Illinois’ Pension Crisis Shows States Can’t Tax Their Way to a Secure Future

Across the country, states are considering measures to protect their budgets and overall financial well-being from metastasizing pension debt.

State and local pensions are underfunded by $5.6 trillion, and young adults are in danger of having their futures taxed away if, instead of enacting serious reforms, states raise taxes to meet their pension obligations.

Nowhere is this dilemma more apparent than in Illinois, where, according to the Illinois Policy Institute,

The growing cost of pensions has trapped the state, the city of Chicago, and hundreds of municipalities in financial crises, forcing many governments to raise taxes and shortchange programs on which lower-income Illinoisans rely.

 IPI also points out Illinois’ pension crisis matters for young government workers, who are paying into a system that might be defunct before they retire.

 

Pension Debt Is Consuming Illinois’ Future

In 2015, Bloomberg ranked Illinois’ pension system the worst in the nation. No one seems to know the extent to which the system is underfunded; one economic analyst estimates the debt is between $130 billion and $250 billion. By comparison, Michigan and Pennsylvania, two other states with serious pension problems, have liabilities of $29.1 billion and $63 billion, respectively.

For most states, pension liabilities consume 4 percent of their budget on average. In Illinois, it’s a whopping 25 percent.

One-quarter of its budget eaten up by pension debt means Illinois has less money to spend on roads, schools, police, fire and other essential services young adults depend on as they enter college, graduate, find a job and settle down.

Now following that path to success will be more expensive, given how Illinois is choosing to solve its pension problem.

 

Taxes Aren’t Helping

State legislators are raising taxes to fix Illinois’ financial disaster. This month, the House and Senate approved a 32 percent income tax increase and a corporate tax hike.

Illinoisans already shoulder some of the highest state and local tax burdens in the country. Illinois has the second highest effective property tax rate, and Illinoisans paid $15 billion in property taxes last year.

These new increases will no doubt continue to drive people from the Land of Lincoln. An exodus of Illinoisans will only worsen the situation; the state lost $45 billion in revenue between 1992 and 2015 as residents fled to less expensive states seeking relief from Illinois’ high taxes.

 

Illinois Should Consider Solutions from Other States

There are better solutions for pension reform than raising taxes. Michigan and New Jersey are considering reforms that would place new employees on 401(k)-style defined-contribution plans that give employees more control over their retirement, and ensure they’re going to receive benefits from the system they’re paying into.

Pennsylvania recently created three pension options for new hires, including savings plans and hybrid plans that combine elements of 401(k)-style plans with traditional pensions. Arizona passed a slate of reforms covering types of plans, salary caps for pension calculations and eligibility age.

These types of pension reforms allow states to honor their promises to pensioners without taxing away the futures of its young employees.

Author Generation Opportunity

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