Illinois Pension Funding Crisis Looming, Tax Measure Failure Hurts Prospects

Illinois’ pension crisis has hit a breaking point. The state’s pension liability was $230 billion in 2019 and is expected to rise to $261 billion in 2020 after a year of poor economic performance due to the COVID-19 pandemic and the ensuing economic downturn. The state’s pension liabilities are currently estimated to be $137 billion and the funds are currently only 40% funded. Relative to its size, Illinois’ pension debt is the worst in the nation and the funds face impending collapse unless a solution can be found.

The Teachers Retirement System of Illinois is the largest of the state’s pension funds. The fund managed to outperform most others throughout the COVID-19 crisis, but still only maintained a 0.52% return rate on investment. The state of Illinois assumes a 7% return annually, making these low levels of returns unsustainable for the long term health of the already declining pension plan. Still, the pension’s operators maintain a positive attitude. “Everyone took a hit during the pandemic,” TRS Interim Executive Director Stan Rupnik said. “But the investment strategies we have in place limited losses and have allowed us to prudently rebuild the portfolio’s value.”

One of the major problems with Illinois’ system are the lack of control over benefits. Retirees who fit into the pension’s Tier 1 system average over $2 million in earnings total in their retirement. At the same time, courts have effectively made it impossible to change the law that affects retirees. The law currently can only be changed to affect new workers, leaving the state with limited tools to combat the rising funding problem.

Another avenue for reform that recently closed is the state’s tax system. In 2020, voters rejected a “fair tax” measure that would have updated the state’s constitution barring a progressive income tax structure. The state currently taxes all income at 4.95% regardless of amount of income. The “fair tax” would have raised money from the top earners by taxing them at a higher rate and would have lowered taxes on earners that made below $100,000, effectively increasing directed funding toward the pension system. The measure was soundly defeated at the ballot box with 55% of voters disapproving of the measure. 

Rather than raising taxes on the wealthiest to cover the pension deficit, the state will now have to look toward alternative measures, including broader tax increases across the board as well as cutting future pension earnings for new workers. One of the paths to reform would be a complete overhaul: a constitutional amendment to cut already-promised benefits. The state should also consider taking smaller measures, including considering more stable investments and using more realistic investment predictions. Only by using a variety of tools to achieve both large and small reforms will Illinois begin to dig itself out of its current crisis.