Pension switch would cost state more in long run: study
(Crain’s) — Despite widespread belief to the contrary, proposals to dump the
state’s employee pension plans in favor of new, 401(k)-style individual accounts
actually would cost taxpayers more in the long run, a union-backed research
The Center for Tax and Budget Accountability, a Chicago-based think tank,
says in a new report released on Monday that switching from a defined-benefit to
a defined-contribution system would cost $275 million to $610 million a year in
extra administrative costs while doing nothing to eliminate the $40.7 billion in
unfunded liability in the existing funds.
Jourlande Gabriel, co-author of the report, conceded that the unfunded
liability at least would not grow if a new 401(k)-style system was implemented
for new state workers, as some business-backed groups have suggested.
But the switch would not reduce unfunded liability that still must be covered
somehow by taxpayers because current state workers and retirees presumably will
stay in the system and draw benefits, she added.
The report also argues that retirees likely would draw lower benefits under a
defined-contribution system because they generally are unsophisticated investors
who often would not adequately diversify their retirement portfolio. When
Nebraska switched to a defined-contribution system, the average benefit was only
$11,230 a year, the report says.
Illinois’ current average state and local government benefit is $17,112 a
year, “not overly generous” compared to the national average of $16,488,
according to the report, which was funded in part by unions representing
teachers, university professors, human services workers and other government
Groups that advocate a switch in the state’s retirement system were not
immediately available for comment on the report.