The Problem with Pensions (re-broadcast)

April 03, 2017
 

Sean Anderson

University of Illinois College of Law

Recently, the Illinois Supreme Court struck down as unconstitutional a law that reduced pension benefits for some City of Chicago employees. That decision closely tracked another one by the same court in 2015, striking down changes to pensions for various state employees, which, by way of full disclosure, includes me and my wife.

It’s common knowledge that public pensions in Illinois are badly underfunded. Estimates vary, but we’re talking upwards of a hundred billion dollars. A number of factors have contributed to the problem, but the biggest has been the consistent failure of the General Assembly and a succession of governors over the course of decades, to contribute enough money to fund pension obligations.

In recent years, the General Assembly’s response has been to pass laws cutting pension benefits and requiring workers to contribute more, while also promising to do a better job of funding pensions. Twice now, the state Supreme Court has struck down such changes, citing a provision in the state constitution that makes public pension membership a contractual right, “the benefits of which shall not be diminished or impaired.”

Over many years, the court has read that constitutional language very broadly, saying it protects each public employee from the moment he or she becomes a member of a pension plan, and prevents the General Assembly from imposing any reduction in promised pension benefits. Let’s be clear: that means any reduction, even to benefits for future work the employee hasn’t even done yet.

Take the case of a 30-year-old who has worked for the state for 5 years. Not only is the state forbidden to reduce the benefits the worker has already accrued through her 5 years of work; it is also forbidden to reduce the benefits the worker can earn going forward, even if she works for the state for another 30 or 40 years.

That approach stands in stark contrast to the one taken under federal law governing most private-employer pensions. A private employer would be prohibited from reducing the benefits our hypothetical employee had earned during her 5 years of past work, but would generally be free to reduce (or even eliminate) the benefits she could earn in future years.

I’m not suggesting that either the Illinois approach or the alternative I’ve described is unambiguously the right one for all situations. But the way Illinois does it certainly reduces state and local governments’ flexibility in responding to changing economic situations. In addition, it might very well hurt public employees, because by outlawing pension reductions it increases downward pressure on wages and other benefits.

Finally, it tends to throw newly hired employees under the bus; the constitution bars pension reductions for current employees, but not for those hired after a reduction goes into effect. The General Assembly has already reduced benefits for new state hires once in recent years, and it might very well do so again.

Talk of amending the constitution doesn’t get very far with public employees or their unions these days. They fear any change could be the proverbial camel’s nose inside the tent, leading to drastic reductions in pension benefits. They might be right, but the constitution as it stands severely limits options for alleviating the state’s pension problems.