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State pensions were anything but ‘too rich’

Updated: December 9, 2013 9:09PM

Despite bipartisan acknowledgement that state workers as well as K-12 teachers and higher education employees are not responsible for Illinois’ pension problems, a bare majority of members of the General Assembly have decided they have to strip those employees of promised income to save the retirement plan. The previous plan, they said, was “too rich” for the citizens of the state.

Another barely hidden way of thinking about the cost claim is that advocates of the recent change believe that Illinois’ public employees are “overpaid.” But are Illinois’ future and current pensioners really overpaid? In a 2013 study (Working in Illinois’ Public Interest) my colleague Frank Manzo and I attempted to answer the cost-benefit question. Drawing from the study’s pension findings reveals that despite the cacophony of claims about Illinois’ unfunded liability something essential has been missed.

Consider that state employees and school teachers in Illinois contribute between 7.0 and 9.4 percent of their salaries into their retirement systems. Only 11 other states require that their state and local government employees pay higher than 7 percent of their salaries into retirement. Consequently, Illinois is among the top quarter of states in government worker contributions to their pensions.

Let’s also acknowledge that prior to reforms, pension benefits for state workers in Illinois accrued at 1.67 percent of their “final average salary” for every year worked. How does that compare to other states? Not so well. More than three-quarters of state retirement plans have an accrual multiplier greater than 1.67 percent. Furthermore, in Illinois, pension benefits are capped at 75 percent of “final average salary” while most state retirement plans have higher caps or no limits at all. These comparisons indicate that Illinois state employees are currently in the top quarter of states in paying into their retirement system while working, but in the bottom quarter of states in receiving a proportionate share of their final income during retirement. In comparison to other states, there is scant evidence of a “too rich” problem when measuring worker inputs and retiree benefits.

Starting with the dubious “too rich” premise, political leaders from both parties along with business organizations, newspaper editorial pages and Republican gubernatorial hopefuls, have consequently addressed the pension system’s cost structure. But why myopically fixate on only one side of the pension system? Is there no revenue side to be considered? Actually there is a very sizeable one.

In 2011, the most recent year for which data was available at the time of our study, there were $13.4 billion in total payments distributed by state and local governments in Illinois to public sector retirees and their dependents. These payments supported $12.22 billion in disposable income for retired Illinois public sector employees after federal income taxes were paid. What happened to the retirement incomes of retirees? More than anyone has acknowledged.

Retirees’ spending supported over $12 billion in economic impacts on state goods and services. For every dollar in pension benefits paid out, $1.77 in total economic output was supported in Illinois. Now imagine Illinois’ private sector without the economic stimulus of current levels of pension expenditures. What therefore are the likely economic impacts to non-retirees of much lower pension benefits? Did anyone assess this impact? Not as far as I can tell.

The loss to non-public employee taxpayers does not end with private consumption. State and local pension payments also benefit state and local tax revenue in Illinois. We estimated that pension expenditures each year trigger economic activity that generates $728 million in state and local Illinois taxes. Ultimately, Illinois’ state and local government pension expenditures largely pay for themselves, as total economic output and tax revenues contribute $12.78 billion to the Illinois economy and government budgets.

The bill’s proponents claim that over 30 years $160 billion will be saved in government outlays. Saving money poorly invested to be used for other valued purposes is good stewardship. But pension payments have been virtuous uses of workers’ deferred earned income. When compared to the potential cumulative income loss to pension beneficiaries and to the rest of Illinois’ citizens, it appears that future state savings may prove penny wise and very pound foolish.

Robert Bruno is a professor at the School of Labor and Employment Relations at the University of Illinois, Urbana-Champaign.

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