Cadillac or Chevy, pensions too costly

Thursday, July 01, 2010

Last Wednesday's Sun-Times editorial about the need for pension reform in Illinois got its conclusions right but not its facts.

Illinois is broke. The core of the problem is the state's unfunded retirement-related obligations to members of state pension funds, which add up to $130 billion -- about $25,000 per household. Its annual budget has a real deficit in the range of $14 billion to $15 billion. These debts and deficits threaten K-12 and higher education, our health care system, and the myriad social services that a civilized state must provide.

The Civic Committee of the Commercial Club of Chicago has recommended: (1) reforming the pensions -- prospectively -- protecting all rights which retirees or employees already have earned; (2) reforming the retiree health care system; (3) cutting costs in other areas, and (4) developing a responsible multi-year plan to balance the budget.

These need to get done before any tax increase; otherwise, we'll get the tax increase but not the reforms and cuts.
The Sun-Times editorial agreed with us on pensions and retiree health costs:

1. As to the pension benefits, the Sun-Times supported prospective changes for current as well as future state workers -- including "a higher retirement age and a smaller cost-of-living hike." We agree.

2. As to retiree health care, again the Sun-Times got it right, supporting an increase in premiums for retiree health care. "State retirees with 20 years of service do not pay any premiums in Illinois," the Sun-Times editorial stated. "This is a luxury the state cannot afford."

3. And the Sun-Times supports making the reforms applicable to police and firefighters -- groups excluded from the earlier reforms. Amen!

These are recommendations the Civic Committee is making in its public education campaign to reform state finance. For details, go to Illinoisisbroke.com.

The Sun-Times editorial objects to the Civic Committee's use of the word "Cadillac" to describe Illinois' pension plan for its employees, but the facts are more important than the adjectives. State employees with enough years of service can retire with full pensions at age 55. (Chicago employees can retire with full pensions at 50.) State retirees get automatic 3 percent cost adjustments whether there is inflation or not.

These are very generous benefits compared to private sector retirement arrangements -- where pensions have largely been replaced by defined contributions, hybrids, or cash balance plans. "Bentley" is probably a better adjective than "Cadillac."

Moreover, several of the Sun-Times' "facts" are askew.

1. It's a myth that most "state employees" do not get Social Security. Teachers do not. But most employees of the state -- members of the State Employees' Retirement System -- are in Social Security. Roughly 96 percent of them! They receive both a pension from the state and Social Security benefits.

2. The Sun-Times apparently meant to refer to all members of state pension plans -- not just those employed by the state. The Sun-Times wrote that such members would have to work 45 years to get to 75 percent of final salary. But that's true only of workers who receive Social Security (fewer than one-fourth of the total) -- and the Sun-Times left out the Social Security benefits.

3. Again, the Sun-Times says that average state workers (referring to all members of state pension plans) who retire after 24 years would get only 40 percent of final salary. But again, that's only true of those who get Social Security (less than one-fourth of the total) -- and the Sun-Times left out the Social Security benefits.

The Sun-Times was right last September -- and is still right -- about the most important point: Illinois "can't afford to carry on as we have." Illinois taxpayers can't afford to pay for full pensions -- Bentleys, Cadillacs or even Chevys -- for state employees who can retire with full pensions at 55. (Or for Chicago employees who can retire at 50.) Nor can it afford to pay 100 percent of their health insurance premiums.

Illinois is Broke. Dot com.

R. Eden Martin is president of the Civic Committee of the Commercial Club of Chicago and a member of the Illinois Is Broke coalition, which supports state budget reform.