Fiscal year 2026 budget allocates money to address Social Security compliance concerns
By BEN SZALINSKI
Capitol News Illinois
bszalinski@capitolnewsillinois.com
SPRINGFIELD — Public employees hired since 2011 must continue to wait for pension reform after Illinois lawmakers declined to take up the issue during the spring session.
Lawmakers and labor unions have both expressed concern that benefits for Tier 2 employees – those who entered the public sector after 2011 – are inadequate and that some workers in that category are in line to receive benefits out of compliance with federal law.
Tier 2 benefits are less generous than those received by Tier 1 employees, who also had to work only five years to become vested compared to 10 years for Tier 2, but the state constitution prohibits diminishing benefits for people to whom they have already been guaranteed.
But problems have arisen from Tier 2, according to a coalition of labor unions seeking reforms, including that the lower level of benefits makes public sector jobs less attractive and hurts recruitment and retention.
‘Safe Harbor’ test
Illinois lawmakers have learned in recent years that Tier 2 benefits for some employees fail the “Safe Harbor” Social Security test, which requires that pension benefits be at least equal to Social Security benefits. If a pension system fails to meet that requirement, the employer must make up the difference.
Officials from pension systems have said falling short of Safe Harbor would be costly, though exactly how much so is unclear.
Despite more than a year of legislative hearings about pension reform and pushes to get it done in previous sessions, lawmakers left Springfield at the end of May without taking up the issue.
“This issue isn’t going away,” the We Are One Illinois coalition of labor unions said in a statement. “Public employees are leaving their professions and our state because they can’t rely on a pension that ensures dignity in retirement. Public employee shortages have been reported all across Illinois, impacting critical services for our residents. Delaying a fix only makes the problem more costly and damaging.”
The coalition said it was “inexcusable” that a proposal they introduced in the House during the final week of session did not receive a committee hearing.
Reforms that fell flat
Reforms filed in late May in Senate Bill 1937 would have accomplished several of the unions’ goals had they passed. Cost of living adjustments would increase 3% annually, and people would have been able to retire as early as age 62 if they had maxed out on their pension. Age 67 is the standard retirement age under Tier 2. Many police officers and firefighters would be able to retire at 52 rather than 55 following 20 years of service under the proposal.
To address the Safe Harbor issue, the bill called for increasing the limit on earnings for people entering the pension system between Jan. 1, 2011, and Jan. 1, 2027, to be equal to the Social Security wage base for that year. Beginning in 2027, the earnings limit could be no more than the Social Security wage base.
The final average salary calculation would also be redefined for Tier 2 employees. The current maximum salary for Tier 2 employees is more than $40,000 below the Social Security salary base and has increased at half the rate of inflation.
It’s not clear how much addressing the Safe Harbor problem or broader pension reform will cost, but prior estimates last year by the Commission on Government Forecasting and Accountability found it could cost $5 billion over the next two decades to tie earnings to the Social Security wage base and improve the annual cost of living adjustment. Lowering the retirement age could also cost about $3 billion over that span.
The bill also would have set a schedule to fully fund pensions by 2049, rather than reach 90% funding by 2045 as required by current law.
Why it stalled
The bill quickly fizzled out when it was introduced, however, despite garnering more than 40 House Democratic cosponsors. The governor’s office said the bill’s late introduction left little time for a full analysis, which in turn contributed to the bill’s demise.
“While we were provided with a short summary of their ideas, the governor’s office cannot and will not conduct any policy due diligence based on only a few bullets,” Alex Gough, a spokesperson for Gov. JB Pritzker, said in a statement. “When it comes to the long-term fiscal health of the state and meeting our pension obligations, the governor welcomes these discussions but will not make major financial decisions that impact taxpayers without the opportunity and time to review the details.”
The union coalition argued the governor’s office was part of discussions throughout the process.
“For more than a year, our coalition has engaged in good faith with lawmakers to address this critical issue,” the We Are One Illinois coalition said. “Throughout, we communicated consistently with the governor’s office and legislative leaders to develop a comprehensive, fiscally responsible solution that met their legislative criteria.”
Funding provided
Despite the reform’s failure, lawmakers sought to address the problem with Safe Harbor in the budget. Part of the budget package created a new Tier 2 reserve fund that can be accessed if there are violations of the Safe Harbor law. Lawmakers appropriated $75 million for the fund this year, in line with Pritzker’s proposal.
Other pension reform was passed for Chicago police officers and firefighters. Lawmakers unanimously passed House Bill 3657 that aligns calculations of Tier 2 benefits for Chicago first responders with those in the rest of the state. Chicago officials warned the plan will cost the city billions, however.
Both the budget and Chicago pension bill still need the governor’s signature.
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