Illinois’ Pension Puzzle

The funding of public-sector pensions has been among the most hotly debated issues in Illinois recently. State-funded pensions currently do not have enough assets on hand to pay all currently promised benefits. The public perception is that these pension programs, as currently structured, are not sustainable and are a drain on state revenue. This report explains how these public programs work, reviews the relevant financial issues, and gives an overview of options for reform.

There are five public-sector pension programs in Illinois: the State Employees’ Retirement System (SERS) for employees of the state government; the Teachers’ Retirement System (TRS), which provides benefits to most public school teachers (teachers in the Chicago Public Schools participate in a separate plan); the State Universities Retirement System (SURS), which provides benefits to employees of public universities and community colleges; the Judges’ Retirement System (JRS), which provides benefits to judges; and the General Assembly Retirement System (GARS) for members of the General Assembly. Most SERS participants also pay into the Social Security system. Participants in the other pension programs do not concurrently participate in Social Security and thus their pension represents their primary source of retirement savings. Participants in all programs are part of the Medicare system.

The alternative to borrowing or reneging on the debt is to fund it through spending cuts, increased revenue, or a combination of these. Both have equity and efficiency implications. Government services generate benefits that are, one would hope, greater than their costs. Efficiency implies cutting those services that generate the least benefit per dollar of expenditures. Raising revenue through taxation distorts economic decision-making and leads some people to avoid economic activity in which they otherwise would engage. The value of this reduction in economic activity is referred to as deadweight loss and represents the true cost of the tax. In general, to minimize this deadweight loss, it is better to have taxes that are assessed on as large a tax base as possible, with as low a rate as possible. That is, to raise a specific amount of money, deadweight loss is minimized by taxing (for example) all income or all consumption, rather than introducing exemptions that require the overall tax to be increased.