State Rep. Daniel Biss (D-Skokie) introduced two new bills Monday to the Illinois General Assembly that will address Illinois’ massive $80 million pension debt, according to a news release. The two bills propose switching public employees’ pension plans to a new cash return plan, as well as creating a benefit buyout program.
If adopted, the cash return plan proposal will only apply to new employees, and the benefit buyout program will be optional.
“These two bills do not fix our incredible unfunded liability,” Biss said in the release. “But an optional buyout program can provide some significant savings for the state and a cash balance plan for future employees is a way to modernize and stabilize our system moving forward.”
The Illinois pension system has traditionally operated on the defined benefit plan, which promises employees a percentage of their final salary as a minimum benefit at the risk of the employer. However, defined benefit plans have recently proven unsustainable over decades because the state consistently underfunds them.
Another plan commonly used in the private sector is the defined contribution plan, in which employee benefits are contingent upon investment performance and there is no minimum benefit. Unions typically oppose adopting defined contribution plans in the public sector because the employee assumes all the risk.
Biss’ proposed cash return plan would have floor and ceiling provisions to ensure employees receive a minimum benefit and employers are able to afford liabilities. The cash return model is rare in the public sector, although Sweden and the state of Nebraska currently use it.
Illinois’ AFL-CIO spokesman Bill Looby said although the pension system’s unfunded liability is a problem undeniably in need of a solution, the defined benefit plan is a revered tradition.
“The defined benefit plan has been a bedrock of retirement security, and public employees give up a lot,” Looby said. “They pay in for that defined benefit plan and… that’s been a bedrock part of making sure people have security in their retirement.”
Kellogg Prof. Joshua Rauh said in an email that cash return plans, if managed correctly, could generate no unfunded liability for the state.
“The fact that this would only be for new employees is what makes it legally feasible, but of course that means that most of the beneficial effects it will have on the budget will be in the rather distant future,” he said.
The second bill Biss introduced Monday would create an optional benefit buyout program for public employees who are interested in withdrawing from their pension accounts before retirement in return for giving up future benefits. In order to opt in on the program, employees may need to increase their retirement age by two to seven years or permanently renounce their annual 3 percent cost of living increase.
“Research shows that some employees value immediate compensation more than they value deferred compensation,” Biss said in the release. “If we’re sitting on a huge unfunded liability, there are people who would rather receive some of that compensation now, it would save the state money and it’s completely optional, we have every reason to consider this as a valid cost-savings solution.”
Rauh added that if the proposed benefit buyout program fails, it might be a case of the “tragedy of the commons.” Theoretically, if everyone accepted the deal, it might improve solvency of the entire pension system. However, individuals might be better off if they didn’t accept the buyout and the majority of other public employees did.
“The fact that this is optional is what makes it legally feasible, but of course that means that any beneficial effects it will have on the budget depend on employees wanting to opt in,” Rauh wrote.
