The five pension systems run by the state of Illinois only have 46 cents on hand for every $1 of benefits they owe. Filling that $144 billion hole would require more money than the price of every NBA team combined.
Illinois’ public pension crisis is the worst in the nation and shows no sign of improving anytime soon.
A new report from the Commission on Government Forecasting and Accountability confirms that despite better than expected investment returns, the state’s unfunded pension liabilities rose another $1.5 billion in fiscal year 2024 to $143.7 billion. This marks the third consecutive year of rising pension debt, but is part of a much longer trend that threatens taxpayers, retirees and state services.
For context, that debt means:
• If every NBA team owner sold their team, they still would be about $4 billion short of having enough money to fill Illinois’ pension hole.
• It would take around 19% of everything produced in the state to fill the pension hole.
• If the unfunded liability were to be divided among each person in the state, each family of four would be responsible for over $45,000.
The funding ratio – the measure of assets on hand to pay future obligations – ticked up slightly from 44.6% to 46.1%. However, until structural reform is enacted to lower the unfunded liabilities, this minor improvement in the funding ratio won’t offer real relief to the taxpayers trying to keep these pensions afloat. These remain some of the worst-funded pension systems in the nation.
Despite the current crisis, lawmakers are still considering additional increases to pension benefits.
Illinois already devotes one of the nation’s largest shares of its budget to pensions, with payments around 20% of current state spending. The state has even made over $27 billion in payments beyond what was legally required. The problem is the payments mandated by law are insufficient to pay down the debt.
In other words, lawmakers have used a flawed funding mechanism to promise benefits that are beyond taxpayers’ ability to fund them, jeopardizing the pension system for future workers and obligating generations of taxpayers. Since 1996, it’s been the cause of 47% of the increase, accounting for $59.18 billion.
The other 53% is because of the structure of the defined benefit plans. During the past two years, those factors have been the leading cause of the growth in the pension debt.
Lawmakers should practice caution
Because Illinois’ constitution strictly prohibits rolling back benefits once they’ve been enacted, it’s incredibly important for lawmakers to exercise caution when it comes to pension reform. The overly generous pension promises made before 2010 created unsustainable debt and drove Illinois’ pension crisis. To keep costs from spiraling out of control, lawmakers created a “Tier 2” pension with moderately reduced benefits for workers hired after 2010. Benefits for workers who were hired before that date are called “Tier 1.”
During the past couple of years, critics of Tier 2 have claimed it violates federal rules that require pensions to provide benefits at least as good as Social Security. To date, there has not been a single instance of a retiree finding this to be the case. For most employees who spend a career in public service, a pension is a much better deal for retirement than Social Security. Nearly 32,000 pensioners received over $100,000 in 2024 in retirement benefits, and the system averages are each well above the average Social Security payout of $22,344.
The cost savings provided by Tier 2 pensions must be preserved. Prematurely raising the pensionable salary cap would be a step in the wrong direction for the fiscal health of these pension systems, and the state as a whole. The fund created by the General Assembly in 2024 can act as a safety net in case it is ever discovered someone’s pension will provide them with less than what they would receive on Social Security, solving the issue without any additional taxes.
No additional increases should be made to restore the unsustainable benefits promised to Tier 1 workers. In fact, lawmakers should pursue a constitutional amendment that would allow for changes to future benefits, as other states have done. For example, a brief holiday from the 3% compounding annual cost of living adjustments for Tier 1 pensioners would go a long way toward helping the state stabilize its pension crisis.
Legislators should also expand retirement choice, such as offering defined-contribution plans and broader buyout options.
Currently, only the State Universities Retirement System offers its employees the ability to opt-in to a defined contribution plan, like a 401k, rather than a pension. It’s an incredibly popular option for its additional security and portability, with 18% of all active employees currently enrolled and that amount estimated to rise toward 30% in the future. It should be an option extended to all new state employees.
The state’s buyout program, which allows employees to trade a lump-sum payment for smaller annual cost-of-living adjustments, has saved nearly $1.5 billion since 2018. In fiscal year 2024, it reduced the unfunded liability by $141 million. Actuaries said it remains one of the only effective tools slowing debt growth. Illinois has yet to recoup the costs of starting the voluntary buyouts, showing it is not an instant cure for pension concerns.
More pensioners deserve choice when it comes to their retirement, whether that’s deciding how they want to invest their money or taking more money up-front in exchange for smaller yearly increases.
Without structural reform, Illinois’ pension debt will continue to outpace what taxpayers can afford. The state is already perilously close to breaking its record for unfunded liabilities – a stark warning that time is running out.
