Analysis of Proposals to Revise Tier 2 Pension Plans

The State of Illinois is facing major pension challenges. In 2010, the state created Tier 2, which resulted in lower pension benefits for employees who started January 1, 2011 or later. The Commission on Government Forecasting and Accountability (2011) estimated this would save the state $71 billion through FY 2045. While the establishment of a Tier 2 pension system improved Illinois’ fiscal situation, it also has raised significant concerns.

1. The most immediate challenge is that Illinois may now or in the future be out of compliance with a federal law that requires public pension plans that do not participate in Social Security to provide retirement benefits comparable to Social Security.

2. A second concern is that the benefits offered under the Tier 2 pension plan may make it more difficult to attract and retain a strong public workforce.

3. Another issue is whether both Tier 1 and Tier 2 pension plans should be updated to allow a portable defined contribution system as a primary pension system, similar to what is offered by many private sector employers and the State Universities Retirement System (SURS).

Initiatives to address the Tier 2 pension challenges would increase the state’s pension costs, which already are high. In the FY 2025 budget, state General Funds pension contributions account for $10.1 billion, which is equivalent to 19 percent of the state’s total budget for the general funds (Governor’s Off ice of Management and Budget, 2024). These high funding levels are expected to continue as the state remains on a path to achieve 90 percent funded levels for the state pension plans by 2045 as required by state statute. Documenting recent experiences should help to inform discussion of what is likely to happen next, as the rental housing market transitions back to normal now that the eviction moratoria have been lifted. A substantial backlog of eviction cases means that the range of innovations in.

The state’s five pension plans combined had $144 billion in unfunded liabilities and a funded level of 46 percent in FY 2024 (Bae & Fast, 2024). This is the lowest funded level among the 50 states (S&P Global, 2024). Therefore, proposals to revise the Tier 2 pension plan could compound the state’s current fiscal challenges.