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In Illinois, Public Pension Funding Cannot Keep up with Pension Benefits' Growth

Public pension shortfalls result from too little money being paid into the pension funds. Or so government employee unions and their political allies would have you believe, when they ask taxpayers to pony up more to pay for pension benefits. Yet left out of this picture is the growth of those benefits.

In Illinois, whose public pension shortfall is among the worst in the nation, the growth of both pension benefits and assets have outpaced every other aspect of the state’s economy over the past three decades, according to a new report by the Illinois public policy news service Wirepoints.

Even as pension assets have grown robustly, however, they have not kept up with the growth of benefits. From 2003 to 2015, Illinois had the nation’s seventh-highest growth of state pension assets, but the third-highest growth of pension benefits—which have grown six times more that state revenues, 8.4 times more than household incomes, and 9.5 times more than inflation.

A major driver of this benefit growth is collective bargaining, which allows government employee unions to negotiate with public officials over pay, benefits, working conditions, and other matters. Unlike in the private sector, where employers have strong incentives to rein in labor costs, public sector unions face relatively little employer resistance to their demands, since both sides in the negotiations are employed by government.

Driving pension costs even higher in Illinois and some other states are benefit calculation formulas that raise payouts significantly. The Wirepoints study’s authors, Ted Dabrowski and John Klingner note (p. 18):

Since 1987, politicians have grown pension obligations through perks that:

  • Add compounding to a retiree’s 3 percent cost-of-living adjustment. That doubles a retiree’s annual pension benefits after 25 years.
  • Significantly increased the pension benefit formulas for the Teachers’ Retirement System, or TRS, and the State Employees’ Retirement System, or SERS.
  • Provided lucrative early retirement options.
  • Allow workers to boost their service credit by up to two years using accumulated unpaid sick leave.
  • Grant automatic salary bumps to workers who earn masters and other graduate degrees.
  • Allow spiking of end-of-career salaries.

And that’s not all. The Illinois state constitution prevents reductions in benefits, and strong union opposition to any such changes make reform extremely difficult, but some reforms are still possible. “Pension benefits themselves are untouchable,” note Dabrowski and John Klingner, “but lawmakers can freeze salaries, cut the subjects of collective bargaining, reduce headcounts, in order to reduce future payouts.” (p. 21) 

Reducing the scope of collective bargaining is crucial. In practice, public-sector collective bargaining ratchets compensation upward—thanks in part to the relatively weak employer resistance noted above—and effectively brings unions into the policy making process, as they negotiate with government officials over expenditure of taxpayer money and even some details of government operations.

For more on public sector unions, see here. For more on public sector collective bargaining, see here.