Illinois is grappling with the most severe public pension crisis in the United States. A recent analysis by the Equable Institute reveals that the state’s pension plans face significant financial instability, posing risks not only to retirees but also to taxpayers. This situation emphasizes the urgent need for reform.
The Equable Institute’s annual report shows that Illinois is lagging in funding its pensions, highlighting a critical necessity for change. If these pension challenges remain unresolved, the state could face ongoing budgetary strains, which may drive residents to leave due to high taxes and jeopardize future pension benefits.
In fact, to preserve cost savings related to Tier 2 pensions and offer state employees retirement options, Illinois must take decisive actions to regain financial stability.
When comparing pension obligations to the state’s gross domestic product (GDP), Illinois ranks at the bottom nationally. Currently, the state’s unfunded pension liabilities account for 19.02% of its GDP, a slight increase from 18.52% the previous year. This percentage illustrates that nearly one-fifth of the state’s economic output is required just to address the funding shortfall.
This situation significantly burdens taxpayers, with costs skyrocketing almost twentyfold since 1996—jumping from $614 million back then to an estimated $11.2 billion in 2025. It’s no wonder that Illinois has one of the highest effective property tax rates in the nation.
With a funding ratio of only 50.6%, Illinois ranks second-worst in the country for covering promised pension benefits with available assets. Although Illinois had the lowest funding rate for the last two years, New Jersey has now slipped just below with a ratio of 50.2%. Alarmingly, Illinois is one of the few states that fall below the 60% threshold, which is concerning.
The individual state pension systems are equally precarious. Three out of five statewide pension systems rank among the ten worst-funded in the nation, tying with New Jersey for the highest number of struggling systems. Other states like Arizona, Kentucky, California, and Missouri each have only one system on this troubled list. Notably, the state university retirement system managed to improve its ranking this year, while others remain in dire straits.
Such low funding rates lead to more uncertainty. With only half of the promised funds available, it’s much like having 50 cents for every dollar owed. As obligations continue to grow faster than asset accumulation, the risks only multiply, potentially leading to delays in benefit payments.
This ongoing deferral of obligations shakes the foundation of Illinois’ financial health, contributing to a low credit rating — one of the key reasons S&P considers the state at the bottom of the ranking. This poor credit rating drives up borrowing costs and discourages newcomers from considering Illinois as their home.
However, there is a path forward for lawmakers to improve the state’s financial condition. Firstly, they should safeguard the savings achieved through Tier 2, a reform initiated in 2010 aimed at creating a more sustainable benefit model. They also need to steer away from pushing the public union narrative that skews back toward the costly Tier 1 promises.
Secondly, offering a defined contribution option, similar to a 401(k) plan, could provide more portable benefits for state workers, lessening the long-term liabilities for taxpayers.
Lastly, seeking voter approval to amend the Illinois Constitution is crucial. The current constitution imposes severe restrictions on pension reforms, making it nearly impossible to implement meaningful changes. Amending it could facilitate the adoption of practical reforms, like responsible cost-of-living adjustments, thereby enhancing financial stability and ensuring the sustainability of pension benefits.
The stark reality of Illinois’ pension situation compared to other states signals an undeniable need for change. The longer this crisis persists, the more it threatens the financial health of the state and the security of pensioners and taxpayers alike.
