What is a pension?

A pension is a payment made by an employer to an employee upon retirement. These benefits are determined by the employees’ years of employment, age and salary in the years prior to retirement. Pensions date back to Ancient Rome, but became popular in the United States about 100 years ago. The first Illinois public pension system was created in 1939.

What is an Illinois public pension?

Public sector workers who are teachers, state university employees, judges, Illinois state government employees, and members of the General Assembly are eligible to receive a pension from the State of Illinois. Nearly 750,000 current or retired public sector workers are members of one of the five pension systems.

How are these pension systems funded?

Employees and employers contribute money for the employees’ retirement, and the pension systems invest the money until the employee retires.

How does the state budget work and how do pensions fit into it?

The General Revenue Fund (GRF) is the money in our state budget that can be budgeted for any purpose and we use it to pay for many of the state’s programs, agencies, and branches of government. This is where we fund many of our programs for schools, job training, seniors, disease prevention, and public safety. These funds are raised through taxes and fees such as income taxes and sales taxes and makes up about 49% of Illinois’ total budget, or roughly $29.95 billion.

The rest of the budget is made up of funds that pay for a specific purpose or program and may raise money through special taxes and fees, bonds, or grants from the federal government.

The 2013 Illinois pension payment takes up 15% of the general revenue fund – or 15% of the money we have to spend on some of our most important priorities.

What is a “COLA”?

A t-shirt you bought in 2000 for $15 would cost you $20.16 in 2012 because prices rise over time. The purpose of a COLA – “Cost-of-Living-Adjustment” – is to help adjust an employee’s retirement benefits for the change in the value of money over time. A COLA is applied to a retiree’s benefit payments each year. However, the COLA has been higher than the rise in prices in 12 of the past 20 years.

Why does Illinois have a pension crisis?

Illinois has had a pension crisis for seven decades! The problem is due to a number of factors – the employer hasn’t put enough into the pension system each year, the investments made with employee and employer contributions have made less money than expected due to the Great Recession, retirees are living longer, and a handful of employees have gamed the system.

What does the Great Recession have to do with the Illinois crisis?

The amount of money employees and employers contribute into the pension system is not enough by itself to pay for all future retirement benefits that are promised to employees. This pool of money must increase from earnings on investments to fully pay for all future retirement benefits. In fact, about 60 percent of the pension benefits paid to retirees comes from investment earnings. During the Great Recession of 2008-09, Illinois pension systems lost 30 percent of their assets due to investment losses. This means the State has to make up the losses by paying more money into the pension systems now and in the future, further squeezing out funding for vital State programs.

What is an “unfunded pension liability”?

An “unfunded pension liability” means the State currently has a smaller pot of money than it needs to pay future retiree benefits that it’s responsible for.

If you want to save up to go to college when you’re 18, you have to put money aside every month and year to eventually pay for college. If you don’t save steadily when you’re 8 and 9, more money will be needed when you’re 15 and 16. This also means, when you are 15 and 16, you have less to spend on other items. The State didn’t set aside what they were supposed to when they were 8 and 9, so now they are 16 years old, planning for college, and have a lot of catching up to do if they want money for college, but also need funds for things in the present like lunch money, clothes and school supplies.

How bad is the Illinois pension crisis?

The Pew Center for the States ranks Illinois dead-last in its “unfunded pension liability”. Moody’s Investors Services lists Illinois as the lowest-rated state due primarily to “…a severe pension funding shortfall”. Each day that pension reform is not passed, the long-term pension deficit increases by $17.1 million. Each year, the pension system “squeezes” the State budget by another billion dollars, which is as much money as the State spends on the entire Department of Children and Family Services and Department of Public Health combined. By 2016, we’ll be spending more on pensions than education.

What is the “pension squeeze”?

As Illinois spends more money on pension payments each year, vital State services are “Squeezed” (reduced, cut or even eliminated). Core programs in education, human services, healthcare, and public safety have been negatively impacted each of the last several fiscal years. With pension payments estimated to reach $10 billion by 2025, services will be “Squeezed” every year unless something is done.