Today’s activity by the Illinois General Assembly to reform the state-funded pension systems is not just about pensions. It’s about the state budget and where the state of Illinois wishes to spend your tax dollars.
Illinois has major economic problems that affect its ability to deliver the goods and services you expect. This has created a pressing budget crisis for Illinois. After Springfield resolves its budget issues, however, it must begin a new and different debate about financial security for Illinois’ retired citizens.
We know enough about human nature to understand that it is difficult to save and invest for the future. This is especially true when we are first entering the workforce, and retirement is 40 or 50 years away. We need to start saving and investing early and consistently — but most of us do not. Given this human nature, here’s what I would propose if building a public retirement system from scratch:
- Enroll everyone in Social Security. It is a guaranteed program that provides a foundation to build retirement security. Currently, many Illinois public employees do not participate in Social Security, including teachers.
- Encourage everyone to save. Pension income, including Social Security benefits, needs to replace 85 percent of your gross pre-retirement income. This percentage may seem high, but it takes into consideration medical costs.
- Give enforcement authority to the pension’s board. The board will be able to intercept funds and taxes that are due, as well as sue in the circuit courts for overdue payments.
- Guarantee a pension plan that neither public nor private sector employees can outlive — called a defined benefit plan. The investment risk is borne by the employer. Let’s face it, 99.9 percent of us have neither the education, time nor inclination to be sophisticated investors. Day trading doesn’t work for you or me. Employer-sponsored defined benefit plans have been shown to achieve higher long-term investment returns and dramatically lower costs. At many public pension systems, investment returns cover 60 percent of the cost. 401(k) plans? They are expensive and ineffective. They are savings plans, not retirement plans.
- Fund the plan by both employees and local employers. The ratio of employer dollars versus employee dollars should be 50-50. Studies show that about 15 percent of pay is needed to fund a plan. Contributions by both parties would be mandatory and enforceable.
- Determine an appropriate retirement age — no earlier than 62 — with full retirement benefits at 67. Those ages would be reset automatically as longevity increases. If you wish to retire earlier, then personal savings/part-time work would be necessary to cover costs due to early retirement.
- Calculate pensions with earnings based on a 35-year history, as with Social Security. The maximum recognized earnings would be set at five times the national per capita income. Pension spiking would be effectively eliminated. The pension earned would more reasonably reflect your lifestyle at retirement.
- Prohibit loans or refunds. This is a retirement plan, not a savings plan. If you die before receiving a benefit, your surviving spouse or beneficiary could receive a portion of your pension but not the full amount.
I believe this plan could have prevented billions in unfunded liabilities carried by state-funded retirement systems. If some — if not all — of these practices were included in any reform proposal today, the state of Illinois, and specifically the people who provide valuable health, safety and educational services, would be better off tomorrow.
Louis W. Kosiba is executive director of the Illinois Municipal Retirement Fund. Reach him at email@example.com.
Illinois Issues, October 2013