CHAMPAIGN, Ill. – A proposal to reform the retirement system for public college and university employees in Illinois would create fiscal sustainability for the state and retirement security for workers, according to a paper co-written by two University of Illinois professors.
Robert F. Rich
University of Illinois finance professor Jeffrey R. Brown says a hybrid retirement plan, which combines elements of a pension-style defined benefit plan with a 401(k)-style defined contribution plan, could potentially save the state billions of dollars over time while also providing a baseline of guaranteed retirement income that cannot be outlived.
“There’s an urgent need to reform pensions in Illinois, and this plan represents a way forward,” said Brown, the William G. Karnes Professor of Finance and the director of the Center for Business and Public Policy in the U. of I. College of Business.
The paper’s recommendations include pegging interest rates used to calculate benefits to market rates; aligning pension vesting rules with the private sector; requiring public colleges and universities to make modest pension contributions, along with a slight increase in contributions from employees; and creating a hybrid retirement plan for new employees.
While the hybrid plan would be mandatory for new employees, the reform proposal also acknowledges that the accrued benefits for current employees would remain unchanged, and transferring to the hybrid plan would be voluntary.
Brown, who co-wrote the plan with Robert F. Rich, the director of the Institute of Government and Public Affairs at Illinois, says reforming pensions can’t merely be viewed as a cash-saving exercise.
“The paper’s recommendations go beyond just saving money,” Brown said. “We have to view retirement benefits as part of a compensation package that’s critical for institutions to attract and retain world-class faculty and staff. Saving money is obviously one of the objectives, but let’s also recognize the important role of colleges and universities in driving the state’s economy, and the ways in which these institutions are different from other state agencies.”
Brown also believes it’s important to reconfigure the contribution burden and change the nature of the pension system so that it captures the best aspects of both defined benefit and defined contribution retirement plans.
“Somehow we’ve gotten into this debate of ‘either-or,’ where some wish to protect the status quo and others believe the only solution to the problem is a 401(k)-style system,” he said. “In reality, there are distinct advantages and disadvantages to both defined benefit and defined contribution systems, and we propose that a hybrid solution that mixes the best of both is optimal.”
Brown cautions that the paper only presents an outline of a plan, one that hasn’t been fully vetted by actuaries.
“While we recognize that any type of reform will be adjusted and modified, we hope that people don’t treat our proposal as a menu where you say, ‘I want one item from column A and another from column B, and let’s forget about C and D,'” he said. “We really put a lot of thought into making this system work as a whole. So the big concern I have is someone saying, ‘I really like the idea of making employers and employees contribute more, but I don’t really like the hybrid-plan idea, or the change in the effective rate of interest.’ Well, if you do that, it’s probably not going to work so well as a reform.”
Brown, who joined the IGPA faculty in 2011 and the College of Business in 2002, is a nationally known expert on public pension policy. As with most reforms of any system in which people have a strong interest, the biggest obstacles are political, he says.
“The question ultimately comes down to a couple of things: Are our elected officials open to reframing the discussion as being about more than just pension costs? Will enough people view this as a credible plan? Everybody has to give something up in order for this to work.”
Brown says he’s not as worried about the Illinois Legislature “kicking the can down the road.”
“Up until the last year I thought that was a huge risk,” he said. “But my sense is that over the past year the debate has really changed, and that everyone now understands the need for reform. The labor unions understand, the participants understand, the governor understands, the General Assembly understands. I don’t think it’s going to be a question of ‘if’ for much longer; I think it has now become a question of ‘when’ and ‘what form.’ “
Brown, a former member of the bipartisan Social Security Advisory Board and a senior economist with the President’s Council of Economic Advisers in 2001-2002, stresses that any changes made to the amount of money institutions and employees contribute each month needs to be incremental.
“It’s really important that this be done in a way that doesn’t create significant and immediate financial shocks on the institutions or individuals,” he said. “You can’t just reduce all state workers’ salaries by 8 percent overnight, as would be done under some alternative proposals, and not expect there to be enormous repercussions in our ability to retain people and attract people. Higher education now competes in a global labor market. So any promises the state of Illinois makes about future retirement benefits have to be credible, and by credible they actually have to be backed up by a system that ensures good funding so that people can see those benefits are not going to be at risk.”
But it’s also a matter of having a defined benefit system that puts less strain on state coffers, Brown says.
“If employers and employees pick up part of the cost, then it’s more likely that the state will able to make good on its part of the contributions,” he said.
Brown has been a member of TIAA Board of Trustees since 2009.
