Changes that would make Illinois pension systems compliant with Social Security by improving benefits for government employees hired since 2011 could be on the table when lawmakers return in January.
The General Assembly passed legislation in 2010 to create a second tier of state pension benefits in hopes of reducing long-term liabilities. But the latest benefits structure for employees entering the government workforce after 2010, known as Tier 2, has raised concerns about its compliance with Social Security and fairness to public employees.
Not all public employees are covered by Social Security. But federal law does require governments to provide benefits that are at least equal to Social Security. If a pension system fails to meet that “Safe Harbor” requirement, the employer must make up the difference. Officials from pension systems have said doing so would be costly, though exactly how much so is unclear.
While calls for changes have grown louder in recent years, the underlying concerns aren’t new, Sen. Robert Martwick, D-Chicago, told Capitol News Illinois.
“It was contemplated by members of the General Assembly during debate for its passage that Tier 2 could create a problem if it didn’t satisfy Safe Harbor,” Martwick said.
Tier 2 employees also say the benefits they receive, which are not as generous as those received by Tier 1 employees who were employed before 2011, will make retirement challenging and are currently hurting recruitment and retention in public sector jobs.
Lawmakers are tentatively scheduled to be back in Springfield on Jan. 4 for a lame duck session before new lawmakers are sworn in on Jan. 8.
“Whether that will all come together in a fashion that is ready for lame duck or not remains to be seen,” Rep. Stephanie Kifowit, D-Oswego, said. “I do think we’re closer than we were than at the beginning of the legislative session.”
Latest proposal
Kifowit’s House pensions committee has held more than a dozen hearings exploring pension reform in the past two years, including on multiple bills she has filed. The latest bills, House bill 5909 and Senate bill 3998, are a product of the “We Are One Illinois” coalition of labor unions seeking Tier 2 reform.
“We understand this is a big lift,” Illinois AFL-CIO Secretary-Treasurer Pat Devaney said in a Dec. 13 committee hearing. “We’re going to continue to push for a lame duck solution. We’re ready today, tomorrow, through the holidays to work.”
The union-backed proposal would aim to fix the “Safe Harbor” flaw of Tier 2, in part by increasing the maximum salary used to calculate pension benefits. The current maximum salary for Tier 2 employees is more than $40,000 less than the Social Security salary base and has increased at half the rate of inflation. The new average salary calculation for Tier 2 would be the same as Tier 1.
Martwick said the problem with Tier 2 is it uses 60% of a person’s highest average salary over eight years to calculate benefits, compared to 70%-80% under Tier 1.
The proposal would also include an annual non-compounded 3% cost of living adjustment for all pension systems to keep pace with inflation. Under the current law, Tier 2 pension systems for teachers, university employees and state employees receive non-compounded increases of 3% or half the rate of inflation, whichever is less. The Tier 2 pensions systems for judges and members of the General Assembly currently are compounded and increase by 3% or the rate of inflation, whichever is less.
Unions and government employers have also described a growing challenge to retain and recruit people to government jobs, in part because of the diminished quality of Tier 2 benefits.
“What we need to look at and identify is that the state of Illinois has a significant staffing shortage,” Kifowit said. “When private businesses have a staff shortage, they increase their benefits and increase their pay to become competitive in the market to attract decent employees.”
Another key fix in the bills would put the Tier 2 retirement ages back in line with Tier 1. Under current law, Tier 2 employees are eligible for retirement benefits at a higher age — depending on how long they’ve been employed — such as 67 for teachers compared to 62 for Tier 1, and age 55 for most police officers and firefighters, compared to 50 for those under Tier 1.
“It is hard to think that a Tier 1 and Tier 2 employee are doing the same amount of work and it is hard to think the Tier 2 employee is going to get fewer benefits just because of when they graduate,” Brittany Archibald-Swank, a 4th grade teacher in Urbana, told Capitol News Illinois.
Other public employees worry about handling the physical demands of a job as they get older.
“I can’t do it. It’s not a matter of willpower. It’s a physical impossibility,” Cook County Sheriff correctional officer Ryan Molina said at a Statehouse rally in November. Molina, who is under the Tier 2 system, would be eligible to retire at age 62 following 20 years of service under the current law, rather than 50 following 20 years of service under the Tier 1 law.
Martwick is backing the unions’ proposal but said it won’t be the final product as conversations continue.
“Every employer owes a responsibility to their employees to provide retirement savings so they have what they need to make their retirement,” Martwick said.
Projected cost
Union officials and leaders of the state’s pension funds told the committee recently it’s not clear how much a Tier 2 fix would cost or what penalties the state would face if the Internal Revenue Service decided to act on the violation.
Only a few Tier 2 employees have retired or will retire in the next few years, officials from the pension systems said. But when they do retire, if their benefits are found noncompliant, units of government from the state to school districts will have to make up the difference to ensure benefits are adequate.
“It’s not that we should fix the illegal parts of the benefits structure, it’s that we have to fix it, otherwise others are going to fix it for us to the drastic detriment of state and local government finances,” Devaney said.
Martwick shared a similar sentiment.
“My whole focus on this thing is throughout the course of this process that we are cognizant that there is no such thing as zero cost. Not doing something doesn’t mean you’re spending zero money,” he said.
Union members in the We Are One Illinois coalition hold a rally at the Illinois Capitol in November. (Capitol News Illinois photo by Andrew Campbell)
A report earlier this year by the Commission on Government Forecasting and Accountability shed some light on what those proposals could cost.
The April analysis of a different bill found it would cost the state $5 billion in total through fiscal year 2045 to tie the salary cap to the Social Security wage base and improve the rate of the annual cost of living adjustment.
The analysis also showed lower retirement ages would cost about $3 billion in total through FY45. But she said the most recent bill proposed by the unions is “more generous” and could cost more.
Between lowering the retirement ages and creating parity with Social Security, COGFA’s analysis shows state pension costs could increase by about $500 million annually. Kifowit said she believes that sum is small enough that the budget can “absorb” it without tax increases – though Illinois could already be facing a multi-billion deficit, according to early estimates from the governor’s office.
She said her preference would be to continue making pension payments beyond what is required by law, like lawmakers did in fiscal years 2022 and 2023.
“I think we need to have a continual stream of additional payments, not just if we have extra money,” Kifowit said.
The pension payment will consume about 19 percent, or $10.4 billion, of the state’s general revenue spending in FY25.
Kifowit said her goal is to avoid any surprise legislation that hasn’t been well-vetted in committee hearings, pointing back to the 2010 legislation that created Tier 2, which was filed and passed through the legislature in just a few days.
“In my opinion, this isn’t going to be the final proposal because it lacks some of the governor’s proposal,” Kifowit said.
Pritzker’s plan
Illinois Gov. JB Pritzker proposed a plan in February that focused more on restructuring the state’s pension payment law than fixing Tier 2. It would aim to make pensions 100 percent funded by fiscal year 2048, rather than 90% by FY45 under current law.
It also plans to use revenue streams currently paying back bonds and dedicate them to pension payments in the early 2030s when the bonds are retired.
Pritzker proposed reviewing and, “if necessary,” adjusting the salary cap on Tier 2 pensions to align with the Social Security wage base to stay compliant with the law. But he has not publicly taken a position on the latest union proposal.
“It’s not something that needs to get done exactly in the next session. But it’s clear that it needs to be dealt with because otherwise you create a whole ’nother liability for the state,” Pritzker said of the Safe Harbor issue at a November news conference.
Illinois’ unfunded pension liability grew by $1.5 billion in fiscal year 2024 to $143.7 billion, according to a December report from COGFA. The pensions systems were collectively funded at 46%, which is an improvement from 44.6% in fiscal year 2023.
The unfunded liability has been growing since fiscal year 2011 when Tier 2 took effect. That year the state had an $83.1 billion liability. It peaked at $144.2 billion in fiscal year 2020 and briefly declined thanks to strong investment returns in fiscal year 2021 but has continued to grow since then.
Capitol News Illinois is a nonprofit, nonpartisan news service that distributes state government coverage to hundreds of news outlets statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.
This article first appeared on Capitol News Illinois and is republished here under a Creative Commons license.
