sustainable, strengthens the ability of universities to compete in a global labor force, and respects the retirement security and the constitutional rights of employees.

Current legislative proposals, such as those that freeze pensionable earnings or arbitrarily cap cost-of-living adjustments, unfairly penalize participants for the state's failure to make required annual pension payments over many decades. However, there is no escaping the fact that the state cannot get out of its current fiscal morass without reducing the cost of pensions. Pension payments are crowding out investments in other priorities, including investments in higher education.

Over the last year, we and our colleagues have offered a number of proposals to reform the State Universities Retirement System (SURS); ideas that are also applicable to the other pension systems. We urge legislators to consider these and other reasonable proposals.

Any meaningful reform package must contain four ingredients: measures to shift responsibility for future normal costs; a credible plan to pay off unfunded liabilities; steps to reduce overall pension costs; and a new improved program to replace the Tier II system for new employees.

A consensus seems to be emerging on reasonable approaches to the first two tasks. A number of university presidents and community colleges have agreed to the idea of paying a portion of the annual cost for their employees as long as the burden is transitioned over time and state appropriations are not cut simultaneously. In addition, a coalition of labor organizations has suggested increasing employee contributions in exchange for the legal right to enforce pension payment by the state. These costs shifts will decrease the state's normal cost payments by approximately 50 percent over the next 15 years and 100 percent thereafter.

There will be little confidence in the pension system without a clear plan for the state to make up for past underfunding. This is the state's obligation, and the state's alone. Our proposal would require the state to commit to a payment schedule that steadily improves the funding ratio of SURS, calculated based on a straight line amortization of the current unfunded liabilities. Importantly, under our proposal the state shall be contractually obligated to pay the full amount of its obligations. Compared to other proposals under consideration, these commitments reduce the state's cost while also setting the pension system on a path to full recovery.

The third ingredient — measures to reduce pension expenditures, rather than just shifting the funding burden from one entity to another — is the most difficult and controversial. Many proposals have targeted the automatic annual adjustment of the retirement annuity, which is often referred to as a cost-of-living adjustment (COLA). The current provision guarantees an annual compounded increase of 3 percent annually, making this provision both valuable to retirees and very expensive to the state. Many pension reform bills would reduce this, such as by requiring retirees and current employees to choose between lower levels of increase or forego access to state-provided retiree health care. Others limit the annual increase to $750 or postpone increases for five years.

We have proposed instead to replace the 3 percent annual increase with an annual compounded increase equal to one-half of the consumer price index (CPI). On average, this will save the state money, especially in times such as now when inflation is running low. But this step is also better for employees because it provides more meaningful protection against high inflation — an essential feature of any good pension system. Because it provides valuable inflation insurance in exchange for the lower average increase, we believe this policy would be constitutionally permissible and it would create a better retirement program. The annual cost of the SURS pension program can also be reduced by rationalizing administrative rules for calculating the rate of interest used to determine a range of benefits, refunds and service credits that is set each year by the SURS board and the state comptroller. These steps and changes to COLA will reduce SURS' $19.3 billion unfunded liability and annual costs by amounts equivalent to that of bills currently under consideration.

The final ingredient is to improve retirement security for new and recently hired employees by replacing the current Tier II program with a "hybrid" plan. The plan would integrate defined benefit and defined contribution components into a single retirement program to balance the pros and cons of each system individually. Because SURS participants do not receive Social Security benefits, a smaller defined benefit plan will provide retirees with a meaningful income floor. Above this, retirement security will be further enhanced by a defined contribution plan, funded by both employee and employer contributions. It will also improve vesting features to increase our ability to compete with peer institutions. The cost to the state will not increase relative to the Tier II program, and these costs will shift to the universities and colleges over time.

The time for action is now, but it must be enlightened action. Yes, we need to reduce costs. Yes, we need to adjust cost-of-living increases. But, in the final analysis, reform must create a secure retirement system that will allow universities to continue to recruit the best and brightest individuals from across the globe. The long-term viability of the state depends on it.

Jeffrey Brown and Avijit Ghosh are professors at the College of Business, University of Illinois at Urbana-Champaign. The opinions expressed reflect their personal views and are not necessarily those of their institution.

Sections (2):Editorials, Opinion
Categories (2):Editorials, Opinions

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Sid Saltfork wrote on March 31, 2013 at 7:03 pm

On Easter, the News Gazette advocates the theft of the earned money of public service retirees.  Thou Shalt Not Steal means nothing to the avarice of the News Gazette's editorial staff, and the well paid professors.  "The opinions expressed reflect their personal views and are not necessarily those of their institution" is a good phrase pertaining to the well paid professors.  The retirees on less generous pensions know full well the "opinions" of the academic elitists.  Shame upon you.

bluegrass wrote on March 31, 2013 at 8:03 pm

Better put on your tin foil hat, the state is coming to steal your money, Sid.  Now you're suggesting that the News Gazette is in on the conspiracy with well paid professors and the government to steal your money, and you're kind of talking to yourself in your own post.  Scary.  I wonder if the News Gazette should reveal your real name to alert the authorities, you know, to save you from yourself.  You know, for safety.

Sid Saltfork wrote on April 01, 2013 at 8:04 am

Based on the News Gazette's repeated editorials calling for the "pension reform" at the retired employees expense; others, and myself see the News Gazette as a culprit in the proposed theft.  The "well paid professors" earn considerably more money than the front line public employees.  They may choose to bite the bullet in their later years; but their proposal is crippling to the retired front line employees.

You have advocated the theft of the earned pensions of public employees in the past.  I have to ask why since you did not earn the money?  I can only assume that you call for the theft for the same reason that you commented.  It is based on greed, mean spiritedness, and jealousy.  "bluegrass", or whatever your name may be; you advocate the stealing of money you did not earn.  Public employees have put up with the local media's one sided opinions that serve as propaganda for the guillible, and naive.  You represent what the editorials, and opinions are aimed at influencing. 

bluegrass wrote on April 01, 2013 at 10:04 am

Waaait a minute.  Please go find one post where I have advocated stealing.  You will not find one.  You say I'm jealous, greedy, and mean spiritedness..ful.  And yet you have hoped aloud that the whole of the state would burn down if you and your peers could not enjoy free healthcare and pensions.  You have advocated taking essential services from the very people who need them most, the poorest of the poor, the people coming here to escape the ravages of a partially failed state in Mexico and other Central American countries to find refuge here in Illinois.  Services like health care, and extra help with food.  You have openly advocated all those solutions as ways to fund your retirement, and yet you still have the audacity to call me greedy and mean spirited.    

When keep referring to "money you did not earn," that's really not altogether true.  State workers pay a portion of their retirement, and no one is making an argument to the contrary.  However, the other portion that goes to pay for 95% of retirees health care, and the employer match, is also known by another name, tax revenue.  Yes, the employer portion is paid (or was not paid in this case) with tax money.  That is to say, a mandatory contribution of that portion of goods, services, and income from the people in the private sector, that the public sector deems appropriate.  That "private sector" part, that would be me.  You know, all the evil, nameless, faceless corporations that employ people to do work.  But don't worry, Sid, I don't have a say in the matter.  It's all up to the veto-proof majority of democrats in the State House & Senate who will make the decision.  It's just taking so long because they're trying to figure out a way to blame it on republicans.


Sid Saltfork wrote on April 01, 2013 at 12:04 pm

You have made your views clear in your past comments on articles.  You howl about "tax money", and the "private sector"; but you neglect to mention that public employees pay taxes also along with their required contribution to their pensions.  It has been acknowledged that the employer, the State of Illinois, did not pay the employer portion of the pension payments.  You neglect to mention the State of Illinois Constitution that protects the public employees from the theft also.  You, and I along with millions of other citizens are the State of Illinois.  You are not separate as much as you want to be from the State of Illinois.  You cling to the democrats versus republican dribble.  Carry on with your deceptive comments.  The public service employees know your kind.  Just another "good conservative" spinning truths in order to maintain their place at the trough.   

bluegrass wrote on April 01, 2013 at 1:04 pm

Deceptive?!  Well, I NEVER!!!  My comments are not deceptive.  Sarcastic at times, but not deceptive.  Perhaps they seem deceptive to you, because you're always looking for a conspiracy theory, instead of taking what I write at it's face value.  

My place "at the trough," as you put it, is the person who grows the grain that fills the trough.  I'm getting ready to write a nice "trough" check to the Illinois Department of Revenue here next week.  Enjoy!!


Sid Saltfork wrote on April 01, 2013 at 2:04 pm

Make sure you pay your full share with your check.  The state needs it because it is broke.

Bless you for paying your taxes.  Please remember that you can pay more than is required if you choose to help your state.

ajbuckle wrote on April 05, 2013 at 9:04 am


Wake up Sid.  That money is not being stolen, it was never there to begin with.

 Union bosses paid politicians to make these promises.  But, it was just words, not actual money put into an actual budget.  Lies, told by corrupt politicians.   

Sid Saltfork wrote on April 06, 2013 at 9:04 am

Sorry to burst your bubble; but the under funding of the state pension systems started before the unions were organized.  Your right about the "corrupt politicians"; but they did put into the state constitution the wording that pensions "shall not be diminished, or impaired".  They are having a problem with "pension reform" now because of the state constitution.  Any changes to the state constitution now would not be retro-active on the current employees, and retirees.  They can mess with it all they want.  Arizona, Colorado, and other states have tried the same thing, and failed due to their state constitutions.  The best thing that they can do now is enact legislation for current employees being put into a 401k plan.  The new hires are already in a similar plan.  The employees, and retirees paid their money into the pension systems.  That is the money that is being stolen with "pension reform". 

asparagus wrote on April 03, 2013 at 5:04 pm

Why can't state workers file a class action law suit against those politicians that took the money out of the pensions funds or prevented it from being paid into them. If these folks are immune to prosecution then maybe we should amend the state constitution to fix that for instances like this. I bet if there was jail time or significant financial penalties involved, these funds would not be touched. As it stands though, how can a political body resist dipping into pots of cash like this when there are starving children and the homeless etc...



Sid Saltfork wrote on April 04, 2013 at 10:04 am

The State Constitution states that the pension benefits cannot be diminished, or impaired.  It does not require the funding by the employer.  Once the employer, the State of Illinois, alters the pensions provisions; the employees, and retirees can file a lawsuit.  The family practice judge's ruling on the healthcare insurance benefits, and pensions is being appealed now.  The Illinois Senate President, John Cullerton, has ironically stated that "no iron clad guarantee" that the employer will make it's required pension payments can be made.  He knows that without revenue increasing, and spending decreasing the pensions will not be funded.  The public employees are being blamed for the cuts in service to the children, and the poor because of their pensions which they funded, but their employer, the State of Illinois, did not fund.  The money was diverted to new programs, pork barrel spending, corporate tax breaks, and municipal grants for votes, and "campaign donations".

It will end up in court.  Either that; or the state will increase taxes, and reduce spending.  It come down to honoring legal debt, or stealing.

Bulldogmojo wrote on April 02, 2013 at 9:04 am

When they start to speak of these systemic problems in sports metaphors it makes me very nervous because then the attitude is "well you win some you lose some". This isn't a game. People's livelyhoods are at stake here and the state of Illinois' pension reporting is being watched by the SEC then we are in real trouble because they couldn't catch Madoff with the Markopolis report 10 years before he turned himself in. If you want to see just how convoluted this business is then you can watch this "Town Hall" meeting on the pension that took place a year ago and see how we are no further ahead since then.

Mugzy wrote on April 02, 2013 at 9:04 am

   Should they agree on a Pension Reform I would still have to wonder........How'd we get here in the first place?

nick wrote on April 02, 2013 at 10:04 am

 The answer to the question regarding the reason for the pension crisis is not complicated. It is an important question and deserves a fair answer. The funds that were designated by law to keep the pensions healthy and on schedule were diverted to individuals and corporations who created projects and services to the state. There may be argument over whether the value received by the state for these projects and services justified the funds diverted to the brokers. However,the fact is that the funds are gone and the pension systems,that would have been healthy if the rules had been followed,are damaged. At this point individuals,depending on their political and social views,are blaming the problem on a variety of factors. The winners are the wealthy and politically powerful. The losers are those who work for the public. The task of the winners is to manipulate perceptions so that public workers,the losers,are seen as the reason for the great crisis.

Mugzy wrote on April 02, 2013 at 12:04 pm

Thanks!!   What can the voters of Illinois do to prevent this from happening again?  I was under the assumption that Laws were already in place to prevent this.  Hmmm...there I go asking question again.  I will do some research.  Thanks nick

Sid Saltfork wrote on April 02, 2013 at 2:04 pm

President of the Illinois Senate, John Cullerton, admitted that no "iron clad guarantee" could be made to prevent the continuance of diverted funding from the pension systems to other budget items.  The State of Illinois Constitution states in regard to state pensions that no benefits shall be diminished, or impaired.  If the constitution is changed, it cannot be retroactive regarding current retirees.  Whatever the legislature comes up with for "pension reform", it will end up in the courts. 

An Illinois Appelate Judge who has a background in family law ruled that the retirees health insurance was not a benefit covered by the state constitution.  However, an independent watch dog group recently reported that the judge's wife is a lobbyist.  The lobbyist judge's wife met for lunch with the legislator who pushed the change in retirees health insurance, SB1313, the day before the judge's ruling.  The innuendo was that the judge's lobbyist wife had an interest in another matter which the legislator may help her with if the judge ruled in the legislator's favor.  It is all speculation with nothing proven.  It is not conspiracy theory.  It is Illinois/Springfield gossip.  It is doubtful that an Illinois judge with a background in law which does not pertain to pensions, and the Illinois Constitution would rule in a matter solely for his lobbyist wife's financial interests.  That would be corruption in Illinois politics.  That would be unlikely. 

Check out the March 25, 2013 article on 

Mugzy wrote on April 02, 2013 at 3:04 pm

sarcasim noted, Sid     (smile)

Sid Saltfork wrote on April 02, 2013 at 5:04 pm

My comments are "sarcastic at times, but not deceptive" as another claimed.  :) 

Sincerely, thanks for your questions Mugzy.  Questions help explain how it happened; and how it can be solved.  Nick summed it up well with his answer.

Brownie wrote on April 03, 2013 at 9:04 am

This has been an extremely slow moving train wreck.  I have a copy of a memo from SURS (State Universities Retirement System) to its participants from February 1984!  It is a call to action about underfunding of the retirement system.  This crisis has been at least 30 years in the making.  The politicians consistenly decided to underfund the retirement system.  All the problems SURS predicted in the memo almost 30 years ago have come true.


Sid Saltfork wrote on April 04, 2013 at 10:04 am

The sad, and criminal part of it was that the employees had no say so in the matter.  They were "required" to comply with what they were stuck with for pensions.  State employees before 1968 did not pay into Social Security like the state university employees.  The legislature decided that by "requiring" all new state employee hires to pay into the pension system, and Social Security it would save money for the state.  From that time forward; state employees pay into their pension system, and Social Security, but state unversity employees pay only into their pension system. 

There are five pension systems, and none of them are alike.  The General Assembly, and Judges pension systems are the elite of course.  Five years ago; there was a strong suggestion that the General Assembly, Judges, State Employees, State University Employees, and Teachers pension systems be lumped into one pension system.  Of course, that did not happen because it never made it through the legislative process.  The legislators have funded their pension system with state funds along with the judges; but not the state employees, the state university employees, and the teachers.  When asked about it, the legislators said that the funding of their pension system was "insignificant" compared to the others.

Illinois has a history of bi-partisan corruption.  It is clear regarding the pension system funding.