The forgotten half of Illinois pension reform
By Jeffrey Brown and Avijit Ghosh
On Jan. 1, 2011, the state of Illinois introduced a revised pension program for new public employees, including new faculty and staff at our public universities. This "Tier II" program significantly reduced retirement benefits, requires employees to work for at least 10 years to receive any benefits, and has seriously handicapped universities in recruiting new employees.
This existing Tier II program is a serious impediment to the long-term viability of public universities in Illinois. It is not hard to understand this difficulty: imagine trying to convince a promising new faculty member to come to Illinois and spend six years striving for tenure, knowing that if they do not succeed, they will receive no credit from Social Security, no public pension and no employer pension! No university with which we compete is so tightfisted.
Yet the current pension reform debate has focused almost exclusively on ways of saving money from the Tier I program for employees hired before 2011. We agree that Tier I reform is critical, and this is why we have put forth substantive proposals to reform it. However, it is equally critical that we remedy the deficiencies of the current Tier II program that is offered to all new employees. It is for this reason that our Six-Step Plan replaces Tier II with an innovative hybrid plan.
The hybrid plan includes both defined benefit (DB) and defined contribution (DC) components. All new employees will be enrolled in both components of the plan and current employees can transition to this plan if they choose. The DB component will provide guaranteed benefits — about one third less than now — that, like the Social Security system, cannot be outlived. The DC component will offer additional opportunity to accumulate assets for retirement through a combination of employee and employer contributions that the employee will invest in a selected portfolio of low cost investments made available to them.
The hybrid plan would cost employees and the state no more than the current plan. Employees will make the same contribution, which will now be credited to both the DB and the DC components. All universities and colleges will put additional monies into each employee's DC account in the form of fixed and matching contributions. The amount of matching contribution can vary by institution depending on the competitive environment they face in recruiting faculty and staff. This way each university and college can tailor the program to their own needs.
Our plan would also change the vesting period to address our ability to attract new faculty, many of whom will leave — or be asked to leave — long before they have been here 10 years.
We propose gradual vesting in a manner similar to many private sector plans: Employees are entitled to 20 percent of the state and university contributions upon completing two years of service.
Each additional year of service vests an additional 20 percent. Those with six or more years of service are entitled to the full amount.
Employees' own contributions to the plans are immediately vested.
Our proposed plan serves a dual role. The DB portion serves as a substitute for the Social Security system in which SURS employees do not participate.
This guarantees them a minimum income for life, an essential element of retirement security. The DC portion is equivalent to 401(k) program common in the private sector.
Coupling this with our proposal to link cost of living adjustments to inflation will provide the long-term retirement security that participants need. At the same time it balances the fiscal risk of the pension program between the employees and the employers.
Legislators must remember that pension reform cannot be only about reducing costs. It must also provide adequate retirement benefits and thus allow universities and colleges to recruit and retain the talent that will allow them to educate the next generation of Illinois citizens. Replacing the existing Tier II system must be part of the broader reform effort.
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. Details of the Six-Step Plan can be found at http://www.igpa.uillinois.edu.