Pension Reform: A Federal Based Proposal
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Commentary

Pension Reform: A Federal Based Proposal

Pension reform efforts in Illinois and other places have shown that it is almost impossible to reduce earned pension benefits without violating state constitutions. In this paper, Diana Furchtgott-Roth at E21 discusses possible solutions to this problem, based on the pension situation in Illinois.

Illinois’s pension plans are currently underfunded by $111 billion, with a funded ratio of only 41 percent according to official estimates. A market valuation using a lower discount rate would drop the state’s funded status to only 22%, the lowest in the nation. The growing pension obligations have put increasing pressure on the state’s budget. Since 1998, taxpayer contributions have risen by 427 percent, compared to the 75 percent increase in employee contributions.

After a constitutional convention in 1970 that granted strong contractual protection to pensions, lawmakers in Illinois no longer had the ability to reduce earned pension benefits. As a result, the Illinois Supreme Court recently struck down a pension reform law signed by former Governor Pat Quinn in 2013.

One solution proposed by the paper, besides a constitutional amendment, is to have Congress create a new section of the US Bankruptcy Code, allowing states to adjust pension benefits after a serious analysis determines that “funding obligations impair the performance of essential state services”. This would enable states to override existing state laws and constitutional provisions.

To read the full paper, go here.

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