State lawmakers should pursue the following:
Increase the public pensions funding target to 100% from 90% in accordance with actuarial best practices. The goal year for 100% funding would remain 2045.
Gradually increase retirement ages for current workers under age 45 by a maximum of five years.
Apply a pensionable salary cap of $100,000 that grows with inflation. Government workers could still earn more than $100,000, but their pensions could not be based on more than the cap. The cap would only apply to employees not currently receiving a retirement check.
Replace Tier 1 retirees’ 3% compounding benefit increase with true cost-of-living adjustments tied to inflation. Annual increases would be simple, not compounding, and rise with the consumer price index for urban consumers, as reported by the U.S. Bureau of Labor Statistics.
Increase Tier 2 COLAs from half of inflation to full inflation. This would end the unfair subsidization of older workers by younger workers and could prevent a potential lawsuit.
Implement COLA holidays to allow inflation to catch up to past benefit increases. If a worker has been retired for eight years or more, they would skip every other year for 16 years for a total of eight adjustment periods at 0%. If a retiree has been receiving benefits for seven years, they would skip one payment every other year for 14 years, and so on.
Enroll all newly hired employees in a defined contribution personal retirement account with a 4% guaranteed employer match. This would ensure the state never gets into pension trouble again. This would also provide state workers with a portable retirement benefit they could take with them from employer to employer, rather than being forced to stay with the state in order to maximize retirement benefits.
Authors: Orphe Divounguy and Bryce Hill
Publication Date: 31 January 2021
Publication Site: Illinois Policy Institute