Boarded-up windows, for-rent signs, thousands of workers without jobs: Main Streets across Illinois, like the country at large, are reeling from the COVID-19 economic downturn.
Serious economic shocks hurt not just employers and job seekers, they also threaten the retirement security of more than 1.1 million Illinois public workers.
Illinois’ more than $200 billion pension crisis long-predates COVID-19, but the pandemic market upheaval showed just how fragile government-run retirement systems have become. In March, the average large pension fund was on track for a 21% annual investment loss.
A severe downturn leading to an investment loss of at least 20% would trigger a full-scale pension meltdown, with Illinois’ five state-run systems running out of money in less than 30 years, according to an actuarial analysis commissioned by the Illinois Policy Institute.
The Institute’s analysis projects the State Universities Retirement System would be the first casualty, reaching total insolvency by 2039. Other retirement systems for teachers, state employees and elected officials were projected to run out of money between 2046 and 2048.
At the local level, there are at least 20 large municipalities that have at least one public pension fund with less than 50 cents saved for every $1 in future payouts, putting them at risk of complete insolvency, too. They include: Melrose Park, Alton, Kankakee, Chicago Heights, East St. Louis, Danville, Niles, Rock Island, Moline, Oak Lawn, Granite City, Peoria, Springfield, Rockford, Harvey, North Chicago, DeKalb, Quincy, Galesburg and Carbondale.
Pension debt per resident ranges from around $1,800 in Carbondale to nearly $5,600 in Melrose Park. That’s on top of $16,680 in state debt per person as of 2018, which translates to a whopping $44,000 per household.
Mayors and elected leaders of these cities need state lawmakers to step up and lead, because state law gives local leaders virtually no options to fix pension problems on their own. Public pension debt is already inflicting great harm through higher state income and local property taxes, fewer jobs, lower economic growth, residents moving out and cuts to public services that weaken the social safety net.
Unprecedented interventions from the Federal Reserve and a faster than expected stock-rebound mean COVID-19 likely won’t be the shock that causes total collapse. Current market trends point to more manageable pension fund losses this year. But coming so close to the brink in March exposes the urgency of reforms to protect both taxpayers and public retirees.
The Illinois Supreme Court already ruled lawmakers cannot change pensions unless we amend the state constitution’s pension clause. That will require political courage from lawmakers, honest dialogue with public employees and widespread public acknowledgement that pensions might not survive the next economic shock.
Politicians need to stop trying to fix pensions by doubling down on the same failed tax hike strategy. Further tax hikes, such as the progressive tax, will only prevent the sustainable growth in government revenues that comes from a prosperous private sector.
But that’s exactly what Gov. J.B. Pritzker is asking voters to do Nov. 3, by approving an amendment to the Illinois Constitution that would make it easier for lawmakers to hike taxes on everyone. Progressive tax powers give politicians a politically expedient way to avoid doing the right thing, but they won’t solve the problem.
Under Pritzker’s proposed progressive tax rate structure, a tax hike that would raise enough to make a dent in pensions would cost all Illinoisans 21% more in income taxes. That tax increase would cost the state nearly 128,000 jobs and $21.8 billion in economic output, the Institute’s analysis shows.
If, instead, politicians enact modest pension reforms, such as replacing automatic, compounding annual pension raises with a true cost-of-living adjustment, Illinois could save roughly $2 billion per year and hit the 100% pension funding level rather than the current 40%. Similar steps on the municipal level could help provide money for local services that add value for homeowners, lower property taxes and ensure public employee retirement security.
COVID-19 may not be the crisis that crashes Illinois’ pensions, but if politicians are smart they’ll use this warning to ensure the next shock doesn’t either.
Adam Schuster is senior director of budget and tax research for the Illinois Policy Institute, a nonpartisan research organization that promotes responsible government and free market principles.