Critics of creating a 401(k)-style retirement benefit for public employees Wednesday pounced on gubernatorial candidate Bill Brady’s suggestion that the state move away from its current pension programs and into a system widely used in private industry.

Critics of creating a 401(k)-style retirement benefit for public employees Wednesday pounced on gubernatorial candidate Bill Brady’s suggestion that the state move away from its current pension programs and into a system widely used in private industry.


The idea might actually increase the cost of retirement programs and would provide a less secure retirement for workers, opponents said.


“It is idiotic on every level,” said Ralph Martire, executive director of the Center for Tax and Budget Accountability, a leading critic of state budgeting.


Brady’s spokeswoman responded that “we know the status quo does not work.”


Brady, a state senator from Bloomington and the Republican candidate for governor, has pushed the idea of putting employees into a defined contribution retirement system for some time. In a speech Tuesday to the City Club in Chicago, Brady renewed that call, saying workers should be put into 401(k)-style retirement programs that would be paid for entirely by employee contributions, with no state contribution.


The five state-funded pension systems are defined benefit plans, which receive their incomes from both state and employee contributions and from investments made with those contributions. Benefits are drawn for the life of the employee. In a 401(k) system, benefits last only as long as the money saved by the worker.


 


Two pension programs


Brady’s plan would apply to new hires made after a certain date, if the plan won approval by lawmakers. The current pension programs would remain in place for people who already belong to them.


Martire said that is one reason the switch would end up costing the state more, not less – Illinois would have two pension programs instead of one.


“Administratively, it is far more expensive for taxpayers,” Martire said. “They are more expensive administratively and definitely result in lower benefits.”


A Wilshire and Associates study estimated a second pension system would add $400 million to $600 million in administrative costs for retirement programs, Martire said. A National Institute on Retirement Security study in 2008 also concluded that “the cost to deliver the same level of retirement income to a group of employees is 46 percent lower in a (defined benefit) plan than a (defined contribution) plan.”


The same study said the most secure retirement plans combine Social Security, a defined benefit plan and a defined contribution system.


A second pension program could also make it more difficult for the state to deal with its existing, woefully underfunded pension programs.


“As new employees come in, their contributions help fund debt for the older employees,” Martire said. “You’d have no new employees coming into the (existing) systems. The ability to pay the unfunded liability becomes huge and immediate.”


Nebraska had a defined contribution plan for state and county workers, but switched to a defined benefit plan in 2003. A Sacramento Bee story said the 401(k) plan was abandoned after a study showed that worker retirement benefits had fallen below levels deemed necessary for an adequate retirement.


 


Social Security issues for teachers


The Teachers Retirement System in Illinois, which covers downstate teachers, said a switch also could create Social Security issues for teachers.


TRS spokesman Dave Urbanek said that, depending on how Brady would structure such a program, teachers might have to be covered by Social Security. They are not now.


Employers pay 6.2 percent of payroll for Social Security coverage. Teachers, though, are employed by local school districts, not the state, meaning they could be responsible for the payments. Currently, TRS gets 49 percent of its money from investment income, 24 percent from state contributions, 23 percent from members and 4 percent from school districts, Urbanek said.


Brady spokeswoman Patty Schuh said Brady has met with both teachers and state employees about his ideas.


“He has told both groups that he is prepared to sit down and figure out how to make this work,” Schuh said. “His goal is a long-term solution to a long-term pension liability that threatens the solvency of the state and the solvency of the systems that people depend on.


“It is premature to focus on specific details,” Schuh said. “We know the status quo does not work.”


 


Legislators skeptical


The American Federation of State, County and Municipal Employees opposes a move to defined contribution plans.


“Every study has shown that defined benefit plans are more efficient and less costly in delivering the same benefit,” said AFSCME spokesman Anders Lindall. “I find it difficult to believe that Sen. Brady has fully thought out his proposal.”


Lindall also said pension liabilities will go down because of changes passed this spring by the General Assembly that generally reduced benefits for future hires.


Two Republican Springfield lawmakers also expressed skepticism about changing the state’s approach to retirement funding.


“I’m not sure it saves any money,” said Sen. Larry Bomke. “If someone proves it will save money, I’d look at it, but thus far it has not been proven to me.”


“I’d have to see the whole plan,” said Rep. Raymond Poe. “Off the top, I don’t see how it would work at this point.”


Doug Finke can be reached at 217-788-1527.