Back to basics on fixing state pensions
By EDEN MARTIN September 13, 2013 5:06PM
The quest for a public employee pension reform “compromise” goes on. It’s an arm-wrestling contest in Springfield to find some combination of reform (cost-reduction) and funding elements that will attract enough votes to pass both the state House and Senate.
It’s about power, not about getting the “right” answer. And the truth is, there is no single “right” answer. At this stage, all possible answers are bad for somebody. It’s “Syria” right here in Illinois.
But maybe going back to basic principles would point to a “least-bad” solution. What are they?
1. If possible — if we can avoid state and local bankruptcies — retirees and workers should get what they’ve earned so far. Reform should be prospective-only.
2. Those already retired have earned what they’re getting, and their right to future COLAs.
3. Those still working have earned what they’ve accrued for past service, but they are not contractually entitled to a future job. Departments can be shut. Positions can be eliminated. Nor are they entitled to a particular future salary. Subject to existing collective-bargaining agreements (which expire after a few years), salaries can be held flat — or even reduced.
4. Accrual for past service means a right to a pension based on salaries earned so far, but not some future salary. It includes a right to have cost-of-living adjustments added to that pension. Reducing that already-accrued pension right by (a) changing or capping the salary basis for the calculation, or (b) reducing existing rights to COLAs, or (c) changing the retirement age, would increase the likelihood of the Illinois Supreme Court dumping the reform.
5. Although pensions already earned shouldn’t be reduced, worker contributions can be increased. Indeed, the unions have proposed increases.
Do these principles point to a “fair” compromise? One that diminishes the risk of judicial invalidation? Here’s where I think they point (and I’m speaking only for myself here):
* Freeze the pension plans as of now. Retirees keep what they are receiving. Workers keep what they’ve accrued up to now, with the COLAs that now exist, and payment starts when they hit the presently specified retirement age (about 55).
* Shift to defined-contribution plans for the future. This is what many if not most private-sector companies with retirement plans have done. Current workers would get this defined-contribution money at Social Security retirement age (about 65) along with their pensions.
* Increase monthly worker contributions along the lines the unions have suggested.
* Provide by statute for actuarial funding — no more back-loading the costs. But without a contract guarantee or special funding mechanism giving priority over other claims.
Objections? There’ll be lots.
Reformers will argue it wouldn’t save enough. But it would save a lot, both by reducing the current unfunded debt and reducing future accruals.
The unions will argue it doesn’t give us what we’ve come to expect. But it would secure for them what they’ve already accrued. And for the future they’d receive benefits comparable to those in the private sector. It sure beats bankruptcy.
The taxpayer groups will say it might require a tax increase. As Casey Stengel said: “Whom knows.”
The legal prognosticators will say there’s still a risk the Illinois Supreme Court might dump it. The risk might not be zero, but it would be less than if the reforms took away what people have already earned.
Nobody would like it. It would be a compromise.