Illinois Has Worst Pension Crisis, Needs Boldest Reforms, Not More Tax Hikes

Governor Pat Quinn passed Illinois' largest tax hike on record immediately after he was elected. That tax hike was supposed to be temporary. It won't be, if governor Quinn and House Speaker Michael Madigan get their way.

Madigan, Quinn, and other Illinois politicians are attempting the same worn-out, taxpayer-unfriendly, method of threatening massive cuts in services if taxes are not permanently hiked. And it will not stop there.

It should not have to be that way, says Ted Dabrowski at the Illinois Policy Institute. Via email, Ted writes ...

Illinois politicians such as Chicago Mayor Rahm Emanuel and Cook County Board President Toni Preckwinkle are offering city and county residents the following choice when it comes to government pension reform: either pay higher property taxes or watch core government services get cut.

But that’s a false choice.

There’s no question that Chicago, Cook County and the state of Illinois desperately need pension reform. But instead of threatening service cuts and property tax hikes, Illinois should take a cue from states such as Oklahoma that are passing real reform.

These states are embracing self-managed plans, such as 401(k)-style accounts, to increase retirement security for their workers and to bring back certainty to state and local budgets.

This week, Oklahoma’s House of Representatives passed a bill that moves some new state workers into 401(k)-style plans.

The bill now moves to the state Senate, and Gov. Mary Fallin is expected to sign the reform into law.

Once signed, Oklahoma will join Michigan and Alaska in requiring new employees to participate in defined contribution, or DC, plans.

Michigan made the move in 1996; Alaska followed suit in 2005.

Six other states already offer optional DC plans for some of their employees. Employees in Florida, Montana, South Carolina, North Dakota, Ohio and Colorado can choose between staying in the traditional defined benefit, or DB, plan or moving to a 401(k)-style plan.

Another 10 states offer either mandatory or optional participation in hybrid retirement plans that combine both DB and DC plans. Six of those states – Georgia, Utah, Michigan (public schools), Rhode Island, Virginia and Tennessee – passed mandatory hybrid systems for new employees after the Great Recession.

Fortunately for Illinois, a model for such reform already exists within the state.

Illinois’ State Universities Retirement System has offered an optional 401(k)-style plan to its employees for more than 15 years.

Plan participants who opt in are required to contribute 8% of their salary toward the self-managed plan. The state contributes an additional 7% into the member’s account. In total, employees put away the equivalent of 15% of their salary yearly into a portable account that the employee, and not the government, legally owns and controls.

More than 17,500 state university workers have opted into the self-managed plan since its inception.

Illinoisans should reject higher property taxes as the solution to the crisis. Instead, they should demand that politicians go back to the drawing board and follow the lead of states that have enacted real reform.

Illinois has the worst pension crisis in the nation. That’s why Illinoisans should demand the country’s boldest reforms.

Ted Dabrowski
Vice President of Policy

Oklahoma was the latest state to move away from defined benefit plans to contribution-based plans or hybrids.

For a look at how these plans have evolved over time, please see Oklahoma pension reform: 401(k)-style plans for new state workers.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com