Illinois lawmakers are considering changes to the state’s Tier 2 pension system as they prepare for the upcoming legislative session in January. The Tier 2 system, created in 2010 to reduce long-term pension liabilities, has raised concerns about its compliance with federal Social Security requirements and fairness to public employees hired since 2011. Federal law requires governments to provide benefits at least equal to Social Security for employees not covered by it.
Failing to meet this “Safe Harbor” requirement could result in costly penalties for the state. Sen. Robert Martwick, D-Chicago, noted that these concerns were anticipated during the original debate on Tier 2.
“It was contemplated by members of the General Assembly during debate that Tier 2 could create a problem if it didn’t satisfy Safe Harbor,” Martwick said. Tier 2 employees argue that their less generous benefits compared to those hired before 2011 (Tier 1) make retirement challenging and hinder recruitment and retention in public sector jobs. Rep.
Illinois lawmakers consider pension adjustments
Stephanie Kifowit’s House pensions committee has held multiple hearings on pension reform, including bills aimed at Tier 2 sponsored by the “We Are One Illinois” coalition of labor unions. The union-backed proposal seeks to fix the “Safe Harbor” flaw by increasing the maximum salary used to calculate pension benefits and including an annual non-compounded 3% cost of living adjustment (COLA) for all pension systems.
Public employers and unions describe growing challenges in retaining and recruiting staff due to reduced Tier 2 benefits. “When private businesses face a staff shortage, they improve benefits and pay to compete,” Kifowit said. The proposal also aims to change Tier 2 retirement ages to match Tier 1, as currently Tier 2 employees have higher retirement ages.
“It is hard to think that a Tier 1 and Tier 2 employee doing the same work won’t receive the same benefits,” said Brittany Archibald-Swank, a fourth-grade teacher in Urbana. Union officials and state pension fund leaders have stated that the cost of fixing Tier 2 remains unclear, especially in terms of potential IRS penalties for noncompliance. A report from the Commission on Government Forecasting and Accountability estimated that tying the salary cap to the Social Security wage base and improving the COLA rate could cost around $5 billion through fiscal year 2045, with additional costs for lowering retirement ages estimated at $3 billion.
As the new session approaches, Illinois lawmakers continue to weigh the complexities and costs of reforming the Tier 2 pension system to benefit current and future government employees.
