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Reick: Defined contribution plan reform that's needed

Published: Thursday, June 5, 2014 5:30 a.m. CDT

The underfunding of Illinois’ public pension system is the biggest problem among the many problems the state needs to solve.

Without a permanent, affordable solution for providing retirement benefits for our public employees, there’s little chance the state can pull itself out of the hole in which it finds itself.

Let me stress at the outset that I do not support the reduction of any current or future benefits that already have been earned. The constitutional guarantee that benefits earned cannot be diminished or impaired must be given full effect. Current retirees and those now working must be given the benefit of their bargain.

However, I don’t believe the current pension system can be saved.

It’s estimated that the system is underfunded by over $100 billion, but Nobel Laureate and University of Chicago economist Eugene Fama recently said the actual amount of underfunding is closer to three times that amount.

I believe the only way to guarantee benefits to current and future retirees is to end the current defined benefit system, calculate vested benefits for all employees, and institute a defined contribution system going forward. Doing so should pass constitutional muster; the Illinois Constitution says that benefits earned while participating in a pension system cannot be diminished, it does not say the current system itself must remain in place into perpetuity.

There is no underlying guarantee of general revenue from the state of Illinois to prop up an insolvent pension fund. If the pension system goes broke, which it’s going to do if allowed to continue on its current path, there’s no obligation on the part of the state to bail it out.

There’s a misconception floating around that a defined contribution plan somehow would be “paid for” with money from the current plan. This is not the case. The money that is currently in the plan would stay there to fund current and future benefits. Setting up a defined contribution plan means that an employee would own his or her account from Day One, the state would have no control over that money. The money saved by the state from moving to this type of system would be substantial and could be used to pay back the unfunded liability payable under the former system.

Some might say that such a system carries risk. To them I ask, what’s riskier: keeping a system dependent on the promises of politicians or owning an account in your own name?

Certainly there are investment risks, but there are investment risks with the current system because the money now being withheld from employees’ pay and contributed by the state is invested in the same market. Like Social Security, a defined benefit plan generally ends when the employee or his or her spouse dies. An employee owns his or her account in a defined contribution plan, which provides the opportunity to build personal wealth.

My experience with pension collapse was when United Airlines filed for bankruptcy. Many of my clients are current or retired pilots with United. When the company went bankrupt, their underfunded defined benefit plan was transferred to the PBGC, and they are now being paid pennies on the dollar. Fortunately, they also had a 401(k) plan, which was their money. It allowed them to retire with some security.

My mom folded laundry at the Kankakee State Hospital for 30 years, and she lives on her state pension. The current system most likely will outlive her, but somewhere there’s a person teaching our kids or fixing our roads who someday is going to present a pension check against an account that’s overdrawn.

Ending the current defined benefit system and instituting a defined contribution plan is the only way to preserve currently earned benefits, provide security for future retirees and offer relief to overburdened Illinois taxpayers.

• Steve Reick is the Republican candidate for Illinois’ 63rd state House District.

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