When you’re in a hole, stop digging.
That seems like such a simple concept that it shouldn’t need stating, but in the area of public pension reform, it’s often proven difficult to implement.
For states facing huge pension shortfalls, it means to stop adding to the total of pension liabilities. When it has been implemented, as in Utah, it has worked.
Better yet, it can be implemented in states whose constitutions prevent lawmakers from making any changes to pension obligations—as in Illinois, where a judge struck down a Chicago reform law on precisely those grounds.
Now the Illinois Policy Institute has proposed a set of proposals for pension reform in the Land of Lincoln that rightly prioritize the “stop digging” principle.
1. Eliminate pensions for politicians. The pension fund for Illinois lawmakers is the most bankrupt of any in the state systems. It has on hand just 16 cents for every dollar it should to meet its future obligations. Lawmakers often say the reason they can’t enact broader pension reform is because the unions will object. But there are no unions here. Lawmakers should lead by example by closing the pension system and if they insist on a taxpayer-funded retirement benefit – adopting a self-managed plan such as a 401(k).
2. Offer 401(k)s to new hires. The Illinois Supreme Court ruling only addressed benefits promised to current government workers. It has no bearing on benefits for people who haven’t yet set their foot in the door of a government jobs. Illinois will never escape its massive retirement crisis until it follows the lead of the private sector and reform-minded states, such as Michigan, Oklahoma and Alaska. Offer new hires self-managed plans such as 401(k)-style plans.
3. Offer optional 401(k)s to current employees. Government workers shouldn’t be forced to pay into an insolvent, politician-controlled pension that may not be around when it’s time for them to retire. Give current employees the freedom to leave the pension systems and save for retirement through a self-managed plan. It’s legal and it¹s the right thing to do.
4. Put local pension costs back where they belong. Illinois teachers are supposed to put away 9.4 percent of their earnings into their pension savings, but in most school districts across the state this doesn’t happen. Instead, local taxpayers pick up that tab as a collectively-bargained contract perk. End that practice. Eliminating teacher pension pick-ups could save Illinois taxpayers about $430 million annually. Further, state government could save another $1 billion by ending the practice of paying the employer, or school district, share of teacher pension costs. Teachers should pay the teachers’ share of pension costs, and school districts should pay the school districts’ share. It’s time to stop shifting these costs to others.
5. Allow municipal bankruptcy. Bankruptcy is an option of last resort that can help struggling municipalities restructure their debt, renegotiate contracts and reform their pension systems.
For more on the prospects for pension reform in Illinois, see here.
For more on principles for public pension reform, see here.