Comprehensive pension reform is on the agenda of the Illinois General Assembly and is being advocated by Illinois businesses, the Chicago Tribune and the Chicago Sun-Times. The most recent proposals give undue emphasis to reductions in annual cost of living adjustments (the COLA) and as a result, are being unfair and punitive to current retirees and public employees. The argument is that Illinois' unfunded liability and yearly increasing costs can only be significantly impacted by a sizeable reduction in the COLA. It should be noted that the COLA is only one component of pension reform which, in turn, is only one component of the overall Illinois budget crisis.
Cost-of-living increases are not unique to Illinois or to our pension system. Indeed, the United States Social Security system has long used COLAs to protect beneficiaries from inflation and general increases in the cost of living. The central idea is that a beneficiary whose income is not going to increase (especially to the extent that he/she is dependent upon Social Security or other pension income) can retain his purchasing power given inflationary pressures.
Given this background, it seems reasonable to compare the Illinois public pension programs' COLA and the Social Security system cost of living adjustment over the past 30 years. For a person retiring in 1982 with a pension of $10,000, his Illinois public pension system pension in 2012 would be $24,272.62. This reflects a 3 percent compounded COLA. The inflation rate during this 30 year period was 129.6 percent. The Social Security system cost of living adjustment would give this same person a benefit of $ 23,771. The Consumer Price Index for All Urban Consumers (CPI-U), which takes cost of living and inflation into account for this same period, would yield a pension benefit of $24,007.66.
What conclusions should be drawn from these data? A) there is virtually no difference between the national CPI-U and the Illinois public pension system; (B) given current life expectancy, the 30-year projections seem very reasonable as a basis of comparison; (C) the Illinois system has not been overly generous over the past 30 years; and (D) cutting back significantly on the COLA would be punitive for current retirees and would place them at a significant disadvantage in purchasing power and in terms of keeping up with projected inflation rates.
Speaker Madigan's most recent proposal would reduce the amount of pension income that one could earn a COLA on to $1,000 per year of service. A person who worked for 30 years could earn a COLA of 3 percent (presumably not compounded) on a maximum of $30,000 of his annuity or $900 a year. This does not even come close to keeping up with annual inflation rates.
This problem is then exacerbated by the fact that annuitants are also expected to pay up to 2 percent of their annuity to purchase health insurance (1 percent if a person is on Medicare) in addition to 5 percent of the cost of insurance for every year of service less than 20 years of employment. A person who worked as an Illinois public employee for eight years would be responsible for paying 60 percent of the cost of their health insurance premiums. In other words, under the new, reformed pension system, annuitants will have significantly less purchasing power
I understand that the public pension system needs to be reformed AND that all constituencies/stakeholders need to "share" in the sacrifice that must accompany any reform. However, the current proposals place an undue burden on retirees and, if passed, will place them at a significant economic disadvantage for the rest of their lives. This is neither fair nor is it just.
Putting aside the question of constitutionality of the COLA reductions, there have been several proposals for reform which reduce the unfunded liability and the increasing normal costs (e.g. proposals by the University of Illinois Institute of Government and Public Affairs in 2012 and 2013, a proposal by Ralph Martire, executive director of the Center for Tax and Budget Accountability); yet, these seem to have been given little attention or consideration. It is time to reject the COLA revisions and for deliberations by all affected parties on a fair reform proposal which is constitutional and reflects shared sacrifice.
Robert F. Rich, director of the University of Illinois Institute of Government and Public Affairs (retired), is a professor of law, medicine, and political science (retired).