Illinois senator offers 401(k)-style option to escape $145 billion pension crisis

By Catrina Barker | The Center Square contributor
The Center Square

(The Center Square) – An Illinois state senator is pushing a sweeping but voluntary change to the state’s pension system that would allow public employees, including teachers, to opt out of traditional pensions in favor of a market-based retirement plan similar to a 401(k).

Bill sponsor state Sen. Chris Balkema, R-Channahon, described the proposal as an expansion of an option that already exists for university professors in Illinois, who currently have access to market-based retirement plans.

“Right now, professors in Illinois already have this option. They can opt out of the traditional pension and contribute to a market-based retirement plan. That system was created because professors often move in and out of the state, and lawmakers didn’t want to penalize them for changing jobs or leaving Illinois,” said Balkema. “Participation has been strong because it’s portable and market driven. This bill would give employees in the other four state pension systems the same choice, they could stay in the traditional pension or voluntarily invest in a market-based plan where they control how their money is invested and, especially for Tier 2 employees, could see higher returns over time.”

Tier 1 and Tier 2 are classifications for Illinois state employees based on when they were hired, with Tier 1 generally having older, more generous pension benefits and Tier 2 having newer, slightly smaller benefits.

He said the proposal could actually improve recruitment and retention in public employment, rather than worsen turnover.

“If today, I’m halfway through my career and I’d like to make a change, but I’m locked into the pension system, I can’t move,” Balkema said. “This would make it a lot more portable. We want to attract and retain high-quality employees.”

Illinois’ pension systems carry roughly $145 billion in unfunded liabilities, a figure Balkema said underscores the need for structural reform.

He argues the proposal could reduce long-term risk for taxpayers while still honoring the state’s existing pension obligations.

“Some people argue that if employees opt out and start investing in a market-based plan, they aren’t contributing to the existing pension system, which could worsen short-term funding gaps,” said Balkema.

Balkema called that argument short-sighted.

“If you look at the trajectory between now and 2045, and the state of Illinois continues to make the payments it has been making over the last two years, roughly $11 billion to $18 billion a year, that would allow us to climb out of the hole we’ve been in for decades because governments did not pay into pension obligations as they should have,” Balkema told TCS. “This bill, which allows a portion of employees to shift to a market-driven formula, would be a huge long-term cost savings because it gives employees more choice and reduces the burden on the state by limiting how many pensions it has to manage.”

Balkema also framed the proposal as a way to bring public-sector benefits more in line with the private sector.

“Run the numbers, folks,” he said. “If you look at stocks and equities, year over year, decade over decade, you’re going to end up with a lot more money in the big picture if you invest in the market versus waiting on a government pension system to provide for you and your family during retirement,” said Balkema.